UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 
 FORM 10-K 
  x

          

          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Fiscal Year Ended December 31, 2008 OR  o

          

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to Commission File Number 333-117367 
 LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. (Exact Name of Registrant as Specified in Its Charter)  Maryland

          

          20-1237795(State or Other Jurisdiction of Incorporation or Organization)

          

          (I.R.S. Employer Identification No.)
  1985 Cedar Bridge Avenue, Suite 1Lakewood, New Jersey

          

          08701(Address of Principal Executive Offices)

          

          (Zip Code)
 Registrant's Telephone Number, Including Area Code: 732-367-0129 Securities registered under Section 12(b) of the Exchange Act:  Title of Each Class

          

          Name of Each Exchange on Which RegisteredNone

          

          None
 Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Large accelerated filer o

          

          Accelerated filer o

          

          Non-accelerated filer x
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x As of June 30, 2008, the aggregate market value of the common shares held by non-affiliates of the registrant was $227.4 million. While there is no established market for the Registrants common shares, the Registrant has sold its common shares pursuant to a Form S-11 Registration Statement under the Securities Act of 1933 at a price of $10.00 per common share. As of March 13, 2009, there were 31.1 million shares of common stock held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

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PagePART IItem 1.Business





1Item 1A.Risk Factors





7Item 1B.Unresolved Staff Comments





32Item 2.Properties





33Item 3.Legal Proceedings





34Item 4.Submission of Matters to a Vote of Security Holders





35PART IIItem 5.Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities





36Item 6.Selected Financial Data





38Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations





40Item 7A.Quantitative and Qualitative Disclosures About Market Risk





57Item 8.Financial Statements and Supplementary Data





58Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





101Item 9A.Controls and Procedures





101Item 9B.Other Information





102PART IIIItem 10.Directors and Executive Officers of the Registrant





103Item 11.Executive Compensation





105Item 12.Security Ownership of Certain Beneficial Owners and Management





106Item 13.Certain Relationships and Related Transactions





107Item 14.Principal Accounting Fees and Services





109PART IVItem 15.Exhibits and Financial Statement Schedules





111Signatures





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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust, Inc. (the Lightstone REIT or the Company) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying
with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Companys future plans, strategies and expectations, are generally identifiable by use of the words believe, expect, intend, anticipate, estimate, project or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Companys control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business, (iii) financing risks, such as the
inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) changes in governmental laws and regulations, (v) the level and volatility of interest rates and foreign currency exchange rates, (vi) the availability of suitable acquisition opportunities and (vii) increases in operating costs. Accordingly, there is no assurance that the Companys expectations will be realized.

All forward-looking statements should be read in light of the factors identified herein at Part 1, Item 1A as well as in the Risk Factors section of the Registration Statement on Form S-11 (File No. 333-117367) of Lightstone Value Plus Real Estate Investment Trust, Inc. filed with the Securities and Exchange Commission (the SEC), as the same may be amended and supplemented from time to time.

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PART I.

Item 1. Business

General Description of Business

The Lightstone REIT, a Maryland corporation, was formed on June 8, 2004 primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States and Puerto Rico. The Lightstone REIT intends to acquire portfolios and individual properties, with its commercial holdings expected to consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties, and its residential properties expected to consist of Class B multi-family complexes. Building classifications in most markets refer
to Class A, B, C and sometimes D properties. Class A, AA and AAA properties are typically newer buildings with superior construction and finish in excellent locations with easy access are attractive to creditworthy tenants and offer valuable amenities such as on-site management or covered parking. These buildings command the highest rental rates in their market. As the classification of a building decreases (e.g., Class A to Class B), one building attribute or another becomes less desirable.

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Lightstone REITs current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the Operating Partnership). We refer to the Lightstone REIT and the Operating Partnership as the Company and the use of we, our, us or similar pronouns in this annual report refers to the Lightstone REIT, the Operating Partnership or the Company as required by the context in which such
pronoun is used.

Our business is managed by Lightstone Value Plus REIT, LLC (the Advisor), an affiliate of the Lightstone Group (our Sponsor), under the terms and conditions of an advisory agreement. Our Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of our board of directors. Our Sponsor is one of the largest private residential and commercial real estate owners and operators in the United States today, with a diversified portfolio of over 900 properties containing approximately 23,000 multifamily units, 4.9 million square feet of office space, 3.7 million square feet of industrial space, 15.7 million square
feet of retail space and 686 hotels comprising 76,400 rooms. These residential, office, industrial and retail properties are located in 27 states, the District of Columbia and Puerto Rico, and the hotel properties are located in 44 states and Canada. Based in New York, and supported by regional offices in New Jersey, Illinois, South Carolina and Maryland, our sponsor employs approximately 14,000 staff and professionals including a senior management team with approximately 24 years on average of industry experience. Our Sponsor has extensive experience in the areas of investment selection, underwriting, due diligence, portfolio management, asset management, property management, leasing, disposition, finance, accounting and investor relations.

Operations

The Lightstone REIT commenced an initial public offering to sell a maximum of 30,000,000 shares of common shares on May 23, 2005, at a price of $10 per share (exclusive of 4 million shares available pursuant to the our dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued and 75,000 shares that are reserved for issuance under the our stock option plan). The Lightstone REITs Registration Statement on Form S-11 (the Registration Statement) was declared effective under the Securities Act of 1933 on April 22, 2005, and on May 24, 2005, the Lightstone REIT
began offering its common shares for sale to the public. Lightstone Securities, LLC (the Dealer Manager), an affiliate of the Sponsor, is serving as the dealer manager of the Companys public offering (the Offering).

The Lightstone REIT issued 20,000 shares to the Advisor on July 6, 2004, for $10 per share. The Lightstone REIT invested the proceeds from this sale in the Operating Partnership, and as a result, held a 99.01% general partnership interest at December 31, 2004 and 2005, a 99.99% general partnership interest at December 31, 2006 and 2007, and a 99.68% general partnership interest as of December 31, 2008 in the Operating Partnerships common units. The Advisor also contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership
units into cash or, at the option of the Lightstone REIT, an equal number of common shares of the Lightstone REIT, as allowed by the limited partnership agreement.

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A Post-Effective Amendment to the Lightstone REITs Registration Statement was declared effective on October 17, 2005. The Post-Effective Amendment reduced the minimum offering from 1 million shares of common stock to 200,000 shares of common stock. As of December 31, 2005, the Lightstone REIT had reached its minimum offering by receiving subscriptions for approximately 226,000 of its common shares, representing gross offering proceeds of approximately $2.3 million. On February 1, 2006, cumulative gross offering proceeds of approximately $2.7 million were released to the Lightstone REIT from escrow and invested in the Operating Partnership.

As of December 31, 2008, cumulative gross offering proceeds of approximately $307.0 million, which includes $7.7 million of proceeds from the dividend reinvestment plan have been released to the Lightstone REIT and used for the purchase of a 99.68% general partnership interest in the Operating Partnership. The Lightstone REIT expects that its ownership percentage in the Operating Partnership will remain significant as it plans to continue to invest all net proceeds from its ongoing Dividend Reinvestment Plan in the Operating Partnership.

Our Advisor has not allocated any organizational costs to the Lightstone REIT as of December 31, 2008. Our Advisor is responsible for offering and organizational costs exceeding 10% of the gross offering proceeds without recourse to the Lightstone REIT. Since its inception, and through December 31, 2008, the Advisor has not allocated any organizational costs to the Lightstone REIT as the offering costs of $30.2 million did not exceed 10% of the total proceeds of $307.0 million.

Lightstone SLP, LLC, an affiliate of the Advisor, periodically purchases special general partner interests (SLP Units) in the Operating Partnership at a cost of $100,000 per unit for each $1.0 million in offering subscriptions. Proceeds from the sale of the SLP Units will be used to fund organizational and offering costs incurred by the Lightstone REIT. As of December 31, 2008, offering costs of $30.2 million were substantially offset by $30.0 million of proceeds from the sale of SLP Units. Through December 31, 2008, the Company has received proceeds related to the SLP Units of $23.0 million. The Advisor paid this remaining obligation of
$7.0 million on March 30, 2009.

Through its Operating Partnership, the Lightstone REIT will seek to acquire and operate commercial, residential, and hospitality properties, principally in the United States. Our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties. All such properties may be acquired and operated by the Lightstone REIT alone or jointly with another party. Since inception, the Lightstone REIT has completed the following acquisitions and investments:

2006

The Company completed the acquisition of the Belz Factory Outlet World in St. Augustine, Florida, four multi-family communities in Southeast Michigan, a retail power center and raw land in Omaha, Nebraska and a portfolio of industrial and office properties located in New Orleans, LA (5 industrial and 2 office properties), Baton Rouge, LA (3 industrial properties) and San Antonio, TX (4 industrial properties).

2007

The Company has made an investment in a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, NY, purchased a land parcel in Lake Jackson, TX on which it completed the development of a retail power center in the first quarter of 2008, an 8.5-acre parcel of undeveloped land, including development rights, which is intended to be used for further development of the adjacent Belz Outlet mall, five apartment communities located in Tampa, FL (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties), and two hotels located in Houston, TX.

2008

The Company has made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company and acquired a 22.54% interest in Mill Run LLC, which consists of two retail properties located in Orlando,

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Florida. In addition, the Company entered into an agreement to acquire a 25% interest in Prime Outlets Acquisitions Company (Prime) which has a portfolio of 18 retail outlet malls and four development projects located in 15 different states across the United States. This transaction closed on March 30, 2009.

The Lightstone REITs Advisor, Dealer Manager and Lightstone Value Plus REIT Management LLC (the Property Manager) are each related parties. Each of these entities will receive compensation and fees for services related to the offering and for the investment and management of our assets. These entities will receive fees during the offering, acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties and other such fees outlined
in each of the respective agreements.

Primary Investment Objectives

Our primary investment objectives are:



          Capital appreciation; and

          Income without subjecting principal to undue risk.Acquisition and Investment Policies

We intend to acquire residential and commercial properties principally, substantially all of which will be located in the continental United States. Our acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties and that our residential properties will be principally comprised of Class B multi-family complexes.

We expect that we will acquire the following types of real estate interests:



          Fee interests in market-rate, middle market multifamily properties at a discount to replacement cost located either in emerging markets or near major metropolitan areas. We will attempt to identify those sub-markets with job growth opportunities and demand demographics which support potential long-term value appreciation for multifamily properties.

          Fee interests in well-located, multi-tenanted, community, power and lifestyle shopping centers and malls located in highly trafficked retail corridors, in selected high-barrier to entry markets and submarkets. We will attempt to identify those sub-markets with constraints on the amount of additional property supply will make future competition less likely.

          Fee interests in improved, multi-tenanted, industrial properties located near major transportation arteries and distribution corridors with limited management responsibilities.

          Fee interests in improved, multi-tenanted, office properties located near major transportation arteries in urban and suburban areas.

          Fee interests in lodging properties located near major transportation arteries in urban and suburban areas.We expect that all of the properties will be owned by subsidiary limited partnerships or limited liability companies. These subsidiaries will be single-purpose entities that we create to own a single property, and each will have no assets other than the property it owns. These entities represent a useful means of shielding our operating partnership from liability under state laws and will make the underlying properties easier to transfer. However, tax law disregards single-member LLCs and so it will be as if the operating partnership owns the underlying properties for tax purposes. Use of single-purpose entities in this manner is customary for REITs.
Our independent directors are not required to approve all transactions involving the creation of subsidiary limited liability companies and limited partnerships that we intend to use for investment in properties on our behalf. These subsidiary arrangements are intended to ensure that no environmental or other liabilities associated with any particular property can be attributed against other properties that the operating partnership or we

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will own. The limited liability aspect of a subsidiarys form will shield parent and affiliated (but not subsidiary) companies, including the operating partnership and us, from liability assessed against it. No additional fees will be imposed upon the REIT by the subsidiary companies managers and these subsidiaries will not affect our stockholders voting rights.

We do not intend to invest in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.

Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, unimproved real properties does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we will not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.

Although we are not limited as to the geographic area where we may conduct our operations, we intend to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible. Our Sponsor currently maintains operations in Alabama, California, Connecticut, District of Columbia, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin and Puerto Rico.

Financing Strategy and Policies

We intend to utilize leverage in acquiring our properties. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the
independent directors and is disclosed to our stockholders.

We may finance our property acquisitions through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. The Lightstone REIT had $239.2 million in outstanding long-term obligations as of December 31, 2008. In addition, the Lightstone REIT had $7.4 million outstanding in notes payable.

Dividend Objectives

Federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (excluding any net capital gains). Distributions will be at the discretion of the board of directors and will depend upon our distributable funds, current and projected cash requirements, tax considerations and other factors. We intend to declare dividends to our stockholders as of daily record dates and aggregate and pay such dividends quarterly.

Since the period beginning February 1, 2006, the Board of Directors of the Lightstone REIT declared quarterly dividends in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period. Through December 31, 2008, we have paid aggregate distribution in the $18.1 million, which includes cash distributions paid to stockholders and common stock issued under our
distribution reinvestment program.

Total dividends declared during the year ended December 31, 2008, 2007 and 2006 were $9.9 million, $7.1 million and $1.1 million, respectively. On January 8, 2009, the Companys Board of Directors declared the dividend for the three-month period ending December 31, 2008 of $5.5 million. The dividend was paid during January 2009.

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For the year ended December 31, 2008, approximately 20% of our distributions were funded or will be funded with cash flow from operations and approximately 80% were funded or will be funded for with uninvested proceeds from the sale of shares from our offering.

On March 30, 2009, the Companys Board of Directors declared the quarterly dividend for the three-month period ended March 31, 2009 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business each day during the quarter, which will be paid, in April 2009.

Tax Status

We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code in conjunction with the filing of our 2006 federal tax return. In order to qualify as a REIT, an entity must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual ordinary taxable income to stockholders. REITs are generally not subject to federal income tax on taxable income that they distribute to their stockholders. It is our intention to adhere to these requirements and maintain our REIT status. The Company has assessed that it qualifies as a REIT in 2008.

To maintain our qualification as a REIT, we engage in certain activities through LVP Acquisitions Corp. (LVP Corp), a wholly-owned taxable REIT subsidiary (TRS). As such, we are subject to federal and state income and franchise taxes from these activities.

Competition

The retail, office, industrial and residential real estate markets are highly competitive. We will compete in all of our markets with other owners and operators of retail, office, industrial and residential real estate. The continued development of new retail, office, industrial and residential properties has intensified the competition among owners and operators of these types of real estate in many market areas in which we intend to operate. We will compete based on a number of factors that include location, rental rates, security, suitability of the propertys design to prospective tenants needs and the manner in which the property is
operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.

In addition, we will compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors will include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are other REITs with asset acquisition objectives similar to ours that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and
financial resources than we will have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by the Lightstone REIT. Therefore, we will compete for institutional investors in a market where funds for real estate investment may decrease.

Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay the investment of proceeds from this offering in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to commence or maintain distributions to stockholders.

We believe that our senior managements experience, coupled with our financing, professionalism, diversity of properties and reputation in the industry will enable us to compete with the other real estate investment companies.

Because we are organized as an UPREIT, we are well positioned within the industries in which we intend to operate to offer existing owners the opportunity to contribute those properties to our Lightstone REIT in tax-deferred transactions using our operating partnership units as transactional currency. As a result, we have a competitive advantage over most of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.

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Environmental

As an owner of real estate, we will be subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.

Employees

We do not have employees. We entered into an advisory agreement with our Advisor on April 22, 2005, pursuant to which our Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We will pay our Advisor fees for services related to the investment and management of our assets, and we will reimburse our Advisor for certain expenses incurred on our behalf.

Economic Dependence

We are dependent upon the net proceeds received from the Offering to conduct our proposed activities. The capital required to purchase real estate and real estate related investments has been obtained from the Offering and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments thereafter.

Available Information

Stockholders may obtain copies of our filings with the Securities and Exchange Commission, or SEC, free of charge from the website maintained by the SEC at http://www.sec.gov. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our telephone number is 1-866-792-8700. Our web site is www.LightstoneREIT.com.

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Item 1A. Risk Factors

Set forth below are the risk factors that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements on page ii. If any of the risk events described below actually occurs, our business, financial condition or results of operations could be adversely affected.

Risks Related to the Common Stock

Our REIT is newly formed; therefore we have limited operating history to evaluate our likely performance.  We acquired our first real estate assets in early 2006. Accordingly, we do not have an extensive operating history upon which to evaluate our likely performance. We may not be able to implement our business plan successfully.

Distributions to stockholders may be reduced or not made at all.  Distributions will be based principally on cash available from our properties. The amount of cash available for distributions will be affected by many factors, such as our ability to buy properties with offering proceeds, the operating performance of the properties we acquire and many other variables. We may not be able to pay or maintain distributions or increase distributions over time. Therefore, we cannot determine what amount of cash will be available for distributions. Some of the following factors, which we believe are the material factors that can affect
our ability to make distributions, are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions:



          Cash available for distributions may be reduced if we are required to make capital improvements to properties.

          Cash available to make distributions may decrease if the assets we acquire have lower cash flows than expected.

          Until we invest our offering proceeds in real properties, we may invest in lower yielding short-term instruments, which could result in a lower yield on stockholders investment.

          In connection with future property acquisitions, we may issue additional shares of common stock and/or operating partnership units or interests in the entities that own our properties. We cannot predict the number of shares of common stock, units or interests that we may issue, or the effect that these additional shares might have on cash available for distributions to stockholders. If we issue additional shares, that issuance could reduce the cash available for distributions to stockholders.

          We make distributions to our stockholders to comply with the distribution requirements of the Internal Revenue Code and to eliminate, or at least minimize, exposure to federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.Our operations could be restricted if we become subject to the Investment Company Act of 1940.  We intend to conduct our operations so that we will not be subject to regulation under the Investment Company Act of 1940. We may therefore have to forego certain investments that could produce a more favorable return. Should we fail to qualify for an exemption from registration under the Investment Company Act of 1940, we would be subject to numerous restrictions under this Act, which would have a material adverse affect on our ability to deliver returns to our stockholders.

We do not believe that our operating partnership or we will be considered an investment as defined in the Investment Company Act of 1940 because we do not intend to engage in the types of business that characterize an investment under that law. Investments in real estate will represent the substantial majority of our business, which would not subject us to investment company status. While a company that owns investment securities having a value exceeding 40 percent of its total assets could be considered an investment company, we believe that if we make investments in joint ventures they will be structured so that they are not considered
investment securities for purposes of the law. However, if an examination of our investments by the

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SEC or a court should deem them to be investment securities, we could be deemed to be an investment company and subject to additional restrictions.

Even if our operating partnership or we are deemed an investment company, we may qualify for an exemption from the provisions of the Investment Company Act, such as the exemption that applies generally to companies that purchase or otherwise acquire interests in real estate. Under Section 3(c)(5)(C), the Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The staff of the SEC has provided guidance on the availability of this exemption. Specifically, the staffs position generally requires us to maintain at
least 55% of our assets directly in qualifying real estate interests (qualifying assets). To constitute a qualifying real estate interest under this 55% requirement, a real estate interest must meet various criteria. We intend to invest only in fee or leasehold interests in real estate. Fee interests in real estate are considered qualifying assets for purposes of Section 3(c)(5)(C) of the Investment Company Act and leasehold interests in real estate may be considered qualifying assets for purposes of Section 3(c)(5)(C) of the Investment Company Act. We do not intend to invest in mezzanine loans, subordinate interests in whole loans (B Notes), distressed debt, preferred equity or multi-class (first loss) mortgage-back securities. Investments in such assets may not be deemed qualifying assets for purposes of Section 3(c)(5)(C) of the Investment Company Act and, as a result, any such investments may have to be limited. There can be no
assurance that our investments will continue to qualify for an exemption from investment company status.

If we fail to maintain an exemption or exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, or (b) to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management,
operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.

We intend to monitor our compliance with the exemptions under the Investment Company Act on an ongoing basis.

The price of our common stock is subjective and may not bear any relationship to what a stockholder could receive if it was sold.  Our board of directors arbitrarily determined the offering price of the common stock and such price bears no relationship to any established criteria for valuing issued or outstanding shares. It determined the offering price of our shares of common stock based primarily on the range of offering prices of other REITs that do not have a public trading market. In addition, our board of directors set the offering price of our shares at $10, a round number, in order to facilitate calculations relating
to the offering price of our shares. However, the offering price of our shares of common stock may not reflect the price at which the shares may trade if they were listed on an exchange or actively traded by brokers, nor of the proceeds that a stockholder may receive if we were liquidated or dissolved.

Our common stock is not currently listed on an exchange or trading market and is illiquid.  There is currently no public trading market for the shares. Subsequent to the close of our initial public offering in October 2008, our common stock has not been listed on a stock exchange Accordingly, we do not expect a public trading market for our shares to develop. We may never list the shares for trading on a national stock exchange or include the shares for quotation on a national market system. The absence of an active public market for our shares could impair your ability to sell our stock at a profit or at all. Therefore, our
shares should be purchased as a long term investment only.

Your percentage of ownership may become diluted if we issue new shares of stock.  Stockholders have no rights to buy additional shares of stock in the event we issue new shares of stock. We may issue common stock, convertible debt or preferred stock pursuant to a subsequent public offering or a private placement, upon exercise of options, pursuant to our distribution reinvestment program or to sellers of properties we directly or indirectly acquire instead of, or in addition to, cash consideration. We may also issue common

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stock upon the exercise of the warrants issued and to be issued to participating broker-dealers. Stockholders who do not participate in any future stock issues will experience dilution in the percentage of the issued and outstanding stock they own.

The special general partner interests will entitle Lightstone SLP, LLC, which is directly owned and controlled by our Sponsor, to certain payments and distributions that will significantly reduce the distributions available to stockholders after a 7% return.  Lightstone SLP, LLC will receive returns on its special general partner interests that are subordinated to stockholders 7% return on their net investment. Distributions to stockholders will be reduced after they have received this 7% return because of the payments and distributions to Lightstone SLP, LLC in connection with its special general partner interests. In
addition, we may eventually repay Lightstone SLP, LLC up to $30,000,000 for its investment in the special general partner interests, which will result in a smaller pool of assets available for distribution to stockholders.

Conflicts of Interest

The Conflicts of Interest section discusses in more detail the more significant of these potential conflicts of interest, as well as the procedures that have been established to resolve a number of these potential conflicts.

There are conflicts of interest between advisor, property managers and their affiliates and us.  David Lichtenstein, our sponsor, is the founder of The Lightstone Group, LLC which he wholly owns and does business in his individual capacity under that name. Through The Lightstone Group, Mr. Lichtenstein controls and indirectly owns our advisor, our property managers, our operating partnership, our dealer manager and affiliates, except for us. Our advisor does not advise any entity other than us. However, employees of our advisor are also employed by Lightstone Value Plus REIT II LLC, the advisor to Lightstone Value Plus Real
Estate Investment Trust II, Inc. (Lightstone II), the sponsors other public program. Mr. Lichtenstein is one of our directors and The Lightstone Group or an affiliated entity controlled by Mr. Lichtenstein employs Bruno de Vinck, our other non-independent director, and each of our officers. As a result, our operation and management may be influenced or affected by conflicts of interest arising out of our relationship with our affiliates.

There is competition for the time and services of the personnel of our advisor and its affiliates.  Our sponsor and its affiliates may compete with us for the time and services of the personnel of our advisor and its other affiliates in connection with our operation and the management of our assets. Specifically, employees of our sponsor, the advisor and our property managers will face conflicts of interest relating to time management and the allocation of resources and investment opportunities.

We do not have employees.  Likewise, our advisor will rely on the employees of the sponsor and its affiliates to manage and operate our business. The sponsor is not restricted from acquiring, developing, operating, managing, leasing or selling real estate through entities other than us and will continue to be actively involved in operations and activities other than our operations and activities. The sponsor currently controls and/or operates other entities that own properties in many of the markets in which we may seek to invest. The sponsor spends a material amount of time managing these properties and other assets unrelated
to our business. Our business may suffer as a result because we lack the ability to manage it without the time and attention of our sponsors employees. We encourage you to read the Conflicts of Interest section of this prospectus for a further discussion of these topics.

Our sponsor and its affiliates are general partners and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours. Because the sponsor and its affiliates have interests in other real estate programs and also engage in other business activities, they may have conflicts of interest in allocating their time and resources among our business and these other activities. Our officers and directors, as well as those of the advisor, may own equity interests in entities affiliated with our sponsor from which we may buy properties. These individuals may make substantial profits in connection with
such transactions, which could result in conflicts of interest. Likewise, such individuals could make substantial profits as the result of investment opportunities allocated to entities affiliated with the sponsor other than us. As a result of these interests, they could pursue transactions that may not be in our best interest. Also, if our sponsor suffers financial or operational problems as the result of any of its activities, whether or not

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related to our business, the ability of our sponsor and its affiliates, our advisor and property manager to operate our business could be adversely impacted.

Certain of our affiliates who provide services to us may be engaged in competitive activities.  Our advisor, property managers and their respective affiliates may, in the future, be engaged in other activities that could result in potential conflicts of interest with the services that they will provide to us. In addition, the sponsor may compete with us for both the acquisition and/or refinancing of properties of a type suitable for our investment after 75% of the total gross proceeds from our initial public offering have been invested or committed for investment in real properties.

If we invest in joint ventures, the objectives of our partners may conflict with our objectives.  In accordance with one of our acquisition strategies, we may make investments in joint ventures or other partnership arrangements between us and affiliates of our sponsor or with unaffiliated third parties. Investments in joint ventures which own real properties may involve risks otherwise not present when we purchase real properties directly. For example, our co-venturer may file for bankruptcy protection, may have economic or business interests or goals which are inconsistent with our interests or goals, or may take actions
contrary to our instructions, requests, policies or objectives. Among other things, actions by a co-venturer might subject real properties owned by the joint venture to liabilities greater than those contemplated by the terms of the joint venture or other adverse consequences.

These diverging interests could result in, among other things, exposing us to liabilities of the joint venture in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. Moreover, there is an additional risk that the co-venturers may not be able to agree on matters relating to the property they jointly own. In addition, the fiduciary obligation that our sponsor or our board of directors may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights.

We may purchase real properties from persons with whom affiliates of our advisor have prior business relationships.  If we purchase properties from third parties who have sold, or may sell, properties to our advisors or its affiliates, our advisor will experience a conflict between our current interests and its interest in preserving any ongoing business relationship with these sellers.

Property management services are being provided by an affiliated party.  Our property managers are owned by our sponsor, and are thus subject to an inherent conflict of interest. In addition, our advisor may face a conflict of interest when determining whether we should dispose of any property we own that is managed by one of our property managers because the property manager may lose fees associated with the management of the property. Specifically, because the property managers will receive significant fees for managing our properties, our advisor may face a conflict of interest when determining whether we should sell
properties under circumstances where the property managers would no longer manage the property after the transaction. As a result of this conflict of interest, we may not dispose of properties when it would be in our best interests to do so.

Our advisor and its affiliates receive commissions, fees and other compensation based upon our investments.  Some compensation is payable to our advisor whether or not there is cash available to make distributions to our stockholders. To the extent this occurs, our advisor and its affiliates benefit from us retaining ownership of our assets and leveraging our assets, while our stockholders may be better served by sale or disposition or not leveraging the assets. In addition, the advisors ability to receive fees and reimbursements depends on our continued investment in real properties. Therefore, the interest of the
advisor and its affiliates in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock. Because asset management fees payable to our advisor are based on total assets under management, including assets purchased using debt, our advisor may have an incentive to incur a high level of leverage in order to increase the total amount of assets under management.

Our sponsor may face conflicts of interest in connection with the management of our day-to-day operations and in the enforcement of agreements between our sponsor and its affiliates.  The property managers and the advisor will manage our day-to-day operations and properties pursuant to management agreements and an advisory agreement. These agreements were not negotiated at arms length and certain fees

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payable by us under such agreements are paid regardless of our performance. Our sponsor and its affiliates may be in a conflict of interest position as to matters relating to these agreements. Examples include the computation of fees and reimbursements under such agreements, the enforcement and/or termination of the agreements and the priority of payments to third parties as opposed to amounts paid to our sponsors affiliates. These fees may be higher than fees charged by third parties in an arms length transaction as a result of these conflicts.

Title insurance services are being provided by an affiliated party. From time to time, Lightstone purchases title insurance from an agent in which our sponsor owns a fifty percent limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by Lightstone of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and
competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arms-length basis.

We may compete with other entities affiliated with our sponsor for tenants.  The sponsor and its affiliates are not prohibited from engaging, directly or indirectly, in any other business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, management, leasing or sale of real estate projects. The sponsor or its affiliates may own and/or manage properties in most if not all geographical areas in which we expect to acquire real estate assets. Therefore, our properties may compete for tenants with other properties owned
and/or managed by the sponsor and its affiliates. The sponsor may face conflicts of interest when evaluating tenant opportunities for our properties and other properties owned and/or managed by the sponsor and its affiliates and these conflicts of interest may have a negative impact on our ability to attract and retain tenants.

We have the same legal counsel as our sponsor and its affiliates.  Proskauer Rose LLP serves as our general legal counsel, as well as special counsel to our sponsor and various affiliates including, our advisor. The interests of our sponsor and its affiliates, including our sponsor, may become adverse to ours in the future. Under legal ethics rules, Proskauer Rose LLP may be precluded from representing us due to any conflict of interest between us and our sponsor and its affiliates, including our advisor.

Each member of our Board of Directors is also on the Board of Directors of Lightstone Value Plus Real Estate Investment II, Inc.  Each of our directors is also a director of Lightstone II. Accordingly, our Board of Directors will owe fiduciary duties and duties of loyalty to Lightstone II and its stockholders. The loyalties of our directors to Lightstone II may influence the judgment of our Board of Directors when considering issues that may affect us. For example, we are permitted to enter into a joint venture or preferred equity investment with Lightstone II for the acquisition of property or real estate-related investments.
Decisions of our Board of Directors regarding the terms of those transactions may be influenced by its loyalties to Lightstone II and its stockholders. In addition, decisions of our Board of Directors regarding the timing of our property sales could be influenced by concerns that the sales would compete with those of Lightstone II.

Risks Related to our Organization, Structure and Management

Limitations on Changes in Control (Anti-Takeover Provisions).  Our organizational structure makes us a difficult takeover target. Certain provisions in our charter, bylaws, operating partnership agreement, advisory agreement and Maryland law may have the effect of discouraging a third party from making an acquisition proposal and could thereby depress the price of our stock and inhibit a management change. Provisions that may have an anti-takeover effect and inhibit a change in our management include:

There are ownership limits and restrictions on transferability and ownership in our charter.  In order for us to qualify as a REIT, no more than 50% of the outstanding shares of our stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. To make sure that we will not fail to qualify as a REIT under this test, our charter provides that, subject to some exceptions, no person may beneficially own (i) more than 9.8% in value of our aggregate outstanding stock or (ii) more than 9.8% in terms of the number of outstanding shares or the value of our
common stock. Our board of directors may exempt a person from the 9.8% ownership limit upon such conditions as the board

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of directors may direct. However, our board of directors may not grant an exemption from the 9.8% ownership limit to any proposed transferee if it would result in the termination of our status as a REIT.

This restriction may:



          have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock; or

          compel a stockholder who had acquired more than 9.8% of our stock to dispose of the additional shares and, as a result, to forfeit the benefits of owning the additional shares.Our charter permits our board of directors to issue preferred stock with terms that may discourage a third party from acquiring us. Our charter authorizes us to issue additional authorized but unissued shares of common stock or preferred stock. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Our board of directors could establish a series of Preferred Stock that could delay or prevent a transaction or a change in control that might involve a premium price for the Common Stock or otherwise
be in the best interest of our stockholders.

The operating partnership agreement contains provisions that may discourage a third party from acquiring us.  A limited partner in the Operating Partnership has the option to exchange his or her limited partnership units for cash or, at our option, shares of our common stock. Those exchange rights are generally not exercisable until the limited partner has held those limited partnership units for more than one year. However, if we or the Operating Partnership propose to engage in any merger, consolidation or other combination with or into another person or a sale of all or substantially all of our assets, or a liquidation, or
any reclassification, recapitalization or change of common and preferred stock into which a limited partnership common unit may be exchanged, each holder of a limited partnership unit will have the right to exchange the partnership unit into cash or, at our option, shares of common stock, prior to the stockholder vote on the transaction. As a result, limited partnership unit holders who timely exchange their units prior to the record date for the stockholder vote on any transaction will be entitled to vote their shares of common stock with respect to the transaction. The additional shares that might be outstanding as a result of these exchanges of limited partnership units may deter an acquisition proposal.

Maryland law may discourage a third party from acquiring us.  Maryland law restricts mergers and other business combinations and provides that control shares of a Maryland corporation acquired in a control share acquisition have limited voting rights. These provisions of Maryland law are more fully described below under the heading Provisions of Maryland Law and of our Charter and Bylaws. The business combination statute could have the effect of discouraging offers from third parties to acquire us, and increasing the difficulty of successfully completing this type of offer. The control share statute may discourage
others from trying to acquire control of us and increase the difficulty of consummating any offer. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by our Sponsor and its affiliates of shares of our stock; however, this provision may be amended or eliminated at any time in the future.

Management and Policy Changes

Our rights and the rights of our stockholders to take action against the directors and our Advisor are limited.  Maryland law provides that a director has no liability in that capacity if he or she performs his duties in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Subject to the restrictions discussed below, our charter, in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our Advisor, require us to indemnify
our directors, officers, employees and agents and our Advisor for actions taken on our behalf, in good faith and in our best interest and without negligence or misconduct or, in the case of independent directors, without gross negligence or willful misconduct. As a result, the stockholders and we may have more limited rights against our directors, officers, employees and agents, and our Advisor than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor in some cases.

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Stockholders have limited control over changes in our policies.  Our board of directors determines our major policies, including our investment objectives, financing, growth, debt capitalization, REIT qualification and distributions. Subject to the investment objections and limitations set forth in our charter, our board of directors may amend or revise these and other policies. Although stockholders will have limited control over changes in our policies, our charter requires the concurrence of a majority of our outstanding stock in order for the board of directors to amend our charter (except for amendments that do not
adversely affect stockholders rights, preferences and privileges), sell all or substantially all of our assets other than in the ordinary course of business or in connection with our liquidation or dissolution, cause our merger or other reorganization, or dissolve or liquidate us, other than before our initial investment in property.

Certain of our affiliates will receive substantial fees prior to the payment of dividends to our stockholders.  We will pay or cause to be paid substantial compensation to our Dealer Manager, Advisor, Property Manager, management and affiliates and their employees. We will pay various types of compensation to affiliates of our Sponsor and such affiliates employees, including salaries, other cash compensation and options. In addition, our Dealer Manager and Property Manager will receive compensation for acting, respectively, as our Dealer Manager and Advisor (although we will pay our Dealer Manager fees and selling
commissions with the proceeds from the sale of the special general partner interests in our operating partnership to our Sponsor or an affiliate). In general, this compensation will not be dependent on our success or profitability. These payments are payable before the payment of dividends to the stockholders and none of these payments are subordinated to a specified return to the stockholders. Also, our Property Manager will receive compensation under the Management Agreement though, in general, this compensation would be dependent on our gross revenues. In addition, other affiliates may from time to time provide services to us if and as approved by the disinterested directors. It is possible that we could obtain such goods and services from unrelated persons at a lesser price.

We may not be reimbursed by our advisor for certain operational stage expenses.  Our Advisor may be required to reimburse us for certain operational stage expenses. In the event our Advisor's net worth or cash flow is not sufficient to cover these expenses, we will not be reimbursed. This may adversely affect our financial condition and our ability to pay distributions.

Limitations on Liability and Indemnification

The liability of directors and officers is limited.  Our directors and officers will not be liable for monetary damages unless the director or officer actually received an improper benefit or profit in money, property or services, or is adjudged to be liable to us or our stockholders based on a finding that his or her action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

Our directors are also required to act in good faith in a manner believed by them to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other person for failure to discharge his obligations as a director. We are permitted to purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, including our Advisor and its affiliates, against any liability asserted which was incurred in any such
capacity with us or arising out of such status, except as limited by our charter. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.

Our charter prohibits us from indemnifying or holding harmless, for any loss or liability that we suffer, any director, officer, employee, agent or the Advisor or its affiliates.

We may indemnify our directors, officers and agents against loss.  Under our charter, we will, under specified conditions, indemnify and pay or reimburse reasonable expenses to our directors, officers, employees and other agents, including our Advisor and its affiliates, against all liabilities incurred in connection with their serving in such capacities, subject to the limitations set forth in our charter. We may also enter into any contract for indemnity and advancement of expenses in this regard. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our
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Risks Associated with our Properties and the Market

Real Estate Investment Risks

Operating risks.

Our cash flows from real estate investments may become insufficient to pay our operating expenses and to cover the dividends we have paid and/or declared.  Although our operating cash flows are currently sufficient to pay both our expenses and debt service payments and dividends at our historical per-share amounts, we cannot assure you that we will be able to maintain sufficient cash flows to fund operating expenses and debt service payments and dividend at any particular level, if at all.

The sufficiency of cash flow to fund future dividend payments will depend on the pace at which we are able to identify and close on suitable cash-generating real property investments. If the accrual of offering proceeds raised in our initial public offering outpaces the investment of these funds in real property acquisitions, cash generated from such investments may become insufficient to fund operating expenses and continued dividend payments at historical levels.

Failure to generate revenue may reduce distributions to stockholders.  The cash flow from equity investments in commercial and residential properties depends on the amount of revenue generated and expenses incurred in operating the properties. If the properties we invest in fail to generate revenue that is sufficient to meet operating expenses, debt service, and capital expenditures, our income and ability to make distributions to stockholders will be adversely affected.

Economic conditions may adversely affect our income.  U.S. and international markets are currently experiencing increased levels of volatility due to a combination of many factors, including decreasing values of home prices, limited access to credit markets, higher fuel prices, less consumer spending and fears of a national and global recession. The effects of the current market dislocation may persist as financial institutions continue to take the necessary steps to restructure their business and capital structures. As a result, this economic downturn has reduced the demand for space and removed support for rents and property
values. We cannot predict when the real estate markets will recover. As a result, the value of our properties may decline if the current market conditions persist or worsen.

A commercial or residential propertys income and value may be adversely affected by national and regional economic conditions, local real estate conditions such as an oversupply of properties or a reduction in demand for properties, availability of for sale properties, competition from other similar properties, our ability to provide adequate maintenance, insurance and management services, increased operating costs (including real estate taxes), the attractiveness and location of the property and changes in market rental rates. Our income will be adversely affected if the properties we invest in cannot be rented on favorable terms
or if a significant number of tenants in such properties are unable to pay rent. Our performance is linked to economic conditions in the regions where the properties we invest in will be located and in the market for residential, office, retail and industrial space generally. Therefore, to the extent that there are adverse economic conditions in those regions, and in these markets generally, that impact the applicable market rents, such conditions could result in a reduction of our income and cash available for distributions and thus affect the amount of distributions we can make to stockholders.

The profitability of attempted acquisitions is uncertain.  We intend to acquire properties selectively. Acquisition of properties entails risks that investments will fail to perform in accordance with expectations. In undertaking these acquisitions, we will incur certain risks, including the expenditure of funds on, and the devotion of managements time to, transactions that may not come to fruition. Additional risks inherent in acquisitions include risks that the properties will not achieve anticipated occupancy levels and that estimates of the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove inaccurate.

Real estate investments are illiquid.  Because real estate investments are relatively illiquid, our ability to vary our portfolio promptly in response to economic or other conditions will be limited. In addition, certain significant expenditures, such as debt service, real estate taxes, and operating and maintenance costs generally are not reduced in circumstances resulting in a reduction in income from the investment. The foregoing and

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any other factor or event that would impede our ability to respond to adverse changes in the performance of our investments could have an adverse effect on our financial condition and results of operations.

Rising expenses could reduce cash flow and funds available for future acquisitions.  Properties we invest in will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance, administrative and other expenses. While some of our properties may be leased on a triple-net basis or require the tenants to pay a portion of the expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we will have to pay those costs. If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of the
expenses, we would be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.

We will depend on tenants who lease from us on a triple-net basis to pay the appropriate portion of expenses.  If the tenants lease on a triple-net basis fail to pay required tax, utility and other impositions, we could be required to pay those costs for properties we invest in, which would adversely affect funds available for future acquisitions or cash available for distributions. If we lease properties on a triple-net basis, we run the risk of tenant default or downgrade in the tenants credit, which could lead to default and foreclosure on the underlying property.

If we purchase assets at a time when the commercial and residential real estate market is experiencing substantial influxes of capital investment and competition for properties, the real estate we purchase may not appreciate or may decrease in value.  The commercial and residential real estate markets from time to time experience a substantial influx of capital from investors. This substantial flow of capital, combined with significant competition for real estate, may result in inflated purchase prices for such assets. To the extent we purchase real estate in such an environment, we are subject to the risk that if the real
estate market ceases to attract the same level of capital investment in the future as it is currently attracting, or if the number of companies seeking to acquire such assets decreases, our returns will be lower and the value of our assets may not appreciate or may decrease significantly below the amount we paid for such assets.

The bankruptcy or insolvency of a major commercial tenant would adversely impact us.  Any or all of the commercial tenants in a property we invest in, or a guarantor of a commercial tenants lease obligations, could be subject to a bankruptcy proceeding. The bankruptcy or insolvency of a significant commercial tenant or a number of smaller commercial tenants would have an adverse impact on our income and our ability to pay dividends because a tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an
event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to stockholders.

Generally, under bankruptcy law, a tenant has the option of continuing or terminating any un-expired lease. In the event of a bankruptcy, there is no assurance that the tenant or its trustee will continue our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected. If the tenant continues its current lease, the tenant must cure all defaults under the lease and provide adequate assurance of its future performance under the lease. If the tenant terminates the lease, we will lose future rent under the lease and our claim for past due amounts
owing under the lease will be treated as a general unsecured claim and may be subject to certain limitations. General unsecured claims are the last claims paid in a bankruptcy and therefore this claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims. While the bankruptcy of any tenant and the rejection of its lease may provide us with an opportunity to lease the vacant space to another more desirable tenant on better terms, there can be no assurance that we would be able to do so.

The terms of new leases may adversely impact our income.  Even if the tenants of the properties we invest in do renew their leases, or we relet the units to new tenants, the terms of renewal or reletting may be less favorable than current lease terms. If the lease rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. As noted

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above, certain significant expenditures associated with each equity investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances result in a reduction in rental income.

We may depend on commercial tenants for our revenue and therefore our revenue may depend on the success and economic viability of our commercial tenants. Our reliance on single or significant commercial tenants in certain buildings may decrease our ability to lease vacated space.  Our financial results will depend in part on leasing space in the properties we acquire to tenants on economically favorable terms. A default by a commercial tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a commercial tenants election not to extend a lease upon its expiration could
have an adverse effect on our income, general financial condition and ability to pay distributions. Therefore, our financial success is indirectly dependent on the success of the businesses operated by the commercial tenants of our properties.

Lease payment defaults by commercial tenants would most likely cause us to reduce the amount of distributions to stockholders. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. A default by a significant commercial tenant or a substantial number of commercial tenants at any one time on lease payments to us would cause us to lose the revenue associated with such lease(s) and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a
mortgage. Therefore, lease payment defaults by tenants could cause us to reduce the amount of distributions to stockholders.

Commercial tenants may have the right to terminate their leases upon the occurrence of certain customary events of default and, in other circumstances, may not renew their leases or, because of market conditions, may be able to renew their leases on terms that are less favorable to us than the terms of the current leases. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Therefore, the weakening of the financial condition of a significant commercial tenant or a number of smaller commercial tenants and vacancies caused by defaults
of tenants or the expiration of leases may adversely affect our operations.

A property that incurs a vacancy could be difficult to re-lease.  A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. If we terminate any lease following a default by a lessee, we will have to re-lease the affected property in order to maintain our qualification as a REIT. If a tenant vacates a property, we may be unable either to re-lease the property for the rent due under the prior lease or to re-lease the property without incurring additional expenditures relating to the property. In addition, we could experience delays in enforcing our rights
against, and collecting rents (and, in some cases, real estate taxes and insurance costs) due from a defaulting tenant. Any delay we experience in re-leasing a property or difficulty in re-leasing at acceptable rates may reduce cash available to make distributions to our stockholders.

In many cases, tenant leases contain provisions giving the tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center, or limit the ability of other tenants to sell such merchandise or provide such services. When re-leasing space after a vacancy is necessary, these provisions may limit the number and types of prospective tenants for the vacant space.

We also may have to incur substantial expenditures in connection with any re-leasing. A number of the properties we invest in may be specifically suited to the particular needs of our tenants. Therefore, we may have difficulty obtaining a new tenant for any vacant space we have in our properties, particularly if the floor plan of the vacant space limits the types of businesses that can use the space without major renovation. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash dividends to be distributed to stockholders. As noted above, certain significant expenditures associated with each equity
investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. The failure to re-lease or to re-lease on satisfactory terms could result in a reduction of our income, funds from operations and cash available for distributions and thus affect the amount of distributions to stockholders. In addition, the resale value of the

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property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

We may be unable to sell a property if or when we decide to do so.  We may give some commercial tenants the right, but not the obligation, to purchase their properties from us beginning a specified number of years after the date of the lease. Some of our leases also generally provide the tenant with a right of first refusal on any proposed sale provisions. These policies may lessen the ability of the Advisor and our board of directors to freely control the sale of the property.

Although we may grant a lessee a right of first offer or option to purchase a property, there is no assurance that the lessee will exercise that right or that the price offered by the lessee in the case of a right of first offer will be adequate. In connection with the acquisition of a property, we may agree on restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. Even absent such restrictions, the real estate market is affected by many factors, such as general economic conditions, availability of financing,
interest rates and other factors, including supply and demand, that are beyond our control. We may not be able to sell any property for the price or on the terms set by us, and prices or other terms offered by a prospective purchaser may not be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct such defects or to make such improvements.

We may not make a profit if we sell a property.  The prices that we can obtain when we determine to sell a property will depend on many factors that are presently unknown, including the operating history, tax treatment of real estate investments, demographic trends in the area and available financing. There is a risk that we will not realize any significant appreciation on our investment in a property. Accordingly, stockholders ability to recover all or any portion of stockholders investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied there from.

We may incur liabilities in connection with properties we acquire.  Our anticipated acquisition activities are subject to many risks. We may acquire properties or entities that are subject to liabilities or that have problems relating to environmental condition, state of title, physical condition or compliance with zoning laws, building codes, or other legal requirements. In each case, our acquisition may be without any recourse, or with only limited recourse, with respect to unknown liabilities or conditions. As a result, if any liability were asserted against us relating to those properties or entities, or if any adverse
condition existed with respect to the properties or entities, we might have to pay substantial sums to settle or cure it, which could adversely affect our cash flow and operating results. However, some of these liabilities may be covered by insurance. In addition, we intend to perform customary due diligence regarding each property or entity we acquire. We also will attempt to obtain appropriate representations and indemnities from the sellers of the properties or entities we acquire, although it is possible that the sellers may not have the resources to satisfy their indemnification obligations if a liability arises. Unknown liabilities to third parties with respect to properties or entities acquired might include:



          liabilities for clean-up of undisclosed environmental contamination;

          claims by tenants, vendors or other persons dealing with the former owners of the properties;

          liabilities incurred in the ordinary course of business; and

          claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.Competition with third parties in acquiring and operating properties may reduce our profitability and the return on stockholders investment.  We compete with many other entities engaged in real estate investment activities, many of which have greater resources than we do. Specifically, there are numerous commercial developers, real estate companies, real estate investment trusts and U.S. institutional and foreign investors that operate in the markets in which we may operate, that will compete with us in acquiring residential, office, retail, industrial and other properties that will be seeking investments and tenants for
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properties. Many of these entities have significant financial and other resources, including operating experience, allowing them to compete effectively with us.

Competitors with substantially greater financial resources than us may generally be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of entities in which investments may be made or risks attendant to a geographic concentration of investments. In addition, those competitors that are not REITs may be at an advantage to the extent they can utilize working capital to finance projects, while we (and our competitors that are REITs) will be required by the annual distribution provisions under the Internal Revenue Code to distribute significant amounts of cash from operations to our stockholders.

Demand from third parties for properties that meet our investment objectives could result in an increase of the price of such properties. If we pay higher prices for properties, our profitability may be reduced and stockholders may experience a lower return on stockholders investment. In addition, our properties may be located in close proximity to other properties that will compete against our properties for tenants. Many of these competing properties may be better located and/or appointed than the properties that we will acquire, giving these properties a competitive advantage over our properties, and we may, in the future, face additional
competition from properties not yet constructed or even planned. This competition could adversely affect our business. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged.

We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for residential renters, retail customer traffic and creditworthy commercial tenants. In addition, our ability to charge premium rental rates to tenants may be negatively impacted. This increased competition may increase our costs of acquisitions or lower the occupancies and the rent we may charge tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties, which we would not have otherwise made, thus affecting cash available for
distributions to stockholders.

We may not have control over costs arising from rehabilitation of properties.  We may elect to acquire properties, which may require rehabilitation. In particular, we may acquire affordable properties that we will rehabilitate and convert to market rate properties. Consequently, we intend to retain independent general contractors to perform the actual physical rehabilitation work and will be subject to risks in connection with a contractors ability to control rehabilitation costs, the timing of completion of rehabilitation, and a contractors ability to build in conformity with plans and specifications.

We may incur losses as result of defaults by the purchasers of properties we sell in certain circumstances.  If we decide to sell any of our properties, we will use our best efforts to sell them for cash. However, we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law. There are no limitations or restrictions on our ability to take purchase money obligations. We may incur losses as a result of such defaults, which may adversely affect our available cash and our ability to make
distributions to stockholders.

We may experience energy shortages and allocations.  There may be shortages or increased costs of fuel, natural gas, water, electric power or allocations thereof by suppliers or governmental regulatory bodies in the areas where we purchase properties, in which event the operation of our properties may be adversely affected.

We may acquire properties with lockout provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.  We may acquire properties in exchange for operating partnership units and agree to restrictions on sales or refinancing, called lock-out provisions that are intended to preserve favorable tax treatment for the owners of such properties who sell them to us. Lockout provisions may restrict sales or refinancings for a certain period in order to comply with the applicable government regulations. Lockout provisions could
materially restrict us from selling or otherwise disposing of or refinancing properties. This would affect our ability to turn our investments into cash and thus affect cash available to return capital to stockholders. Lockout provisions could

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impair our ability to take actions during the lockout period that would otherwise be in the best interests of our stockholders and, therefore, might have an adverse impact on the value of the shares, relative to the value that would result if the lockout provisions did not exist. In particular, lockout provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

Changes in applicable laws may adversely affect the income and value of our properties.  The income and value of a property may be affected by such factors as environmental, rent control and other laws and regulations, changes in applicable general and real estate tax laws (including the possibility of changes in the federal income tax laws or the lengthening of the depreciation period for real estate) and interest rates, the availability of financing, acts of nature (such as hurricanes and floods) and other factors beyond our control.

Retail Industry Risks.

Our retail properties are subject to the various risks discussed above. In addition, they are subject to the risks discussed below.

Retail conditions may adversely affect our income.  A retail propertys revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our common stock may be negatively impacted.

Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we may derive from percentage rent leases could decline upon a general economic downturn.

Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.  In the retail sector, any tenant occupying a large portion of the gross leasable area of a retail center, a tenant of any of the triple-net single-user retail properties outside the primary geographical area of investment, commonly referred to as an anchor tenant, or a tenant that is our anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew
its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition.

A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenants lease is terminated. We may own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These co-tenancy provisions may also exist in some leases where we own a portion of a retail property and one or more of the anchor tenants leases space in that portion of the center not owned or controlled by us. If such tenants were to vacate their space, tenants with co-tenancy provisions
would have the right to terminate their leases with us or seek a rent reduction from us. In such event, we may be unable to re-lease the vacated space.

Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. In the event that we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant.

Competition with other retail channels may reduce our profitability and the return on stockholders investment.  Retail tenants will face potentially changing consumer preferences and increasing competition from other forms of retailing, such as discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues, discount shopping clubs, internet and telemarketing. Other retail centers within the market

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area of properties we invest in will compete with our properties for customers, affecting their tenants cash flows and thus affecting their ability to pay rent. In addition, tenants rent payments may be based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and our cash flow will decrease.

Residential Industry Risks.

Our residential properties will be subject to the various risks discussed above. In addition, they will be subject to the risks discussed below.

The short-term nature of our residential leases may adversely impact our income.  If residents of properties we invest in decide not to renew their leases upon expiration, we may not be able to relet their units. Because substantially all of our residential leases will be for apartments, they will generally be for terms of no more than one or two years. If we are unable to promptly renew the leases or relet the units then our results of operations and financial condition will be adversely affected. Certain significant expenditures associated with each equity investment in real estate (such as mortgage payments, real estate
taxes and maintenance costs) are generally not reduced when circumstances result in a reduction in rental income.

An economic downturn could adversely affect the residential industry and may affect operations for the residential properties that we acquire.  As a result of the effects of an economic downturn, including increased unemployment rates, the residential industry may experience a significant decline in business caused by a reduction in overall renters. Moreover, low residential mortgage interest rates could result from an economic downturn and encourage potential renters to purchase residences rather than lease them. Our residential properties may experience declines in occupancy rate due to any such decline in residential
mortgage interest rates.

Lodging Industry Risks.

We may be subject to the risks common to the lodging industry.  Our hotels will be subject to all of the risks common to the hotel industry and subject to market conditions that affect all hotel properties. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:



          increases in supply of hotel rooms that exceed increases in demand;

          increases in energy costs and other travel expenses that reduce business and leisure travel;

          reduced business and leisure travel due to continued geo-political uncertainty, including terrorism;

          adverse effects of declines in general and local economic activity;

          adverse effects of a downturn in the hotel industry; and

          risks generally associated with the ownership of hotels and real estate, as discussed below.We do not have control over the market and business conditions that affect the value of our lodging properties, and adverse changes with respect to such conditions could have an adverse effect on our results of operations, financial condition and cash flows. Hotel properties, including extended stay hotels, are subject to varying degrees of risk generally common to the ownership of hotels, many of which are beyond our control, including the following:



          increased competition from other existing hotels in our markets;

          new hotels entering our markets, which may adversely affect the occupancy levels and average daily rates of our lodging properties;

          declines in business and leisure travel;

          increases in energy costs, increased threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and leisure travelers;

          increases in operating costs due to inflation and other factors that may not be offset by increased room rates;

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

          changes in, and the related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances; and

          adverse effects of international, national, regional and local economic and market conditions.Adverse changes in any or all of these factors could have an adverse effect on our results of operations, financial condition and cash flows, thereby adversely impacting our ability to service debt and to make distributions to our stockholders.

Third-Party management of lodging properties can adversely affect our properties.  If we invest in lodging properties, such properties will be operated by a third-party management company and could be adversely affected if that third-party management company, or its affiliated brands, experiences negative publicity or other adverse developments. Any lodging properties we may acquire are expected to be operated under brands owned by an affiliate of our sponsor and managed by a management company that is affiliated with such brands. Because of this concentration, negative publicity or other adverse developments that affect that
operator and/or its affiliated brands generally may adversely affect our results of operations, financial condition, and consequently cash flows thereby impacting our ability to service debt, and to make distributions to our stockholders.

As a REIT, we cannot directly operate our lodging properties.  We cannot and will not directly operate our lodging properties and, as a result, our results of operations, financial position, ability to service debt and our ability to make distributions to stockholders are dependent on the ability of our third-party management companies and our tenants to operate our extended stay hotel properties successfully. In order for us to satisfy certain REIT qualification rules, we cannot directly operate any lodging properties we may acquire or actively participate in the decisions affecting their daily operations. Instead, through a
taxable REIT subsidiary, or taxable REIT subsidiary (TRS) lessee, we must enter into management agreements with a third-party management company, or we must lease our lodging properties to third-party tenants on a triple-net lease basis. We cannot and will not control this third-party management company or the tenants who operate and are responsible for maintenance and other day-to-day management of our lodging properties, including, but not limited to, the implementation of significant operating decisions. Thus, even if we believe our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory operating results, we may not be able to require the third-party management company or the tenants to change their method of operation of our lodging properties. Our results of operations, financial position, cash flows and our ability to service debt and to make distributions to stockholders are, therefore, dependent on the ability of our
third-party management company and tenants to operate our lodging properties successfully.

We will rely on a third-party hotel management company to establish and maintain adequate internal controls over financial reporting at our lodging properties. In doing this, the property manager should have policies and procedures in place which allows them to effectively monitor and report to us the operating results of our lodging properties which ultimately are included in our consolidated financial statements. Because the operations of our lodging properties ultimately become a component of our consolidated financial statements, we evaluate the effectiveness of the internal controls over financial reporting at all of our properties, including
our lodging properties, in connection with the certifications we provide in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively, pursuant to the Sarbanes Oxley Act of 2002. However, we will not control the design or implementation of or changes to internal controls at any of our lodging properties. Thus, even if we believe that our lodging properties are being operated without effective internal controls, we may not be able to require the third-party management company to change its internal control structure. This could require us to implement extensive and possibly inefficient controls at a parent level in an attempt to mitigate such deficiencies. If such controls are not effective, the accuracy of the results of our operations that we report could be affected. Accordingly, our ability to conclude that, as a company, our internal controls are effective is significantly dependent upon the effectiveness of internal controls that our third-party management company
will implement at our lodging properties. Our lodging operations were not significant to our overall results in 2007, and while we do not consider it likely, it is possible that we could have a significant deficiency or material weakness as a result of the ineffectiveness of the internal controls at one or more of our lodging properties.

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If we replace a third-party management company or tenant, we may be required by the terms of the relevant management agreement or lease to pay substantial termination fees, and we may experience significant disruptions at the affected lodging properties. While it is our intent to enter into management agreements with a third-party management company or tenants with substantial prior lodging experience, we may not be able to make such arrangements in the future. If we experience such disruptions, it may adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and to make distributions to
our stockholders.

Our use of the taxable REIT subsidiary structure will increase our expenses.  A TRS structure will subject us to the risk of increased lodging operating expenses. The performance of our TRS lessees will be based on the operations of our lodging properties. Our operating risks will include not only changes in hotel revenues and changes to our TRS lessees ability to pay the rent due to us under the leases, but also increased hotel operating expenses, including, but not limited to, the following cost elements:



          wage and benefit costs;

          repair and maintenance expenses;

          energy costs;

          property taxes;

          insurance costs; and

          other operating expenses.Any increases in one or more these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.

Failure to properly structure our TRS leases could cause us to incur tax penalties.  A TRS structure will subject us to the risk that the leases with our TRS lessees do not qualify for tax purposes as arms-length which would expose us to potentially significant tax penalties. Our TRS lessees will incur taxes or accrue tax benefits consistent with a C corporation. If the leases between us and our TRS lessees were deemed by the Internal Revenue Service to not reflect an arms-length transaction as that term is defined by tax law, we may be subject to tax penalties as the lessor that would adversely impact our
profitability and our cash flows.

Failure to maintain franchise licenses could decrease our revenues.  Our inability or that of our third-party management company or our third-party tenants to maintain franchise licenses could decrease our revenues. Maintenance of franchise licenses for our lodging properties is subject to maintaining our franchisors operating standards and other terms and conditions. Franchisors periodically inspect lodging properties to ensure that we, our third-party tenants or our third-party management company maintain their standards. Failure by us or one of our third-party tenants or our third-party management company to maintain
these standards or comply with other terms and conditions of the applicable franchise agreement could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination fee. As a condition to the maintenance of a franchise license, our franchisor could also require us to make capital expenditures, even if we do not believe the capital improvements are necessary, desirable, or likely to result in an acceptable return on our investment. We may risk losing a franchise license if we do not make franchisor-required capital expenditures.

If our franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or to operate the lodging property without a franchise license. The loss of a franchise license could materially and adversely affect the operations or the underlying value of the lodging property because of the loss associated with the brand recognition and/or the marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more lodging properties could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to
service debt and make distributions to our stockholders.

Risks associated with employing hotel employees.  We will generally be subject to risks associated with the employment of hotel employees. Any lodging properties we acquire will be leased to a wholly-owned TRS

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entity and be subject to management agreements with a third-party manager to operate the properties that we do not lease to a third party under a net lease. Hotel operating revenues and expenses for these properties will be included in our consolidated results of operations. As a result, although we do not directly employ or manage the labor force at our lodging properties, we are subject to many of the costs and risks generally associated with the hotel labor force. Our third-party manager will be responsible for hiring and maintaining the labor force at each of our lodging properties and for establishing and maintaining the appropriate processes and
controls over such activities. From time to time, the operations of our lodging properties may be disrupted through strikes, public demonstrations or other labor actions and related publicity. We may also incur increased legal costs and indirect labor costs as a result of the aforementioned disruptions, or contract disputes or other events. Our third-party manager may be targeted by union actions or adversely impacted by the disruption caused by organizing activities. Significant adverse disruptions caused by union activities and/or increased costs affiliated with such activities could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.

Travel and hotel industries may be affected by economic slowdowns, terrorist attacks and other world events.  The most recent economic slowdown, terrorist attacks, military activity in the Middle East, natural disasters and other world events impacting the global economy had adversely affected the travel and hotel industries, including extended stay hotel properties, in the past and these adverse effects may continue or occur in the future. As a result of terrorist attacks around the world, the war in Iraq and the effects of the economic recession, subsequent to 2001 the lodging industry experienced a significant decline in
business caused by a reduction in both business and leisure travel. We cannot presently determine the impact that future events such as military or police activities in the U.S. or foreign countries, future terrorist activities or threats of such activities, natural disasters or health epidemics could have on our business. Our business and lodging properties may continue to be affected by such events, including our hotel occupancy levels and average daily rates, and, as a result, our revenues may decrease or not increase to levels we expect. In addition, other terrorist attacks, natural disasters, health epidemics, acts of war, prolonged U.S. involvement in Iraq or other significant military activity could have additional adverse effects on the economy in general, and the travel and lodging industry in particular. These factors could have a material adverse effect on our results of operations, financial condition, and cash flows, thereby impacting our ability to service debt and
ability to make distributions to our stockholders.

Hotel industry is very competitive.  The hotel industry is intensely competitive, and, as a result, if our third-party management company and our third-party tenants are unable to compete successfully or if our competitors marketing strategies are more effective, our results of operations, financial condition, and cash flows including our ability to service debt and to make distributions to our stockholders, may be adversely affected. The hotel industry is intensely competitive. Our lodging properties compete with other existing and new hotels in their geographic markets. Since we do not operate our lodging properties,
our revenues depend on the ability of our third-party management company and our-third party tenants to compete successfully with other hotels in their respective markets. Some of our competitors have substantially greater marketing and financial resources than we do. If our third-party management company and our third-party tenants are unable to compete successfully or if our competitors marketing strategies are effective, our results of operations, financial condition, ability to service debt and ability to make distributions to our stockholders may be adversely affected.

Hotel industry is seasonal which can adversely affect our hotel properties.  The hotel industry is seasonal in nature, and, as a result, our lodging properties may be adversely affected. The seasonality of the hotel industry can be expected to cause quarterly fluctuations in our revenues. In addition, our quarterly earnings may be adversely affected by factors outside our control, such as extreme or unexpectedly mild weather conditions or natural disasters, terrorist attacks or alerts, outbreaks of contagious diseases, airline strikes, economic factors and other considerations affecting travel. To the extent that cash flows
from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may attempt to borrow in order to make distributions to our stockholders or be required to reduce other expenditures or distributions to stockholders.

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Expanding use of internet travel websites by customers can adversely affect our profitability.  The increasing use of internet travel intermediaries by consumers may experience fluctuations in operating performance during the year and otherwise adversely affect our profitability and cash flows. Our third party hotel management company will rely upon Internet travel intermediaries such as Travelocity.com, Expedia.com, Orbitz.com, Hotels.com and Priceline.com to generate demand for our lodging properties. As Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other
significant contract concessions from our third-party management company. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as three-star downtown hotel) at the expense of brand identification. Consumers may eventually develop brand loyalties to their reservations system rather than to our third-party management company and/or our brands, which could have an adverse effect on our business because we will rely heavily on brand identification. If the amount of sales made through Internet intermediaries increases significantly and our third-party management company and our third-party tenants fail to appropriately price room inventory in a manner that maximizes the opportunity for enhanced profit margins, room revenues may flatten or decrease and our profitability may be adversely affected.

Real Estate Financing Risks

General Financing Risks

We plan to incur mortgage indebtedness and other borrowings, which may increase our business risks.   We acquire and intend to continue to acquire properties subject to existing financing or by borrowing new funds. In addition, we intend to incur or increase our mortgage debt by obtaining loans secured by selected or all of the real properties to obtain funds to acquire additional real properties. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders as dividends at least 90% of our annual REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes.

We intend to incur mortgage debt on a particular real property if we believe the propertys projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow, requiring us to use cash from other sources to make the mortgage payments on the property, then the amount available for distributions to stockholders may be affected. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and our loss of the property securing the loan, which is in default.

For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may, in some circumstances, give a guaranty on behalf of an entity that owns one of our properties. In these cases, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or
cross-default provisions, there is a risk that more than one real property may be affected by a default.

Our mortgage debt contains clauses providing for prepayment penalties. If a lender invokes these penalties upon the sale of a property or the prepayment of a mortgage on a property, the cost to us to sell the property could increase substantially, and may even be prohibitive. This could lead to a reduction in our income, which would reduce cash available for distribution to stockholders and may prevent us from borrowing more money. Moreover, our financing arrangements involving balloon payment obligations involve greater risks than financing arrangements whose principal amount is amortized over the term of the loan. At the time the balloon payment is
due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment.

If we have insufficient working capital reserves, we will have to obtain financing from other sources.   We have established working capital reserves that we believe are adequate to cover our cash needs. However, if these reserves are insufficient to meet our cash needs, we may have to obtain financing to fund our cash requirements. Sufficient financing may not be available or, if available, may not be available on economically

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feasible terms or on terms acceptable to us. If mortgage debt is unavailable at reasonable rates, we will not be able to place financing on the properties, which could reduce the number of properties we can acquire and the amount of distributions per share.

If we place mortgage debt on the properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, our income could be reduced, which would reduce cash available for distribution to stockholders and may prevent us from borrowing more money. Additional borrowing for working capital purposes will increase our interest expense, and therefore our financial condition and our ability to pay distributions may be adversely affected.

We may not have funding or capital resources for future improvements.  When a commercial tenant at a property we invest in does not renew its lease or otherwise vacates its space in such properties, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for leasing costs, tenant improvements and tenant refurbishments to the vacated space. We will incur certain fixed operating costs during the time the space is vacant as well as leasing commissions and related costs to re-lease the vacated space. We may also have similar future capital needs in order to renovate or
refurbish any of our properties for other reasons.

Also, in the event we need to secure funding sources in the future but are unable to secure such sources or are unable to secure funding on terms we feel are acceptable, we may be required to defer capital improvements or refurbishment to a property. This may cause such property to suffer from a greater risk of obsolescence or a decline in value and/or produce decreased cash flow as the result of our inability to attract tenants to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted. Or, we may be required to secure funding on
unfavorable terms.

We may be adversely affected by limitations in our charter on the aggregate amount we may borrow.   Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our board of directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net
assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess.

That limitation could have adverse business consequences such as:



          limiting our ability to purchase additional properties;

          causing us to lose our REIT status if additional borrowing was necessary to pay the required minimum amount of cash distributions to our stockholders to maintain our status as a REIT;

          causing operational problems if there are cash flow shortfalls for working capital purposes; and

          resulting in the loss of a property if, for example, financing was necessary to repay a default on a mortgage.Our debt financing for acquisitions is frequently determined from appraised values in lieu of acquisition cost. As appraisal values are typically greater than acquisition cost for the type of value assets we seek to acquire, our debt can be expected to exceed certain leverage limitations of the Lightstone REIT. Our Board, including all of its independent directors, has approved and will continue to approve any leverage exceptions as required by the Lightstone REIT's Articles of Incorporation.

Any excess borrowing over the 300% level will be disclosed to stockholders in our next quarterly report, along with justification for such excess.

Lenders may require us to enter into restrictive covenants relating to our operations.  In connection with obtaining financing, a bank or other lender could impose restrictions on us affecting our ability to incur

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additional debt and our distribution and operating policies. Loan documents we enter into may contain negative covenants limiting our ability to, among other things, further mortgage our properties, discontinue insurance coverage or replace Lightstone Value Plus REIT, LLC as our advisor. In addition, prepayment penalties imposed by banks or other lenders could affect our ability to sell properties when we want.

Financing Risks on the Property Level

Some of our mortgage loans may have due on sale provisions.  In purchasing properties subject to financing, we may obtain financing with due-on-sale and/or due-on-encumbrance clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan.

These clauses may cause the maturity date of such mortgage loans to be accelerated and such financing to become due. In such event, we may be required to sell our properties on an all-cash basis, to acquire new financing in connection with the sale, or to provide seller financing. It is not our intent to provide seller financing, although it may be necessary or advisable for us to do so in order to facilitate the sale of a property. It is unknown whether the holders of mortgages encumbering our properties will require such acceleration or whether other mortgage financing will be available. Such factors will depend on the mortgage market and on
financial and economic conditions existing at the time of such sale or refinancing.

Lenders may be able to recover against our other properties under our mortgage loans.  We will seek secured loans (which are nonrecourse) to acquire properties. However, only recourse financing may be available, in which event, in addition to the property securing the loan, the lender may look to our other assets for satisfaction of the debt. Thus, should we be unable to repay a recourse loan with the proceeds from the sale or other disposition of the property securing the loan, the lender could look to one or more of our other properties for repayment. Also, in order to facilitate the sale of a property, we may allow the
buyer to purchase the property subject to an existing loan whereby we remain responsible for the debt.

Our mortgage loans may charge variable interest.  Some of our mortgage loans may be subject to fluctuating interest rates based on certain index rates, such as the prime rate. Future increases in the index rates would result in increases in debt service on variable rate loans and thus reduce funds available for acquisitions of properties and dividends to the stockholders.

Insurance Risks.

We may suffer losses that are not covered by insurance.  If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits. We intend to cause comprehensive insurance to be obtained for our properties, including casualty, liability, fire, extended coverage and rental loss customarily obtained for similar properties in amounts which our Advisor determines are sufficient to cover reasonably foreseeable losses, with policy specifications and insured limits that we believe are adequate and appropriate under the circumstances.

Material losses may occur in excess of insurance proceeds with respect to any property, as insurance proceeds may not provide sufficient resources to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, earthquakes, floods, hurricanes, pollution, environmental matters, mold or, in the future, terrorism which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.

Insurance companies have recently begun to exclude acts of terrorism from standard coverage. Terrorism insurance is currently available at an increased premium, and it is possible that the premium will increase in the future or that terrorism coverage will become unavailable. However, mortgage lenders in some cases have begun to insist that commercial owners purchase specific coverage against terrorism as a condition for providing loans. We intend to obtain terrorism insurance if required by our lenders, but the terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In
addition, we may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.

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There is no assurance that we will have adequate coverage for such losses. If such an event occurred to, or caused the destruction of, one or more of our properties, we could lose both our invested capital and anticipated profits from such property. In addition, certain losses resulting from these types of events are uninsurable and others may not be covered by our terrorism insurance. Terrorism insurance may not be available at a reasonable price or at all.

In December 2007, the Terrorism Risk Insurance Extension Act of 2007 (TRIEA) was enacted into law. TRIEA extends the federal terrorism insurance backstop through 2014. TRIEA was adopted to ensure affordable terrorism insurance to commercial insureds, including real estate investment trusts. Its extension should increase availability of terrorism insurance coverage on our properties through 2014, and thus mitigate certain of the risks described above.

In addition, many insurance carriers are excluding asbestos-related claims from standard policies, pricing asbestos endorsements at prohibitively high rates or adding significant restrictions to this coverage. Because of our inability to obtain specialized coverage at rates that correspond to the perceived level of risk, we may not obtain insurance for acts of terrorism or asbestos-related claims. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we decide in the future to purchase insurance for terrorism or asbestos, the cost could have a negative impact on our results of
operations. If an uninsured loss or a loss in excess of insured limits occurs on a property, we could lose our capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt that is recourse to us, would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss of this nature would adversely affect us. Although we intend to adequately insure our properties, there is no assurance that we will successfully do so.

Compliance with Laws.

The costs of compliance with environmental laws and regulations may adversely affect our income and the cash available for any distributions.  All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and aboveground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with
disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal.

Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.

Environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic materials. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination arising from that site. The presence of hazardous or toxic materials, or the failure to address conditions relating to their presence properly, may adversely affect the
ability to rent or sell the property or to borrow using the property as collateral.

Persons who dispose of or arrange for the disposal or treatment of hazardous or toxic materials may also be liable for the costs of removal or remediation of such materials, or for related natural resource damages, at or from an off-site disposal or treatment facility, whether or not the facility is or ever was owned or operated by those persons. In addition, environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed on, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or
operator from liability.

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There may be potential liability associated with lead-based paint arising from lawsuits alleging personal injury and related claims. Typically, the existence of lead paint is more of a concern in residential units than in commercial properties. Although a structure built prior to 1978 may contain lead-based paint and may present a potential for exposure to lead, structures built after 1978 are not likely to contain lead-based paint.

Property values may also be affected by the proximity of such properties to electric transmission lines. Electric transmission lines are one of many sources of electro-magnetic fields (EMFs) to which people may be exposed. Research completed regarding potential health concerns associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric transmission lines, and other states have required transmission facilities to measure for levels of EMFs.

On occasion, lawsuits have been filed (primarily against electric utilities) that allege personal injuries from exposure to transmission lines and EMFs, as well as from fear of adverse health effects due to such exposure. This fear of adverse health effects from transmission lines has been considered both when property values have been determined to obtain financing and in condemnation proceedings. We may not, in certain circumstances, search for electric transmission lines near our properties, but are aware of the potential exposure to damage claims by persons exposed to EMFs.

Recently, indoor air quality issues, including mold, have been highlighted in the media and the industry is seeing mold claims from lessees rising. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or abating mold conditions. However, due to the recent increase in mold claims and given that the law relating to mold is unsettled and subject to change, we could incur losses from claims relating to the presence of, or exposure to, mold or other microbial organisms, particularly if we are unable to maintain adequate insurance to cover such losses. We may also incur unexpected expenses relating to the
abatement of mold on properties that we may acquire.

Limited quantities of asbestos-containing materials are present in various building materials such as floor coverings, ceiling texture material, acoustical tiles and decorative treatments. Environmental laws govern the presence, maintenance and removal of asbestos. These laws could be used to impose liability for release of, and exposure to, hazardous substances, including asbestos-containing materials, into the air. Such laws require that owners or operators of buildings containing asbestos (1) properly manage and maintain the asbestos, (2) notify and train those who may come into contact with asbestos and (3) undertake special precautions,
including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements. These laws may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to asbestos fibers. As the owner of our properties, we may be potentially liable for any such costs.

There is no assurance that properties, which we acquire in the future, will not have any material environmental conditions, liabilities or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we own.

The costs of compliance with laws and regulations relating to our residential properties may adversely affect our income and the cash available for any distributions.

Various laws, ordinances, and regulations affect multi-family residential properties, including regulations relating to recreational facilities, such as activity centers and other common areas. We intend for our properties to have all material permits and approvals to operate. In addition, rent control laws may also be applicable to any of the properties.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental contamination may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liabilities, and the current environmental condition of our properties might be affected by the operations of the tenants, by

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the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

These laws typically allow liens to be placed on the affected property. In addition, there are various local, state and federal fire, health, life-safety and similar regulations which we may be required to comply with, and which may subject us to liability in the form of fines or damages for noncompliance.

Any newly acquired or developed multi-family residential properties must comply with Title II of the Americans with Disabilities Act (the ADA) to the extent that such properties are public accommodations and/or commercial facilities as defined by the ADA. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas of the properties where such removal is readily achievable. We intend for our properties to comply in all material respects with all present requirements under the ADA and applicable state laws.

We will attempt to acquire properties, which comply with the ADA or place the burden on the seller to ensure compliance with the ADA. We may not be able to acquire properties or allocate responsibilities in this manner. Noncompliance with the ADA could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages to private litigants. The cost of defending against any claims of liability under the ADA or the payment of any fines or damages could adversely affect our financial condition and affect cash available to return capital and the amount of distributions to stockholders.

The Fair Housing Act (the FHA) requires, as part of the Fair Housing Amendments Act of 1988, apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA could result in the imposition of fines or an award of damages to private litigants. We intend for any of our properties that are subject to the FHA to be in compliance with such law. The cost of defending against any claims of liability under the FHA or the payment of any fines or damages could adversely affect our financial condition.

Risks Related to General Economic Conditions and Terrorism

If we invest our capital in marketable securities of real estate related companies pending an acquisition of real estate, our profits may be adversely affected by the performance of the specific investments we make.  A resolution passed by our Board of Directors allows us from time to time to invest up to 30% of our available cash in marketable securities of real estate related companies. Issuers of real estate securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate related investments discussed below, including risks relating to rising interest
rates or volatility in the credit markets. Our investments in marketable securities of real estate related companies will involve special risks relating to the particular issuer of securities, including the financial condition and business outlook of the issuer. As of December 31, 2008, the adjusted cost basis of our marketable securities of real estate related companies was approximately $15.7 million, and we included approximately $4.2 million of unrealized losses related to such securities in accumulated other comprehensive loss. Substantial market price volatility caused by general economic or market conditions, including disruptions in the credit markets, may require us to mark down the value of these investments, and our profits and results of operations may be adversely affected.

Adverse economic conditions may negatively affect our returns and profitability.  The timing, length and severity of any economic slowdown that the nation may experience, including the current economic slowdown, cannot be predicted with certainty. Since we may liquidate within seven to ten years after the proceeds from our initial public offering are fully invested, there is a risk that depressed economic conditions at that time could cause cash flow and appreciation upon the sale of our properties, if any, to be insufficient to allow sufficient cash remaining after payment of our expenses for a significant return on
stockholders investment.

The terrorist attacks of September 11, 2001 on the United States negatively impacted the U.S. economy and the U.S. financial markets. Any future terrorist attacks and the anticipation of any such attacks, or the consequences of the military or other response by the U.S. and its allies, may have further adverse impacts on the U.S. financial markets and the economy and may adversely affect our operations and our profitability. It is not possible to predict the severity of the effect that any of these future events would have on the U.S. financial markets and economy.

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It is possible that the economic impact of the terrorist attacks may have an adverse effect on the ability of the tenants of our properties to pay rent. In addition, insurance on our real estate may become more costly and coverage may be more limited due to these events. The instability of the U.S. economy may also reduce the number of suitable investment opportunities available to us and may slow the pace at which those investments are made. In addition, armed hostilities and further acts of terrorism may directly impact our properties.

These developments may subject us to increased risks and, depending on their magnitude, could have a material adverse effect on our business and stockholders investment.

Current state of debt markets could limit our ability to obtain financing which may have a material adverse impact on our earnings and financial condition.  The commercial real estate debt markets are currently experiencing volatility as a result of certain factors including the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold Collateralized Mortgage Backed Securities in the market. Credit spreads for major sources of capital have widened significantly as investors have demanded a higher risk premium. This is resulting in lenders increasing the cost for debt
financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions. This may result in our acquisitions generating lower overall economic returns and potentially reducing cash flow available for distribution.

The recent dislocations in the debt markets has reduced the amount of capital that is available to finance real estate, which, in turn, (a) will no longer allow real estate investors to rely on capitalization rate compression to generate returns and (b) has slowed real estate transaction activity, all of which may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition and operations of real properties and mortgage loans. Investors will need to focus on market-specific growth dynamics, operating performance, asset management and the long-term quality of the underlying real estate.

In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate which may result in price or value decreases of real estate assets.

Tax Risks

Stockholders investment has various federal income tax risks.  Although the provisions of the Internal Revenue Code relevant to stockholders investment are generally described in the section of the prospectus titled Federal Income Tax Considerations, stockholders should consult their own tax advisors concerning the effects of federal, state and local income tax law on an investment and on stockholders individual tax situation.

If we fail to maintain our REIT status, our dividends will not be deductible to us, and our income will be subject to taxation. We intend to maintain our REIT status under the Internal Revenue Code, which will afford us significant tax advantages. The requirements to maintain this qualification, however, are complex. If we fail to meet these requirements, our dividends will not be deductible to us and we will have to pay a corporate level tax on our income. This would substantially reduce our cash available to pay distributions and stockholders yield on stockholders investment. In addition, tax liability might cause us to borrow funds,
liquidate some of our investments or take other steps, which could negatively affect our operating results.

Moreover, if our REIT status is terminated because of our failure to meet a technical REIT test or if we voluntarily revoke our election, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. This could materially and negatively affect stockholders investment by causing a loss of common stock value.

Stockholders may have tax liability on distributions that they elect to reinvest in common stock.  If stockholders participate in our distribution reinvestment program, such stockholders will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock. As a result, unless a stockholder is a tax-exempt entity, its may have to use funds from other sources to pay its tax liability on the value of the common stock received.

The opinion of Proskauer Rose LLP regarding our status as a REIT does not guarantee our ability to remain a REIT.  We qualified as a REIT in 2006. Our qualification as a REIT depends upon our ability to

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meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Internal Revenue Code. Our legal counsel, Proskauer Rose LLP will not review these operating results or compliance with the qualification standards. We may not satisfy the REIT requirements in the future. Also, this opinion represented Proskauer Rose LLPs legal judgment based on the law in effect as of the date of our prospectus and is not binding on the Internal Revenue Service or the courts, and could be subject to modification or withdrawal based on future legislative, judicial or administrative
changes to the federal income tax laws, any of which could be applied retroactively.

Failure to qualify as a REIT or to maintain such qualification could materially and negatively impact stockholders investment and its yield to stockholders by causing a loss of common share value and by substantially reducing our cash available to pay distributions.

If the Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation.  We intend to maintain the status of the Operating Partnership as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the Operating Partnership could make to us. This would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and the yield on stockholders investment. In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.

Even REITS are subject to federal and state income taxes.  Even if we qualify and maintain our status as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a prohibited transaction, such income will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. This will result in our stockholders being treated for tax purposes as though they had received
their proportionate shares of such retained income.

However, to the extent we have already paid income taxes directly on such income, our stockholders will also be credited with their proportionate share of such taxes already paid by us. Stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the Operating Partnership or at the level of the other companies through which we indirectly own our assets.

We may not be able to continue to satisfy the REIT requirements, and it may cease to be in our best interests to continue to do so in the future.

Future changes in the income tax laws could adversely affect our profitability.  Future events, such as court decisions, administrative rulings and interpretations and changes in the tax laws or regulations, including the REIT rules, that change or modify these provisions could result in treatment under the federal income tax laws for us and/or our stockholders that differs materially and adversely from that described in this prospectus; both for taxable years arising before and after such event. Future legislation, administrative interpretations or court decisions may be retroactive in effect.

In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and may adversely affect the taxation of our stockholders.

In view of the complexity of the tax aspects of the offering, particularly in light of the fact that some of the tax aspects of the offering will not be the same for all investors, prospective investors are strongly advised to consult their tax advisors with specific reference to their own tax situation prior to an investment in shares of our common stock.

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Employee Benefit Plan Risks

An investment in our common stock may not satisfy the requirements of ERISA or other applicable laws.  When considering an investment in our common stock, an individual with investment discretion over assets of any pension plan, profit-sharing plan, retirement plan, IRA or other employee benefit plan covered by ERISA or other applicable laws should consider whether the investment satisfies the requirements of Section 404 of ERISA or other applicable laws. In particular, attention should be paid to the diversification requirements of Section 404(a)(1)(C) of ERISA in light of all the facts and circumstances, including the
portion of the plans portfolio of which the investment will be a part. All plan investors should also consider whether the investment is prudent and meets plan liquidity requirements as there may be only a limited market in which to sell or otherwise dispose of our common stock, and whether the investment is permissible under the plans governing instrument. We have not, and will not, evaluate whether an investment in our common stock is suitable for any particular plan. Rather, we will accept entities as stockholders if an entity otherwise meets the suitability standards.

The annual statement of value that we will be sending to stockholders subject to ERISA and stockholders is only an estimate and may not reflect the actual value of our shares. The annual statement of value will report the value of each common share as of the close of our fiscal year. The value will be based upon an estimated amount we determine would be received if our properties and other assets were sold as of the close of our fiscal year and if such proceeds, together with our other funds, were distributed pursuant to a liquidation. However, the net asset value of each share of common stock will be deemed to be $10 until the end of the first year
following the completion of our initial public offering. Thereafter, our Advisor or its affiliates will determine the net asset value of each share of common stock. Because this is only an estimate, we may subsequently revise any annual valuation that is provided. It is possible that:



          a value included in the annual statement may not actually be realized by us or by our stockholders upon liquidation;

          stockholders may not realize that value if they were to attempt to sell their common stock; or

          an annual statement of value might not comply with any reporting and disclosure or annual valuation requirements under ERISA or other applicable law. We will stop providing annual statements of value if the common stock becomes listed for trading on a national stock exchange or included for quotation on a national market system.Item 1B. Unresolved Staff Comments

None applicable.

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Item 2. Properties



Location

          

          Year Built (Range of Years Built)

          

          Leasable Square Feet

          

          Percentage Occupied as of 12/31/08

          

          Annualized Revenues Based on Rents at December 31, 2008Wholly-Owned Real Estate Properties:St. Augustine Outlet Mall(2)

          

          

          St. Augustine, FL

          

          

          

          1998

          

          

          

          340,787

          

          

          

          84.2

          %

          

          $

          4.5 millionOakview Power Center

          

          

          Omaha, NE

          

          

          

          1999  2005

          

          

          

          177,331

          

          

          

          99.2

          %

          

          $

          2.5 million7 Flex/Office/Industrial Bldgs from the Gulf Coast Industrial Portfolio

          

          

          New Orleans, LA

          

          

          

          1980  2000

          

          

          

          339,700

          

          

          

          91.3

          %

          

          $

          3.2 million4 Flex/Industrial Bldgs from the Gulf Coast Industrial Portfolio

          

          

          San Antonio, TX

          

          

          

          1982  1986

          

          

          

          484,260

          

          

          

          81.3

          %

          

          $

          2.0 million3 Flex/Industrial Buildings from the Gulf Coast Industrial Portfolio

          

          

          Baton Rouge, LA

          

          

          

          1985  1987

          

          

          

          182,792

          

          

          

          96.2

          %

          

          $

          1.2 millionBrazos Crossing Power Center(1)

          

          

          Lake Jackson, TX

          

          

          

          2007  2008

          

          

          

          61,213

          

          

          

          100.0

          %

          

          $

          0.8 millionSarasota Industrial Property

          

          

          Sarasota, FL

          

          

          

          1992

          

          

          

          281,276

          

          

          

          0.0

          %

          

          

          Portfolio total

          

          

          

          

          

          

          

          1,867,359

          

          

          

          75.2%




(1)

          Opened March 2008(2)

          Renovation completed November 2008, includes temporary tenants

Location

          

          Year Built (Range of Years Built)

          

          Leasable Units

          

          Percentage Occupied as of 12/31/08

          

          Annualized Revenues Based on Rents at December 31, 2008Wholly-Owned Multi-Family Properties:Michigan Apt's (Four Multi-Family Apartment Buildings)

          

          

          Southeast MI

          

          

          

          1965  1972

          

          

          

          1,017

          

          

          

          90.8

          %

          

          $

          7.9 millionSoutheast Apt's (Five Multi-Family Apartment Buildings)

          

          

          Greensboro/Charlotte, NC & Tampa, FL

          

          

          

          1980  1987

          

          

          

          1,576

          

          

          

          90.7

          %

          

          $

          10.8 millionPortfolio total

          

          

          

          

          

          

          

          2,593

          

          

          

          90.7%



Location

          

          Year Built

          

          Available Rooms

          

          Occupancy Percentage as of 12/31/08

          

          Revenue per Available Room at 12/31/08Wholly-Owned Operating Properties:

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (3)Sugarland and Katy Highway Extended Stay Hotels

          

          

          Houston, TX

          

          

          

          1998

          

          

          

          106,267

          

          

          

          67.1

          %

          

          $

          37




(3)

          Currently undergoing renovations

Location

          

          Year Built

          

          Leasable Square Feet

          

          Percentage Occupied as of 12/31/08

          

          Annualized Revenues Based on Rents at December 31, 2008Unconsolidated Affiliated Real Estate Entities:1407 Broadway

          

          

          New York, NY

          

          

          

          1952

          

          

          

          1,114,695

          

          

          

          82.6

          %

          

          $

          36.2 millionOrlando Outlet & Design Center

          

          

          Orlando, FL

          

          

          

          (4)

          

          

          

          970,640

          

          

          

          88.9

          %

          

          $

          26.6 millionPortfolio total

          

          

          

          

          

          

          

          2,085,335

          

          

          

          85.5%




(4)

          Orlando Outlet Grand Opening in April 2008

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Item 3. Legal Proceedings:

From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes.

On March 29, 2006, Jonathan Gould, a former member of our Board of Directors and Senior Vice-President  Acquisitions, filed a lawsuit against us in the District Court for the Southern District of New York. The suit alleges, among other things, that Mr. Gould was insufficiently compensated for his services to us as director and officer. Mr. Gould sought damages of (i) up to $11,500,000 or (ii) a 2.5% ownership interest in all properties that we acquire and an option to acquire up to 5% of the membership interests of Lightstone SLP, LLC. We filed a motion to dismiss the lawsuit. After review of the motion to dismiss, counsel for Mr.
Gould represented that Mr. Gould was dropping his claim for ownership interest in the properties we acquire and his claim for membership interests. Mr. Goulds counsel represented that he would be suing only under theories of quantum merit and unjust enrichment seeking the value of work he performed. Counsel for the Lightstone REIT made motion to dismiss Mr. Goulds complaint, which was granted by Judge Sweeney. Mr. Gould has filed an appeal of the decision dismissing his case, which is pending. Management believes that this suit is frivolous and entirely without merit and intends to defend against these charges vigorously.

On January 4, 2007, 1407 Broadway Real Estate LLC (Office Owner), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC (Mezz II), consummated the acquisition of a sub-leasehold interest (the Sublease Interest) in an office building located at 1407 Broadway, New York, New York (the Office Property). Mezz II is a joint venture between LVP 1407 Broadway LLC (LVP LLC), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC (Manager), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief
Executive Officer, and Shifra Lichtenstein, his wife.

The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. (Gettinger). In July 2006, Abraham Kamber Company, as sublessor under the sublease (Sublessor), served two notices of default on Gettinger (the Default Notices). The first alleged that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease
Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings. The parties have been directed to engage in and complete discovery. We consider the litigation to be without merit.

Prior to consummating the acquisition of the Sublease Interest, Office Owner received a letter from Sublessor indicating that Sublessor would consider such acquisition a default under the original sublease, which prohibits assignments of the Sublease Interest when there is an outstanding default there under. On February 16, 2007, Office Owner received a Notice to Cure from Sublessor stating the transfer of the Sublease Interest occurred in violation of the Sublease given Sublessor's position that Office Seller is in default. Office Owner will commence and vigorously pursue litigation in order to challenge the default, receive an injunction and toll
the termination period provided for in the Sublease.

On September 4, 2007, Office Owner commenced a new action against Sublessor alleging a number claims, including the claims that Sublessor has breached the sublease and committed intentional torts against Office Owner by (among other things) issuing multiple groundless default notices, with the aim of prematurely terminating the sublease and depriving Office Owner of its valuable interest in the sublease. The complaint seeks a declaratory judgment that Office Owner has not defaulted under the sublease, damages for the losses Office Owner has incurred as a result of Sublessors wrongful conduct, and an injunction to prevent Sublessor from issuing
further default notices without valid grounds or in bad faith.

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Office Owner is the borrower under a Loan Agreement dated January 4, 2007 and amended on September 10, 2007 with Lehman Brothers Holdings Inc. (Lehman). Pursuant to that loan agreement, Lehman has loaned a total of $127,250,000, leaving borrowing availability of $13,540,509. Because Lehman did not honor October 2008 and January 2009 draws that are well within Office Owners borrowing limits, Office Owner filed a motion dated February 6, 2009 in Lehmans bankruptcy case, asking the Bankruptcy Court to enter an order compelling Lehman to comply with its obligations to lend, or alternatively, to grant Office Owner relief from the
bankruptcy stay to declare Lehman in default of the loan and related documents, suspend payments under the loan, seek a replacement senior lender for the remaining unfunded portion of the loan, and pursue other remedies. That motion has been consensually adjourned while the parties attempt to resolve the dispute and has not yet been heard by the Bankruptcy Court.

The requested funds will be used to pay for building improvements and tenant build-outs at the Office Property, and Office Owner has also given notice to Lehman that it reserves all rights and claims it may have against Lehman for damages arising from the consequences of Lehmans failure to honor its funding commitments.

As of the date hereof, we are not a party to any other material pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II.

Item 5. Markets for Common Equity and Related Shareholder Matters

As of March 13, 2009, we had approximately 31.1 million common shares outstanding, held by a total of 7,767 stockholders. The number of stockholders is based on the records of ACS Securities Services, Inc, which serves as our registrar and transfer agent.

There currently is no public market for our common shares and we do not expect one to develop. We currently have no plans to list our shares on a national securities exchange or over-the-counter market, or to include our shares for quotation on any national securities market. Consequently, there is the risk that a shareholder may not be able to sell our common shares promptly or at all.

Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.

The prices at which stockholders who have held shares for the required one-year period may sell shares back to us are as follows:



          during the 12 months following the termination of the offering period, the lesser of (i) $9.50 per share or (ii) the purchase price per share if purchased from Lightstone Securities at a reduced price in accordance with the volume discounts; and

          after 12 months following the termination of the offering period, the lesser of (i) $10.00 per share or (ii) the purchase price per share if purchased from Lightstone Securities at a reduced price in accordance with the volume discounts.Redemption of shares, when requested, will be made quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the board of directors, at its sole discretion, may reserve for this purpose.

Our board of directors, at its sole discretion, may choose to terminate the share repurchase program after the end of the offering period, or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our board of directors to eliminate or reduce the share repurchase program will require the unanimous affirmative vote of the independent directors.

In order for NASD members and their associated persons to have participated in the offering and sale of our common shares or to participate in any future offering of our common shares, we are required pursuant to NASD Rule 2710(c)(6) to disclose in each annual report distributed to our stockholders a per share estimated value of the common shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, our Advisor must prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their
reports relating to an investment in our common shares. For these purposes, the estimated value of the shares shall be deemed to be $10.00 per share as of December 31, 2008. The basis for this valuation is the fact that we closed our public offering of our common shares in October 2008 at the price of $10.00 per share.

Dividends

Federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (excluding any net capital gains). Distributions will be at the discretion of our board of directors and will

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depend upon our distributable funds, current and projected cash requirements, tax considerations and other factors. We intend to declare dividends to our stockholders as of daily record dates and aggregate and pay such dividends quarterly.

Since the period beginning February 1, 2006, the Board of Directors of the Lightstone REIT declared quarterly dividends in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period. Through December 31, 2008, we have paid aggregate distribution in the $18.1 million, which includes cash distributions paid to stockholders and common stock issued under our
distribution reinvestment program.

Total dividends declared during the year ended December 31, 2008, 2007 and 2006 were $9.9 million, $7.1 million and $1.1 million, respectively. On January 8, 2009, the Companys Board of Directors declared the dividend for the three-month period ending December 31, 2008 of $5.5 million. The dividend was paid during January 2009.

For the year ended December 31, 2008, approximately 20% of our distributions were funded or will be funded with cash flow from operations and approximately 80% were funded or will be funded for with uninvested proceeds from the sale of shares from our offering.

On March 30, 2009, the Companys Board of Directors declared the quarterly dividend for the three-month period ended March 31, 2009 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business each day during the quarter, which will be paid, in April 2009.

Our stockholders have the option to elect the receipt of shares in lieu of cash under our Dividend Reinvestment Program.

Recent Sales of Unregistered Securities

During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933. Through March 13, 2009, we repurchased approximately 0.3 million shares.

Use of Initial Public Offering Proceeds

On April 22, 2005, our Registration Statement on Form S-11 (File No. 333-117367), covering a public offering, which we refer to as the Offering, of up to 30,000,000 common shares for $10 per share (exclusive of 4,000,000 shares available pursuant to the Companys dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued, and 75,000 shares that are reserved for issuance under the Companys stock option plan) was declared effective under the Securities Act of 1933. On October 17, 2005, the Companys filing of a Post-Effective Amendment to its
Registration Statement was declared effective. The Post-Effective Amendment reduced the minimum offering from 1,000,000 shares of common stock to 200,000 shares of common stock.

The Offering terminated on October 10, 2008 when all shares offered where sold. However, the shares continued to be sold to existing stockholders pursuant to the dividend reinvestment plan through December 1, 2008. As of December 31, 2008, cumulative gross offering proceeds were approximately $307.0 million, which includes $7.7 million of proceeds from the dividend reinvestment plan. From the effective date of the Offering through its closing, we have incurred the following expenses in connection with the issuance and distribution of the registered securities:



Type of Expense AmountUnderwriting discounts and commissions

          

          $

          23,847,655Other expenses paid to non-affiliates

          

          

          6,340,647Total offering expenses

          

          $

          30,188,302

With net offering proceeds of $307.0 million as of December 31, 2008, and mortgage debt in the amount of $239.2 million, and note payable obligation of $7.4 million outstanding as of December 31, 2008, we

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acquired approximately $349.9 million in real estate investments and related assets. Cumulatively, we have used the net offering proceeds as follows:



At December 31, 2008Construction of plant, building and facilities

          

          $

          31,871,612Purchase of real estate interests

          

          

          120,976,564Repayment of indebtedness

          

          

          396,118Cash and cash equivalents (as of December 31, 2008)

          

          

          66,106,067Gross Temporary investments (as of December 31, 2008)

          

          

          23,614,419Other uses(1)

          

          

          64,042,540Total uses

          

          $

          307,007,320




(1)

          Amount includes note receivable balance as of December 31, 2008 of $48.5 million. See note 6 of the notes to the consolidated financial statements.As of March 13, 2009, we have sold approximately 31.1 million shares at an aggregate of price of approximately $309.4 million, which includes proceeds from our Dividend Reinvestment Plan.

Item 6. Selected Financial Data

The following selected consolidated and combined financial data are qualified by reference to and should be read in conjunction with our Consolidated Financial Statements and Notes thereto and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations below.



2008

          

          2007

          

          2006

          

          2005

          

          2004(1)Operating Data:Revenues

          

          $

          41,138,102

          

          

          $

          25,821,795

          

          

          $

          8,438,688

          

          

          

          

          

          

          $

          Loss from investments in affiliated real estate entities

          

          

          (3,357,267

          )

          

          

          (7,267,949

          )

          

          

          

          

          

          

          

          

          

          

          Loss before loss allocated to minority interests

          

          

          (28,224,164

          )

          

          

          (9,242,416

          )

          

          

          (1,536,430

          )

          

          

          (117,571

          )

          

          

          Loss allocated to minority interests

          

          

          84,805

          

          

          

          26

          

          

          

          86

          

          

          

          1,164

          

          

          

          Net loss applicable to common shares

          

          

          (28,139,359

          )

          

          

          (9,242,390

          )

          

          

          (1,536,344

          )

          

          

          (116,407

          )

          

          

          Basic and diluted loss per common shares

          

          

          (1.24

          )

          

          

          (1.01

          )

          

          

          (0.96

          )

          

          

          (5.82

          )

          

          

          Dividends declared per common share

          

          

          9,911,835

          

          

          

          7,125,331

          

          

          

          1,101,708

          

          

          

          

          

          

          

          Weighted average common shares outstanding  basic and diluted

          

          

          22,658,290

          

          

          

          9,195,369

          

          

          

          1,594,060

          

          

          

          20,000

          

          

          

          20,000Balance Sheet Data:Total assets

          

          $

          501,809,240

          

          

          $

          369,701,354

          

          

          $

          140,708,217

          

          

          $

          430,996

          

          

          $

          205,489Long-term obligations

          

          

          246,660,923

          

          

          

          243,435,657

          

          

          

          95,475,000

          

          

          

          

          

          

          

          Stockholder's Equity

          

          

          214,513,327

          

          

          

          100,112,198

          

          

          

          35,975,704

          

          

          

          83,593

          

          

          

          200,000Other financial data:Funds from operations applicable to common shares(2)

          

          $

          (11,640,360

          )

          

          $

          4,866,331

          

          

          $

          1,138,389

          

          

          $

          (116,407

          )

          

          $

          




(1)

          For the period from June 8, 2004 (date of inception) through December 31, 2004 for operating data, and as of as of December 31, 2004 for balance sheet data.(2)

          We consider Funds from Operations, or FFO, a widely accepted and appropriate measure of performance for a REIT. FFO provides a non-GAAP supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, The National Association of Real Estate Investment Trusts, Inc. (NAREIT) has promulgated a standard known

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as FFO, which it believes more accurately reflects the operating performance of a REIT such as ours. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of operating property, plus depreciation and amortization and after adjustment for unconsolidated partnership and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition of computing FFO. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations for reconciliation of FFO non-gaap measurement to net loss applicable to common shares.We believe that FFO and FFO available to common shares are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses related to dispositions of depreciable property and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to common shares can help compare the operating performance of a companys real estate between periods or as compared to different
companies. FFO and FFO available to common shares do not represent net income, net income available to common shares or net cash flows from operating activities in accordance with GAAP. Therefore, FFO and FFO available to common shares should not be exclusively considered as alternatives to net income, net income available to common shares or net cash flows from operating activities as determined by GAAP or as measures of liquidity. The Companys calculation of FFO and FFO available to common shares may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see Special Note Regarding Forward-Looking Statements above for a description of these risks and uncertainties.

Overview

Lightstone Value Plus Real Estate Investment Trust, Inc. (the Lightstone REIT or Company) intends to acquire and operate commercial, residential and hospitality properties, principally in the United States. Principally through the Lightstone Value Plus REIT, LP, (the Operating Partnership), our acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties and that our residential properties will be principally comprised of
Class B multi-family complexes.

The Company commenced an initial public offering to sell a maximum of 30,000,000 shares of common shares on May 23, 2005, at a price of $10 per share (exclusive of 4 million shares available pursuant to the Companys dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued and 75,000 shares that are reserved for issuance under the Companys stock option plan). The Companys Registration Statement on Form S-11 (the Registration Statement) was declared effective under the Securities Act of 1933 on April 22, 2005, and on May 24, 2005, the Lightstone
REIT began offering its common shares for sale to the public. Lightstone Securities, LLC (the Dealer Manager), an affiliate of the Sponsor, is serving as the dealer manager of the Companys public offering (the Offering).

The Offering terminated on October 10, 2008 when all shares offered where sold. However, the shares continued to be sold to existing stockholders pursuant to the dividend reinvestment plan through December 1, 2008. As of December 31, 2008, cumulative gross offering proceeds of approximately $307.0 million, which includes $7.7 million of proceeds from the dividend reinvestment plan have been released to the Lightstone REIT and used for the purchase of a 99.68% general partnership interest in the Operating Partnership. The Company expects that its ownership percentage in the Operating Partnership will remain significant as it plans to continue to
invest all net proceeds from the Offering in the Operating Partnership.

Lightstone SLP, LLC, an affiliate of the Advisor, periodically purchases special general partner interests (SLP Units) in the Operating Partnership at a cost of $100,000 per unit for each $1.0 million in offering subscriptions. Proceeds from the sale of the SLP Units will be used to fund organizational and offering costs incurred by the Company. As of December 31, 2008, offering costs of $30.2 million will be substantially offset by $30.0 million of proceeds from the sale of SLP Units. Through December 31, 2008, the Company has received proceeds related to the SLP Units of $23.0 million. The Advisor paid the remaining obligation of $7.0
million in March 2009.

We do not have employees. We entered into an advisory agreement dated April 22, 2005 with Lightstone Value Plus REIT LLC, a Delaware limited liability company, which we refer to as the Advisor, pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

Beginning with the year ended December 31, 2006, the Company qualified to be taxed as a real estate investment trust (a REIT), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code). To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be
subject

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to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Companys net income and net cash available for distribution to stockholders. As of December 31, 2008, the Company has complied with the requirements for maintaining its REIT status

To maintain our qualification as a REIT, we engage in certain activities through LVP Acquisitions Corp. (LVP Corp), a wholly-owned taxable REIT subsidiary (TRS). As such, we are subject to federal and state income and franchise taxes from these activities.

Acquisitions and Investment Strategy

We intend to acquire fee interests in multi-tenanted, community, power and lifestyle shopping centers, and in malls located in highly trafficked retail corridors, high-barrier to entry markets, and sub-markets with constraints on the amount of additional property supply. Additionally, we seek to acquire mid-scale, extended stay lodging properties and multi-tenanted industrial properties located near major transportation arteries and distribution corridors; multi-tenanted office properties located near major transportation arteries; and market-rate, middle market multifamily properties at a discount to replacement cost. We do not intend to invest in
single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.

Investments in real estate will be made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with affiliated entities for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be
permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, unimproved real properties does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we will not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.

Through December 31, 2008, Lightstone REIT has completed eight acquisitions: the Belz Factory Outlet World, a retail outlet shopping mall in St. Augustine, Florida, on March 31, 2006; four multi-family communities in Southeast Michigan on June 29, 2006; the Oakview Plaza, a retail shopping mall located in Omaha, Nebraska, on December 21, 2006 a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas, on February 1, 2007; and a land parcel in Lake Jackson, TX, intended for immediate development as a power retail center, on June 29, 2007, two hotels in Houston, Texas on October 17, 2007, five multi family apartment communities, one in
Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte, North Carolina on November 16, 2007, and an industrial building in Sarasota, Florida on November 13, 2007.

In addition, as of December 31, 2008, Lightstone REIT has acquired two investments in unconsolidated affiliated real estate entities: a 22.54% membership interest in a limited liability corporation which owns 2 factory outlet centers in Orlando, Florida, on June 26, 2008; and a 49% equity interest in a joint venture, formed to purchase a sub-leasehold interest in a ground lease to an office building in New York, NY, on January 4, 2007. On April 16, 2008, Lightstone REIT made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company. On June
26, 2008, Lightstone REIT entered into an agreement to acquire a 25% membership interest in an affiliated limited liability company which owns 18 factory outlet centers located 15 different states in the United States. This transaction closed on March 30, 2009.

Although we are not limited as to the geographic area where we may conduct our operations, we intend to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible. Our Sponsor currently maintains operations throughout the United States (Hawaii, South Dakota, Vermont and Wyoming excluded), the District of Columbia, Puerto Rico and Canada.

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We have and will continue to utilize leverage in acquiring our properties. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority
of the independent directors and is disclosed to our stockholders. As of December 31, 2008, aggregate long-term permanent borrowings exceed 75% of the aggregate fair market value of all properties and were appropriately approved by a majority of the independent directors and are disclosed to our stockholders.

We may finance our property acquisitions through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. At December 31, 2006, we qualified as a REIT and have elected to be taxed as a REIT for the taxable year ending December 31, 2008, 2007 and 2006. We plan to own substantially all of our assets and conduct our operations through the Operating Partnership. The Company has assessed it qualified as a REIT for the year ended December 31, 2008.

Current Environment

The slowdown in the economy, which accelerated in the fourth quarter of 2008, coupled with continued job losses and/or lack of job growth leads us to be cautious regarding the expected performance of 2009 for our commercial as well as multifamily residential properties. In addition, the effect of the current economic downturn is having an impact on many retailers nationwide, including tenants of our commercial properties. There have been many national retail chains that have filed for bankruptcy. Analysts expect that more retailers will file for bankruptcy in 2009. In addition to those who have filed, or may file, bankruptcy, many retailers have
announced store closings and a slowdown in their expansion plans. For multifamily residential properties, in general, evictions have increased and requests for rent reductions and abatements are becoming more frequent.

We believe that the quality of our investment properties is strong. Our occupancy rates for commercial properties in 2008 compared to 2007 remain at approximately 75%, which includes our St. Augustine outlet mall which recently completed an expansion during the last quarter of 2008. For our multifamily proprieties occupancy rates in 2008 compared to 2007 remained at approximately the 90% level. As a result of the current state of the economy, we expect leasing will be challenging in 2009.

Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial markets volatility, and recession.

We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-K.

Critical Accounting Policies

General.  The consolidated financial statements of the Lightstone REIT included in this annual report include the accounts of Lightstone REIT and the Operating Partnership (over which Lightstone REIT exercises financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments.

Revenue Recognition and Valuation of Related Receivables.  Our revenue, which will be comprised largely of rental income, will include rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting will require us to record as an asset, and include in revenue, unbilled rent that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Accordingly, we must determine, in our
judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. We will review unbilled rent receivables on a quarterly basis and take into consideration the tenants payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collection of unbilled rent with respect to any given tenant is in doubt, we would be required to record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable, which would have an adverse effect on our net income for the year in which the allowance is increased or the direct write-off is recorded and would decrease our total assets and stockholders equity.

Investments in Real Estate.  We will record investments in real estate at cost and will capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We will expense costs of repairs and maintenance as incurred. We will compute depreciation using the straight-line method over the estimated useful lives of our real estate assets, which we expect will be approximately 39 years for buildings and improvements, 5 to 10 years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We will be required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments will have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We have adopted Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which we refer to as SFAS 144, and which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. SFAS 144 requires that the operations related to properties that have been sold or that we intend to sell, be presented as discontinued operations in the statement of income for all periods presented, and properties we intend to sell be designated as held for sale on our balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we will review the recoverability of the propertys carrying value. The review of recoverability will be based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the propertys use and eventual disposition. Our forecast of these cash flows will consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to
recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property.

We will be required to make subjective assessments as to whether there are impairments in the values of our investments in real estate. We will evaluate our ability to collect both interest and principal related to any

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real estate related investments in which we may invest. If circumstances indicate that such investment is impaired, we will reduce the carrying value of the investment to its net realizable value. Such reduction in value will be reflected as a charge to operations in the period in which the determination is made.

Real Estate Purchase Price Allocation.  Upon acquisition of real estate operating properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), assumed debt issued in accordance with SFAS No. 141 (through December 31, 2008), Business Combinations (SFAS No. 141), at the date of acquisition, based on evaluation of information and estimates available at that date. See New Accounting Pronouncements for discussion of SFAS No. 141R, which
is effective beginning January 1, 2009. Based on these estimates, we allocate the initial purchase price to the applicable assets and liabilities. As final information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized within twelve months of the acquisition date.

We will allocate the purchase price of an acquired property to tangible assets (which includes land, buildings and tenant improvements) based on the estimated fair values of those tangible assets assuming the building was vacant. We will record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) managements estimate of fair market lease rates for the corresponding in-place leases, measured over a period
equal to the remaining non-cancelable term of the lease. We will amortize any capitalized above-market lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We will amortize any capitalized below-market lease values as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.

We will measure the aggregate value of other intangible assets acquired based on the difference between (1) the property valued with existing in-place leases adjusted to market rental rates and (2) the property valued as if vacant. Our estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors we may consider in our analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases. We will also consider information obtained about each property as a result of
our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, we will also include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. We will also estimate costs to execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

The total amount of other intangible assets acquired will be further allocated to in-place lease values and customer relationship intangible values based on our evaluation of the specific characteristics of each tenants lease and our overall relationship with that respective tenant. Characteristics we will consider in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenants credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

We will amortize the value of in-place leases to expense over the initial term of the respective leases, which we would not expect to exceed 20 years. Currently, our leases range from one month to 11 years. The value of customer relationship intangibles will be amortized to expense over the initial term in the respective leases, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles will be charged to expense.

Unconsolidated Affiliated Real Estate Entities.  We will evaluate our investments in unconsolidated affiliated real estate entities in accordance with Financial Accounting Standards Board, Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which we refer to as FIN 46R. If we determine that the real estate entity or joint venture is a variable interest entity, or a VIE, and that we are

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the primary beneficiary as defined in FIN 46R, we would account for such investment as if it were a consolidated subsidiary. For a real estate or joint venture investment which is not a VIE or in which we are not the primary beneficiary, we will consider Accounting Principle Board Opinion 18  The Equity Method of Accounting for Investments in Common Stock, Statement of Opinion 78-9  Accounting for Investments in Real Estate Ventures, and Emerging Issues Task Force Issue 96-16  Investors Accounting for an Investee When the Investor has the Majority of the Voting Interest but the Minority
Partners have Certain Approval or Veto Rights, to determine the method of accounting for each of our partially-owned entities.

In accordance with the above pronouncements, we will account for our investments in partially-owned entities under the equity method when we do not exercise direct or indirect control of the entity and our ownership interest is more than 3% but less than 50%, in the case of a partially-owned limited partnership, or more than 20% but less than 50%, in the case of all other partially-owned entities. Factors that we will consider in determining whether or not we exercise control include substantive participating rights of partners on significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital
budgets, board and management representatives and authority and other contractual rights of our partners. To the extent that we are deemed to control an entity, such entities will be consolidated.

On a periodic basis we will evaluate whether there are any indicators that the value of our investments in partially owned entities are impaired. An investment is impaired if our estimate of the value of the investment is less than the carrying amount. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge.

Accounting for Derivative Financial Investments and Hedging Activities.  We will account for our derivative and hedging activities, if any, using SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities  Deferral of the Effective Date of FASB Statement No. 133, and SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which require all derivative instruments to be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. We will formally document all relationships between hedging instruments and hedged items, as well as our risk- management objective and strategy for undertaking each hedge transaction. We will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or
liability, with a corresponding amount recorded in other comprehensive income within stockholders equity. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges under SFAS 133. The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

Inflation

Our long-term leases are expected to contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions will include clauses entitling us to receive scheduled base rent increases and base rent increases based upon the consumer price index. In addition, our leases are expected to require tenants to pay a negotiated share of operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in cost and operating expenses resulting from inflation.

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Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest

Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent period costs of the Lightstone REIT are expensed as incurred. Such fees include acquisition fees associated with the purchase of a joint venture interest, asset management fees paid to our Advisor and property management fees paid to our Property Manager.

Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred in accordance with SFAS 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to redevelopment activities will be depreciated over the estimated useful life of the associated project.

Leasing activity at our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay will be capitalized and amortized over the life of the related lease in accordance with the provisions of SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.

Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.

Lightstone SLP, LLC, an affiliate of our Sponsor, has and continues to purchase special General partner interests in the Operating Partnership. These special general partner interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership. During the year ended December 31, 2008, distributions of $1.0 million were declared and paid. Distributions of $0.7 million were declared and $0.5 million were paid during the year ended December 31, 2007. The distribution for the
fourth quarter 2008 was declared in January 2009 in the amount of $0.5 million. Such distributions are paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2008 and will always be subordinated until stockholders receive a stated preferred return.

Our Advisor is responsible for offering and organizational costs exceeding 10% of the gross offering proceeds without recourse to the Company. Since its inception, and through December 31, 2008, the Advisor has not allocated any organizational costs to the Company as the offering costs of $30.2 million did not exceed 10% of the total proceeds of $307.0 million.

Income Taxes

We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code in conjunction with the filing of our 2006 federal tax return. In order to qualify as a REIT, an entity must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual ordinary taxable income to stockholders. REITs are generally not subject to federal income tax on taxable income that they distribute to their stockholders. It is our intention to adhere to these requirements and maintain our REIT status. As a REIT, we still may be subject to certain state, local and foreign taxes on our income and
property and to federal income and excise taxes on our undistributed taxable income.

We have net operating loss carryforwards for Federal income tax purposes through the year ended December 31, 2006. The availability of such loss carryforwards will begin to expire in 2026. As we do not consider it likely that we will realize any future benefit from our loss carry-forward, any deferred asset resulting from the final determination of our tax losses will be fully offset by a valuation allowance of the same amount.

In 2007, to maintain our qualification as a REIT, we engage in certain activities through LVP Acquisitions Corp. (LVP Corp), a wholly-owned taxable REIT subsidiary (TRS) (See note 3 of notes to consolidated financial statements). As such, we are subject to federal and state income and franchise taxes from these activities. For the year ended December 31, 2008, the tax provision recorded related to the TRS

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was approximately $0.1 million and is included in other income, net in the consolidated statement of operations. For the years ended December 31, 2007 and 2006, there was no tax provision recorded.

Effective January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. The adoption of FIN 48 did not have a material impact on the Companys financial position, results of operation, or cash flows. As of December 31, 2008, the Company had no material uncertain income tax positions. The tax years 2004 through 2008 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Results of Operations

The Companys primary financial measure for evaluating each of its properties is net operating income (NOI). NOI represents rental income less property operating expenses and real estate taxes. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the companys properties.

We commenced operations on February 1, 2006 upon the release of our offering proceeds from escrow. We acquired our three initial real estate properties on March 31, 2006, June 29, 2006, and December 21, 2006, respectively. We continued to acquire properties throughout 2007, on January 4, 2007; a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas, on February 1, 2007; and a land parcel in Lake Jackson, TX, intended for immediate development as a power retail center, on June 29, 2007, two hotels in Houston, Texas on October 17, 2007, five multifamily apartment communities, one in Tampa, Florida, two in Greensboro, North Carolina
and two in Charlotte, North Carolina on November 16, 2007, and an industrial building in Sarasota, Florida on November 13, 2007.

Properties that the Company owned for all of both 2008 and 2007 represent 2 retail properties and 4 multifamily apartment communities. The Companys growth for the years ended December 31, 2008 and 2007 is primarily driven by the impact of acquisitions. Prior to 2008, as we have a limited operating history, and we have completed our first nine acquisitions over the past two years, the majority of fluctuations are the result of these acquisitions.

Comparison of the Year Ended December 31, 2008 Versus the Year Ended December 31, 2007

Revenues

Total revenues increased by $15.3 million to $41.1 million for the year ended December 31, 2008 compared to $25.8 million for the year ended December 31, 2007. Rental income increased by approximately $14.2 million primarily due to our acquisitions of a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas, on February 1, 2007; and a land parcel in Lake Jackson, TX, on June 29, 2007 which subsequently opened in April of 2008, two hotels in Houston, Texas on October 17, 2007, five multifamily apartment communities, one in Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte, North Carolina on November 16, 2007.
Tenant recovery income increase by $1.1 million primarily as a result of our acquisition of a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas as well as the acquisition of five multifamily apartment communities during 2007. The acquisitions in 2007 accounted for $14.3 million of the rental income increase and $0.8 million of the tenant recovery income increase in 2008 compared to 2007. Excluding the impact of acquisitions, total revenues were flat for the year ended December 31, 2008 compared to 2007.

Property Operating Expenses

Property operating expenses increased by $8.3 million to approximately $17.8 million, for the year ended December 31, 2008, compared to $9.5 million for the same period last year. Our 2007 acquisitions (see revenues above) resulted in an increase in property operating expenses of $7.6 million. The remaining increase is primarily due to the expected increase at St. Augustine Outlet Mall due to the recent expansion. The grand opening occurred during the fourth quarter of 2008.

Real Estate Taxes

Real estate taxes increased by $1.5 million to approximately $4.2 million, for the year ended December 31, 2008, compared to $2.7 million for the same period last year as a result of our 2007 acquisitions (see revenues above).

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Impairment of Long-lived Assets and Loss on Disposal

For the year ended December 31, 2008, we recorded an asset impairment charge of $4.9 million primarily related to impairment on one our industrial properties located in Sarasota, Florida. We identified certain indicators of impairment related to this property such as the property is currently vacate and is experiencing negative cash flows and the difficulty in leasing space. We performed a cash flow valuation analysis and determined that the carrying value of the property exceeded its undiscounted cash flows. Therefore, we recorded an impairment charge related to the property consisting of the excess carrying value of the asset over its estimated
fair value within the accompanying consolidated statement of operations. For the years ended December 31, 2007, we did not record an impairment charge.

General and Administrative Expenses

General and administrative costs increased by $8.6 million to $12.3 million due to the following:



          $5.0 million additional acquisition fees, including closing costs, related to our investments in unconsolidated affiliated real estate entities during 2008 as well as our potential future investment in Prime compared to 2007. See notes 4 and 6 of notes to consolidated financial statements.

          $1.2 million related to asset management fees due to an increase in the average asset value during 2008 compared to 2007 as a result of our acquisitions.

          $1.0 million related to an increase in bad debt expense predominately within our multifamily residential properties.

          The remaining increase is primarily associated with an increase in consulting fees associated with legal, accounting and other professional services.Depreciation and Amortization

Depreciation and amortization expense increased by $2.7 million to $8.9 million in 2008 as compared to 2007 primarily due to the acquisition of new properties in 2007. During 2008, we incurred a full year of depreciation and amortization expense compared to a partial year during 2007 based upon the dates of acquisition of our properties.

Other, Net

Other, net includes vending and other ancillary revenue as well as provision for income taxes related to our TRS. During 2008, other, net decreased by $0.2 million primarily related to the provision for income taxes related to our TRS. The provision is 2008 was $0.1 million compared to none in 2007. The remaining decrease is a reduction in vending and other ancillary revenue.

Interest Income

Interest income increased by approximately $2.9 million due to:



          Interest earned of $1.4 million on note receivables issued during 2008 (See Notes 4 and 6 of the notes to consolidated financial statements).

          The remaining increase is primarily due to the increase in interest and dividend income recorded on the short-term investments and marketable securities. The average balance of cash and marketable securities was $65.7 million for 2008 and $43.0 million for 2007.Interest Expense

Interest expense, including amortization of deferred financing costs, increased $4.4 million for the year ended December 31, 2008 as compared to 2007, primarily due to the inclusion of a full year of interest expense associated with the financing of new properties acquired during 2007. This increase was offset slightly by an increase in interest costs capitalized during the year ended December 31, 2008 compared to 2007 of approximately $0.8 million related to financed renovation and expansion projects.

Gain on Sale of Equity Securities

Gain on sale of equity securities decreased by $0.8 million for the year ended December 31, 2008 as compared to 2007 due to timing of sales of securities and difference in cost basis compared to proceeds received on sale.

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Other than Temporary Impairment  Marketable Securities

During the year ended December 31, 2008, we recorded a non-cash charge of $9.8 million, of which $9.7 million and $0.1 million was recorded during the quarters ended September 30, 2008 and December 31, 2008, respectively, related to a decline in value of certain investment securities which were determined to be other than temporary. No such impairments were recorded during the year ended December 31, 2007 (See note 7 of notes to consolidated financial statements).

Loss from Investments in Unconsolidated Affiliated Real Estate Entities

A $3.4 million loss from investment in unconsolidated real estate entities for the year ended December 31, 2008 compared to a $7.3 million loss during the year ended December 31, 2007. The change of $3.9 million is primarily related to a lower net loss realized from our 49% investment in 1407 Broadway of $3.0 million in 2008 compared to $7.3 million in 2007. The improved performance within 1407 Broadway primarily related to a reduction in interest expense as a result of a lower LIBOR rates during 2008 compared to 2007 plus a decrease in depreciation and amortization expense as a result of in-place leases becoming fully amortized.

Minority Interest

The loss allocated to minority interests of approximately $84,805 for the year ended December 31, 2008 relates to the interest in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (See Note 1 of the notes to the consolidated financial statements). During the year ended December 31, 2007, the minority interests of $26 relates to the interests in the Operating Partnership held by our Sponsor.

Comparison of the Year Ended December 31, 2007 Versus the Year Ended December 31, 2006

Revenues

Total revenues more than tripled as compared to 2006. Total Revenues for 2007 were $25.8 million compared to $8.4 million for the year ended December 31, 2006. Rental income increased by approximately $14.7 million primarily as a result of our acquiring the Belz Outlets in St. Augustine, Florida on March 31, 2006 and the southeastern Michigan multi-family properties on June 29, 2006, a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas, on February 1, 2007; and a land parcel in Lake Jackson, TX, intended for immediate development as a power retail center, on June 29, 2007, two hotels in Houston, Texas on October 17, 2007, five
multi family apartment communities, one in Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte, North Carolina on November 16, 2007. Tenant recovery income increased by approximately $2.7 million primarily as a result of our acquiring the Belz Outlets in St. Augustine, Florida, the Oakview Center in Omaha, Nebraska, and the portfolio of 12 industrial and 2 office buildings in Louisiana and Texas.

Total Property Expenses

Total property expenses, including property operating expenses and real estate taxes, increased by $7.8 million to approximately $12.3 million, for the year ended December 31, 2007, compared to $4.5 million for the same period last year. Increases in property operating expenses ($5.9 million) and real estate taxes ($1.9 million) were primarily the result of the acquisition of a full year of expenses for the 2006 acquisitions, and the additional expenses associated with all of the 2007 acquisitions.

General and Administrative Expenses

General and administrative costs increased by $2.9 million to $3.7 million, primarily as a result of the payment of acquisition and legal fees in the amount of $1.6 million and $0.1 million, respectively, related to the Lightstone REITs investment in the sub lease interest to a ground lease of a Manhattan office building payment, and asset management fees in the amount of $1.0 million, and costs incurred related to outside consulting fees to advise the Company regarding Sarbanes Oxley compliance testing performed in 2007. General and administrative expenses for the year ended December 31, 2006 totaled $0.8 million, which included asset
management fees of $0.3 million. We expect general and administrative expenses to increase in the future as a result of acquisitions in future periods.

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Depreciation and Amortization

Depreciation and amortization expense increased by $3.5 million, in 2007 as compared to 2006 primarily due to the inclusion of a full year of expenses for the 2006 acquisitions, and the additional expenses associated with all of the 2007 acquisitions.

Interest Income

Interest income increased by approximately $1.4 million, due primarily to the increase in interest and dividend income recorded on the short-term investments and marketable securities. The Cash and cash equivalents, including marketable securities at December 31, 2007, was $40.3 million, or a $21.0 million increase over the balance at December 31, 2006.

Interest Expense

Interest expense increased $6.8 million for the year ended December 31, 2007 as compared to 2006, due to the inclusion of a full year of expenses for the 2006 acquisitions, and the additional expenses associated with all of the 2007 acquisitions.

Minority Interest

The loss allocated to minority interests of approximately $26 and $86 for the year ended December 31, 2007 and 2006, respectively, relates to the interests in the Operating Partnership held by our Sponsor.

Financial Condition, Liquidity and Capital Resources

Overview

We intend that rental revenue will be the principal source of funds to pay operating expenses, debt service, capital expenditures and dividends, excluding non-recurring capital expenditures. To the extent that our cash flow from operating activities is insufficient to finance non-recurring capital expenditures such as property acquisitions, development and construction costs and other capital expenditures, we are dependent upon the net proceeds received from our public offering to conduct such proposed activities. We have financed such activities through debt and equity financings. Our public offering closed during October 2008. We expect that future
financing will be through debt financings and proceeds from our dividend reinvestment plan. The capital required to purchase real estate investments has been obtained from our offering and from any indebtedness that we may incur in connection with the acquisition and operations of any real estate investments thereafter.

We expect to meet our short-term liquidity requirements generally through funds received in our public offering, working capital, and net cash provided by operating activities. We frequently examine potential property acquisitions and development projects and, at any given time, one or more acquisitions or development projects may be under consideration. Accordingly, the ability to fund property acquisitions and development projects is a major part of our financing requirements. We expect to meet our financing requirements through funds generated from our public offering and long-term and short-term borrowings.

We intend to utilize leverage in acquiring our properties. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.

Our source of funds in the future will primarily be the net proceeds of our offering, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

We currently have $239.2 million of outstanding mortgage debt, and an additional $7.4 million of outstanding notes payable. We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

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The Company does not have any other significant capital plans for 2009.

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our board of directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next
quarterly report to stockholders, along with justification for such excess. As of December 31, 2008, our total borrowings represented 98% of net assets.

Borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lenders rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion,
secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

We intend to obtain level payment financing, meaning that the amount of debt service payable would be substantially the same each year. Accordingly, we expect that some of the mortgages on our property will provide for fixed interest rates. However, we expect that most of the mortgages on our properties will provide for a so-called balloon payment and that certain of our mortgages will provide for variable interest rates. Any mortgages secured by a property will comply with the restrictions set forth by the Commissioner of Corporations of the State of California.

We may also obtain lines of credit to be used to acquire properties. These lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so. We may draw upon the lines of credit to acquire properties pending our receipt of proceeds from our initial public offering. We expect that such properties may be purchased by our Sponsors affiliates on our behalf, in our name, in order to avoid the imposition of a transfer tax
upon a transfer of such properties to us.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor, our Dealer Manager, and our Property Manager during the various phases of our organization and operation. During our organizational and offering stage, these payments included payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organization and offering costs. During the acquisition and development stage, these payments will include asset acquisition fees and asset management fees, and the reimbursement of
acquisition related expenses to our Advisor. During the operational stage, we will pay our Property Manager a property management fee and our Advisor an asset management fee. We will also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.

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The following table represents the fees incurred associated with the payments to our Advisor, our Dealer Manager, and our Property Manager for the year ended December 31, 2008, 2007 and 2006:



2008

          

          2007

          

          2006Acquisition fees

          

          $

          2,336,565

          

          

          $

          6,551,896

          

          

          $

          2,771,992Asset management fees

          

          

          2,203,563

          

          

          

          1,033,371

          

          

          

          274,724Property management fees

          

          

          1,783,275

          

          

          

          1,057,272

          

          

          

          328,532Acquisition expenses reimbursed to Advisor

          

          

          1,265,528

          

          

          

          635,848

          

          

          

          Development fees

          

          

          932,783

          

          

          

          71,901

          

          

          

          Leasing commissions

          

          

          1,001,324

          

          

          

          176,041

          

          

          

          33,706Total

          

          $

          9,523,038

          

          

          $

          9,526,329

          

          

          $

          3,408,954

As of December 31, 2008, we had approximately $66.1 million of cash and cash equivalents on hand and $11.5 million of marketable securities. Our cash and cash equivalents on hand and our marketable securities resulted primarily from proceeds from our Offering.

Summary of Cash Flows.  The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:



Year Ended December 31, 2008

          

          Year Ended December 31, 2007

          

          Year Ended December 31, 2006Cash flows provided by (used in) operating activities

          

          $

          (5,083,076

          )

          

          $

          6,651,989

          

          

          $

          1,722,853Cash flows used in investing activities

          

          

          (97,097,602

          )

          

          

          (227,971,386

          )

          

          

          (119,467,655

          )Cash flows provided by financing activities

          

          

          138,696,930

          

          

          

          231,628,502

          

          

          

          136,820,482Net change in cash and cash equivalents

          

          

          36,516,252

          

          

          

          10,309,105

          

          

          

          19,075,680Cash, beginning of the period

          

          

          29,589,815

          

          

          

          19,280,710

          

          

          

          205,030Cash, end of the period

          

          $

          66,106,067

          

          

          $

          29,589,815

          

          

          $

          19,280,710

Our principal source of cash flow was derived from the issuance of our common stock and the operation of our rental properties. We intend that our properties will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly dividends.

Operating Activities

During the year ended December 31, 2008, cash flows used in operating activities was $5.1 million compared to cash generated from operating activities of $6.7 million during the year ended December 31, 2007 resulting in a total change of $11.8 million. The change is primarily driven by difference in our net loss adjusted for non-cash items primarily as a result of acquisition fees paid in 2008 compared to 2007 of $3.5 million. In addition, movements in working capital accounts, which were a use of funds of $4.3 million for 2008 compared to source of funds of $4.0 million contributed to the change. The change in working capital relates primarily to
the timing of payments of interest on note receivables issued in 2008 (see Note 4 and 6 of the notes to consolidated financial statements), an increase in accounts receivable primarily within our commercial properties and timing of accounts payable.

During 2007, cash flows from operating activities were generated primarily from our retail property in St. Augustine, Florida acquired in March of 2006, the four residential apartment communities we acquired in June of 2006, the Oakview Plaza in Omaha, Nebraska acquired on December 21, 2006 and the Gulf Coast industrial portfolio acquired on February 1, 2007, two hotels acquired in Houston, Texas on October 17, 2007, five multi family apartment communities acquired on November 16, 2007, substantially offset by the payment of a $1.6 million acquisition fee related to our investment in a joint venture which acquired a sub-leasehold interest in a ground
lease to an office building located at 1407 Broadway, New York, New York.

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Our principal demands for liquidity are our property operating expenses, real estate taxes, insurance, tenant improvements, leasing costs, acquisition and development activities, debt service and distributions to our stockholders. The principal sources of funding for our operations are operating cash flows, the sale of properties, and the issuance of equity and debt securities and the placement of mortgage loans.

Investing Activities

Cash used in investing activities for the year ended December 31, 2008 primarily related to the following:



          $49.5 million note receivable issued in connection to the signing of a material agreement to enter into a contribution and conveyance agreement to acquire a 25% interest in Prime Outlets Acquisition Company, which owns 18 retail outlet malls and four development projects;

          a preferred equity contribution of $11.0 million into a real estate lending company which is an affiliate of our Sponsor;

          $28.4 million on investments in real estate, primarily related to the renovation and expansion project at our St. Augustine Outlet Mall; and

          $13.0 million in net purchases of marketable securities.

          Offset by repayments on note receivable of $1.0 million and distribution payments received from investments in unconsolidated affiliates of $2.0 million.Cash used in investing activities for the year end December 31, 2007 of $228.0 million resulted primarily from the purchases of the Gulf Coast Industrial portfolio on February 1, 2007, the investment in the unconsolidated joint venture, two hotels acquired in Houston, Texas on October 17, 2007, five multifamily apartment communities acquired on November 16, 2007, as well as the purchase of an industrial building in Sarasota, Florida, the purchase of marketable securities of $27.7 million offset by the proceeds from the sale of Marketable securities of $17.0 million.

Financing Activities

Cash provided by financing activities of $138.7 million during the year ended December 31, 2008 is primarily related to proceeds from issuance of common stock of $167.9 million, net proceeds from mortgage financing and notes payable of $3.2 million and proceeds from sale of general partnership units of $10.1 million. Offset by the payment of offering costs of $17.0 million associated with the issuance of common stock, the issuance of a note receivable of $17.6 million entered into in connection with our investment in two retail outlet malls in Orlando, Florida and distributions paid to common stockholders of $6.9 million.

Cash provided by financing activities during the year ended December 31, 2007 is primarily the proceeds from mortgage financing and notes payable ($148.2 million) and the proceeds from the issuance of common stock ($88.6 million), and the proceeds from the sale of general partnership units ($8.9 million).

We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of dividends in accordance with REIT requirements in both the short and long-term. We believe our current balance sheet position is financially sound, however due to the current weakness in and unpredictability of the capital and credit markets we can give no assurance that affordable access to capital will exist when our debt maturities occur.

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Contractual Obligations

The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of December 31, 2008.



Contractual Obligations

          

          2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          TotalMortgage Payable(1)

          

          $

          12,325,023

          

          

          $

          359,526

          

          

          $

          1,586,957

          

          

          $

          2,781,012

          

          

          $

          3,107,355

          

          

          $

          219,084,109

          

          

          $

          239,243,982Note Payable(2)

          

          

          7,416,941

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          7,416,941Interest Payments(3)

          

          

          13,745,231

          

          

          

          13,084,302

          

          

          

          12,851,955

          

          

          

          12,980,592

          

          

          

          12,772,092

          

          

          

          27,751,042

          

          

          

          93,185,214Total Contractual Obligations

          

          $

          33,487,195

          

          

          $

          13,443,828

          

          

          $

          14,438,912

          

          

          $

          15,761,604

          

          

          $

          15,879,447

          

          

          $

          246,835,151

          

          

          $

          339,846,137




(1)

          These amounts represent mortgage payable obligations outstanding as of December 31, 2008.(2)

          Amount represents note payable obligation outstanding as of December 31, 2008.(3)

          These amounts represent future interest payments related to mortgage and note payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one month LIBOR rate as of December 31, 2008 was used.Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We have historically been and currently are in compliance with all of our debt covenants. We expect to remain in compliance with all our existing debt covenants; however, should circumstances arise that would cause us to be in default, the various lenders would have the ability to accelerate the maturity on our outstanding debt.

Funds from Operations

We consider Funds from Operations, or FFO, a widely accepted and appropriate measure of performance for a REIT. FFO provides a non-GAAP supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, The National Association of Real Estate Investment Trusts, Inc. (NAREIT) has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT such as ours. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of operating property, plus depreciation
and amortization and after adjustment for unconsolidated partnership and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition of computing FFO.

We believe that FFO and FFO available to common shares are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses related to dispositions of depreciable property and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to common shares can help compare the operating performance of a companys real estate between periods or as compared to different
companies. FFO and FFO available to common shares do not represent net income, net income available to common shares or net cash flows from operating activities in accordance with GAAP. Therefore, FFO and FFO available to common shares should not be exclusively considered as alternatives to net income, net income available to common shares or net cash flows from operating activities as determined by GAAP or as measures of liquidity. The Companys calculation of FFO and FFO available to common shares may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.

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Below is a reconciliation of net income to FFO for the years ended December 31, 2008, 2007 and 2006:



For the Year Ended December 31,2008

          

          2007

          

          2006Net loss applicable to common shares

          

          $

          (28,139,359

          )

          

          $

          (9,242,390

          )

          

          $

          (1,536,344

          )Allocation to Minority Interests

          

          

          (84,805

          )

          

          

          (26

          )

          

          

          (86

          )Adjustments:Depreciation and amortization of real estate assets

          

          

          8,941,153

          

          

          

          6,163,437

          

          

          

          2,674,819Equity in depreciation and amortization for unconsolidated affiliated real estate entities

          

          

          7,363,009

          

          

          

          7,945,310

          

          

          

          Loss on sale of investment property

          

          

          315,642

          

          

          

          

          

          

          

          FFO applicable to common shares

          

          $

          (11,604,360

          )

          

          $

          4,866,331

          

          

          $

          1,138,389FFO per common share, basic and diluted

          

          $

          (0.51

          )

          

          $

          0.53

          

          

          $

          0.71Weighted average number of common shares outstanding, basic and diluted

          

          

          22,658,290

          

          

          

          9,195,369

          

          

          

          1,594,060

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. This statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or risk inherent in the inputs to the valuation technique. This Statement
clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. This Statement also clarifies that a fair value measurement for a liability reflects its nonperformance risk. The statement is effective in the fiscal first quarter of 2008 for financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in the financial statement at fair value at lease annually. Therefore, the Company adopted the provisions of SFAS No. 157 with respect to only financial assets, which are comprised solely of marketable securities, and financial liabilities. The adoption of SFAS No.157 did not have a material effect on the consolidated results of
operations or financial position.

Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:



          Level 1  Quoted prices in active markets for identical assets or liabilities.

          Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

          Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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Assets measured at fair value on a recurring basis as of December 31, 2008 are as follows:



Fair Value Measurement UsingAs of December 31, 2008

          

          Level 1

          

          Level 2

          

          Level 3

          

          TotalCorporate bonds

          

          $

          9,656,500

          

          

          $

          

          

          

          $

          

          

          

          $

          9,656,500Equity Securities, primarily REITs

          

          

          1,794,065

          

          

          $

          

          

          

          $

          

          

          

          $

          1,794,065Total Marketable securities  available for sale

          

          $

          11,450,565

          

          

          $

          

          

          

          $

          

          

          

          $

          11,450,565

The Company did not have any other significant financial assets or liabilities, which would require revised valuations under SFAS No. 157 that are recognized at fair value.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159). This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. The Company adopted SFAS No. 159 as required effective January 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the consolidated results of operations or financial position.

In December 2007, the FASB issued FASB No. 141(R) which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. One significant change includes expensing acquisition fees instead of capitalizing these fees as part of the purchase price. This will only impact our recording of acquisition fees associated with the purchase of wholly-owned entities on a prospective basis. Prior to FASB 141 (R), we expensed acquisition fees related to investments in
unconsolidated affiliated entities. This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued No. 160, which establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. FASB 160 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of FASB No. 160 is not expected to have a material effect on the consolidated results of operations or financial position.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest
rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of December 31, 2008, we had an interest rate cap agreement outstanding for LIBOR at 6.0% related to our note payable obligation as per our debt agreement. At December 31, 2008, the fair value of this interest rate cap agreement was zero. We did not have any other swap or derivative agreements outstanding.

We also hold equity securities for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of December 31, 2008, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $1.1 million.

The following table shows the mortgage and note payable obligations maturing during the next five years and thereafter at December 31, 2008:



2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          TotalMortgage Payable

          

          $

          12,325,023

          

          

          $

          359,526

          

          

          $

          1,586,957

          

          

          $

          2,781,012

          

          

          $

          3,107,355

          

          

          $

          219,084,109

          

          

          $

          239,243,982Note Payable

          

          

          7,416,941

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          7,416,941Total maturities

          

          $

          19,741,964

          

          

          $

          359,526

          

          

          $

          1,586,957

          

          

          $

          2,781,012

          

          

          $

          3,107,355

          

          

          $

          219,084,109

          

          

          $

          246,660,923

As of December 31, 2008, approximately $19.4 million, or 8%, of our debt (mortgage and note payable obligations combined) are variable rate instruments and our interest expense associated with these instruments is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in LIBOR) would increase annual interest expense by approximately $0.2 million.

The fair value of the mortgage debt and notes payable as of December 31, 2008 was approximately $239.8 million compared to the book value of approximately $246.7 million. The fair value of the mortgage debt and notes payable as of December 31, 2007 approximated the book value of approximately $243.4 million.

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary. As of December 31, 2008, we had no off-balance sheet arrangements.

We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.

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Item 8. Financial Statements and Supplementary Data

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES (A Maryland Corporation)

INDEX



PageReport of Independent Registered Public Accounting Firm on Consolidated Financial Statements





59Financial Statements:Consolidated Balance Sheets as of December 31, 2008 and 2007





60Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006





61Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2008, 2007 and 2006





62Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006





63Notes to Consolidated Financial Statements





64Real Estate and Accumulated Depreciation (Schedule III)





99

Schedules not filed:

All schedules other than the one listed in the Index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries

We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three year period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

We have also audited the consolidated financial statement schedule, Schedule III  Real Estate and Accumulated Depreciation, as of December 31, 2008. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Amper, Politziner & Mattia, LLP

March 31, 2009 Edison, New Jersey

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS As of December 31, 2008 and 2007



December 31, 2008

          

          December 31, 2007ASSETSInvestment property:Land

          

          $

          65,050,624

          

          

          $

          62,032,138Building

          

          

          273,255,468

          

          

          

          240,221,044Construction in progress

          

          

          3,318,021

          

          

          

          7,499,319Gross investment property

          

          

          341,624,113

          

          

          

          309,752,501Less accumulated depreciation

          

          

          (17,287,242

          )

          

          

          (5,455,550

          )Net investment property

          

          

          324,336,871

          

          

          

          304,296,951Investments in unconsolidated affiliated real estate entities

          

          

          21,375,908

          

          

          

          6,284,675Investment in affiliate, at cost

          

          

          10,150,000

          

          

          

          Cash and cash equivalents

          

          

          66,106,067

          

          

          

          29,589,815Marketable securities

          

          

          11,450,565

          

          

          

          10,752,910Restricted escrows

          

          

          7,773,705

          

          

          

          9,595,453Tenant accounts receivable

          

          

          2,073,756

          

          

          

          1,471,740Other accounts receivable, primarily escrow receivable

          

          

          1,238,894

          

          

          

          59,440Note receivable, related party

          

          

          48,500,000

          

          

          

          Acquired in-place lease intangibles (net of accumulated amortization of $1,849,234 and $2,646,629, respectively)

          

          

          1,141,538

          

          

          

          1,982,292Acquired above market lease intangibles (net of accumulated amortization of $710,720 and $373,175, respectively)

          

          

          439,939

          

          

          

          830,727Deferred intangible leasing costs (net of accumulated amortization of $832,824 and $605,093, respectively)

          

          

          695,016

          

          

          

          1,153,712Deferred leasing costs (net of accumulated amortization of $158,792 and $50,606, respectively)

          

          

          1,019,225

          

          

          

          154,879Deferred financing costs (net of accumulated amortization of $634,612 and $172,939, respectively)

          

          

          1,723,093

          

          

          

          2,154,560Interest receivable from related parties

          

          

          1,815,279

          

          

          

          Prepaid expenses and other assets

          

          

          1,969,384

          

          

          

          1,374,200Total Assets

          

          $

          501,809,240

          

          

          $

          369,701,354LIABILITIES AND STOCKHOLDERS' EQUITYMortgage payable

          

          $

          239,243,982

          

          

          $

          237,610,371Note payable

          

          

          7,416,941

          

          

          

          5,825,286Accounts payable and accrued expenses

          

          

          8,518,275

          

          

          

          5,811,535Due to sponsor

          

          

          1,145,890

          

          

          

          521,427Tenant allowances and deposits payable

          

          

          5,673,760

          

          

          

          943,854Distributions payable

          

          

          

          

          

          

          2,463,361Prepaid rental revenues

          

          

          978,648

          

          

          

          1,066,724Acquired below market lease intangibles (net of accumulated amortization of $2,258,021 and $1,874,843, respectively)

          

          

          1,204,434

          

          

          

          2,391,883264,181,930

          

          

          

          256,634,441Minority interest in partnership

          

          

          23,113,983

          

          

          

          12,954,715Commitments and contingencies (Note 19)Stockholders' equity:Preferred shares, $1 Par value, 10,000,000 shares authorized, none outstanding

          

          

          

          

          

          

          Common stock, $.01 par value; 60,000,000 shares authorized, 30,985,544 and 13,606,608 shares issued and outstanding, respectively

          

          

          309,855

          

          

          

          136,066Additional paid-in-capital

          

          

          275,589,300

          

          

          

          120,297,590Accumulated other comprehensive loss

          

          

          (4,212,454

          )

          

          

          (1,199,278

          )Accumulated distributions in addition to net loss

          

          

          (57,173,374

          )

          

          

          (19,122,180

          )Total stockholders equity

          

          

          214,513,327

          

          

          

          100,112,198Total Liabilities and Stockholders' Equity

          

          $

          501,809,240

          

          

          $

          369,701,354

The Companys notes are an integral part of these consolidated financial statements.

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2008, 2007 and 2006



For the Year Ended December 31, 2008

          

          For the Year Ended December 31, 2007

          

          For the Year Ended December 31, 2006Revenues:Rental income

          

          $

          36,309,102

          

          

          $

          22,065,035

          

          

          $

          7,447,759Tenant recovery income

          

          

          4,829,000

          

          

          

          3,756,760

          

          

          

          990,929Total revenues

          

          

          41,138,102

          

          

          

          25,821,795

          

          

          

          8,438,688Expenses:Property operating expenses

          

          

          17,756,179

          

          

          

          9,523,862

          

          

          

          3,633,519Real estate taxes

          

          

          4,188,142

          

          

          

          2,739,866

          

          

          

          882,212Impairment of long lived assets and loss on disposal

          

          

          4,866,437

          

          

          

          

          

          

          

          General and administrative costs

          

          

          12,329,641

          

          

          

          3,710,363

          

          

          

          808,502Depreciation and amortization

          

          

          8,941,153

          

          

          

          6,163,437

          

          

          

          2,674,819Total operating expenses

          

          

          48,081,552

          

          

          

          22,137,528

          

          

          

          7,999,052Operating (loss) income

          

          

          (6,943,450

          )

          

          

          3,684,267

          

          

          

          439,636Other income, net

          

          

          377,632

          

          

          

          539,520

          

          

          

          151,545Interest income

          

          

          4,819,109

          

          

          

          1,884,180

          

          

          

          459,916Interest expense

          

          

          (13,818,263

          )

          

          

          (9,384,383

          )

          

          

          (2,587,527

          )Gain on sale of equity securities

          

          

          528,334

          

          

          

          1,301,949

          

          

          

          Other than temporary impairment  marketable securities

          

          

          (9,830,259

          )

          

          

          

          

          

          

          Loss from investments in unconsolidated affiliated real estate entities

          

          

          (3,357,267

          )

          

          

          (7,267,949

          )

          

          

          Minority interest

          

          

          84,805

          

          

          

          26

          

          

          

          86Net loss applicable to common shares

          

          $

          (28,139,359

          )

          

          $

          (9,242,390

          )

          

          $

          (1,536,344

          )Net loss per common share, basic and diluted

          

          $

          (1.24

          )

          

          $

          (1.01

          )

          

          $

          (0.96

          )Weighted average number of common shares outstanding, basic and diluted

          

          

          22,658,290

          

          

          

          9,195,369

          

          

          

          1,594,060

The Companys notes are an integral part of these consolidated financial statements.

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY For the Years Ended December 31, 2008, December 31, 2007 and December 31, 2006



Preferred Shares

          

          Common Shares

          

          Additional Paid-in Capital

          

          Accumulated Other Comprehensive Loss

          

          Accumulated Distributions in Excess of Net Loss

          

          Total Stockholders EquityPreferred Shares

          

          Amount

          

          Common Shares

          

          AmountBALANCE, December 31, 2005

          

          

          

          

          

          $

          

          

          

          

          20,000

          

          

          $

          200

          

          

          $

          199,800

          

          

          $

          

          

          

          $

          (116,407

          )

          

          $

          83,593Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (1,536,344

          )

          

          

          (1,536,344

          )Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (1,101,708

          )

          

          

          (1,101,708

          )Proceeds from offering

          

          

          

          

          

          

          

          

          

          

          4,276,165

          

          

          

          42,762

          

          

          

          42,570,940

          

          

          

          

          

          

          

          

          

          

          

          42,613,702Selling commissions and dealer manager fees

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (3,337,501

          )

          

          

          

          

          

          

          

          

          

          

          (3,337,501

          )Other offering costs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (943,869

          )

          

          

          

          

          

          

          

          

          

          

          (943,869

          )Proceeds from distribution reinvestment program

          

          

          

          

          

          

          

          

          

          

          20,824

          

          

          

          208

          

          

          

          197,623

          

          

          

          

          

          

          

          

          

          

          

          197,831BALANCE, December 31, 2006

          

          

          

          

          

          

          

          

          

          

          4,316,989

          

          

          

          43,170

          

          

          

          38,686,993

          

          

          

          

          

          

          

          (2,754,459

          )

          

          

          35,975,704Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (9,242,390

          )

          

          

          (9,242,390

          )Unrealized loss on available for sale securities

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (1,199,278

          )

          

          

          

          

          

          

          (1,199,278

          )Total comprehensive loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (10,441,668

          )Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (7,125,331

          )

          

          

          (7,125,331

          )Proceeds from offering

          

          

          

          

          

          

          

          

          

          

          9,082,793

          

          

          

          90,828

          

          

          

          88,541,468

          

          

          

          

          

          

          

          

          

          

          

          88,632,296Selling commissions and dealer manager fees

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (6,130,796

          )

          

          

          

          

          

          

          

          

          

          

          (6,130,796

          )Other offering costs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (2,762,855

          )

          

          

          

          

          

          

          

          

          

          

          (2,762,855

          )Proceeds from distribution reinvestment program

          

          

          

          

          

          

          

          

          

          

          206,826

          

          

          

          2,068

          

          

          

          1,962,780

          

          

          

          

          

          

          

          

          

          

          

          1,964,848BALANCE, December 31, 2007

          

          

          

          

          

          

          

          

          

          

          13,606,608

          

          

          

          136,066

          

          

          

          120,297,590

          

          

          

          (1,199,278

          )

          

          

          (19,122,180

          )

          

          

          100,112,198Comprehensive loss:Net loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (28,139,359

          )

          

          

          (28,139,359

          )Unrealized loss on available for sale securities

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (3,013,176

          )

          

          

          

          

          

          

          (3,013,176

          )Total comprehensive loss

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (31,152,535

          )Distributions declared

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (9,911,835

          )

          

          

          (9,911,835

          )Proceeds from offering

          

          

          

          

          

          

          

          

          

          

          16,900,087

          

          

          

          169,000

          

          

          

          167,709,611

          

          

          

          

          

          

          

          

          

          

          

          167,878,611Redemption and cancellation of shares

          

          

          

          

          

          

          

          

          

          

          (102,207

          )

          

          

          (1,022

          )

          

          

          (918,841

          )

          

          

          

          

          

          

          

          

          

          

          (919,863

          )Selling commissions and dealer manager fees

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (14,379,358

          )

          

          

          

          

          

          

          

          

          

          

          (14,379,358

          )Other offering costs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (2,633,923

          )

          

          

          

          

          

          

          

          

          

          

          (2,633,923

          )Proceeds from distribution reinvestment program

          

          

          

          

          

          

          

          

          

          

          581,056

          

          

          

          5,811

          

          

          

          5,514,221

          

          

          

          

          

          

          

          

          

          

          

          5,520,032BALANCE, December 31, 2008

          

          

          

          

          

          $

          

          

          

          

          30,985,544

          

          

          $

          309,855

          

          

          $

          275,589,300

          

          

          $

          (4,212,454

          )

          

          $

          (57,173,374

          )

          

          $

          214,513,327

The Companys notes are an integral part of these consolidated financial statements.

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TABLE OF CONTENTS

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2008, 2007 and December 31, 2006



Year Ended December 31, 2008

          

          Year Ended December 31, 2007

          

          Year Ended December 31, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

          

          $

          (28,139,359

          )

          

          $

          (9,242,390

          )

          

          $

          (1,536,344

          )Loss allocated to minority interests

          

          

          (84,805

          )

          

          

          (26

          )

          

          

          (86

          )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization

          

          

          8,345,479

          

          

          

          5,617,908

          

          

          

          2,551,588Gain on sale of marketable securities

          

          

          (528,335

          )

          

          

          (1,301,949

          )

          

          

          Impairment of long lived assets and loss on disposal

          

          

          4,866,437

          

          

          

          

          

          

          

          Realized loss on impairment of marketable securities

          

          

          9,830,259

          

          

          

          

          

          

          

          Amortization of deferred financing costs

          

          

          473,630

          

          

          

          146,126

          

          

          

          26,813Amortization of deferred leasing costs

          

          

          595,674

          

          

          

          545,529

          

          

          

          123,230Amortization of above and below-market lease intangibles

          

          

          (796,661

          )

          

          

          (628,150

          )

          

          

          (878,177

          )Equity in loss from investments in unconsolidated affiliated real estate entities

          

          

          3,357,267

          

          

          

          7,267,949

          

          

          

          Provision for bad debts

          

          

          1,286,837

          

          

          

          262,310

          

          

          

          60,376Changes in assets and liabilities:Increase in prepaid expenses and other assets

          

          

          (1,581,124

          )

          

          

          (518,555

          )

          

          

          (573,470

          )Increase in tenant and other accounts receivable

          

          

          (3,068,307

          )

          

          

          (1,477,258

          )

          

          

          (376,608

          )Increase in tenant allowance and security deposits payable

          

          

          57,228

          

          

          

          641,884

          

          

          

          301,970Increase in accounts payable and accrued expenses

          

          

          390,780

          

          

          

          4,352,908

          

          

          

          1,942,541(Decrease)/increase in prepaid rents

          

          

          (88,076

          )

          

          

          985,703

          

          

          

          81,020Net cash (used in) provided by operating activities

          

          

          (5,083,076

          )

          

          

          6,651,989

          

          

          

          1,722,853CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of investment property, net

          

          

          (28,408,095

          )

          

          

          (201,085,650

          )

          

          

          (104,120,077

          )Purchase of marketable securities

          

          

          (23,135,006

          )

          

          

          (27,689,153

          )

          

          

          Issuance of note receivable, related party

          

          

          (49,500,000

          )

          

          

          

          

          

          

          Repayment of note receivable, related party

          

          

          1,000,000

          

          

          

          

          

          

          

          Proceeds from sale of marketable securities

          

          

          10,122,251

          

          

          

          17,038,915

          

          

          

          Investment in affiliate

          

          

          (11,000,000

          )

          

          

          (13,552,623

          )

          

          

          Distribution from investments in unconsolidated affiliates

          

          

          2,001,500

          

          

          

          

          

          

          

          Funding of restricted escrows

          

          

          1,821,748

          

          

          

          (2,682,875

          )

          

          

          (6,912,578

          )Refundable deposit for investment in real estate

          

          

          

          

          

          

          

          

          

          

          (8,435,000

          )Net cash used in investing activities

          

          

          (97,097,602

          )

          

          

          (227,971,386

          )

          

          

          (119,467,655

          )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from mortgage financing

          

          

          2,029,730

          

          

          

          142,333,800

          

          

          

          95,475,000Proceeds from notes payable

          

          

          1,591,654

          

          

          

          5,825,286

          

          

          

          Mortgage payments

          

          

          (396,118

          )

          

          

          (198,429

          )

          

          

          Payment of loan fees and expenses

          

          

          (42,163

          )

          

          

          (1,608,909

          )

          

          

          (718,590

          )Proceeds from issuance of common stock

          

          

          167,878,611

          

          

          

          88,632,296

          

          

          

          42,613,702Redemption and cancellation of common shares

          

          

          (919,863

          )

          

          

          

          

          

          

          Proceeds from issuance of special general partnership units

          

          

          10,063,525

          

          

          

          8,672,567

          

          

          

          4,281,369Payment of offering costs

          

          

          (17,013,281

          )

          

          

          (8,893,651

          )

          

          

          (4,055,404

          )Note receivable from minority interest partner

          

          

          (17,640,000

          )

          

          

          

          

          

          

          Due from escrow agent

          

          

          

          

          

          

          163,949

          

          

          

          (163,949

          )Due from affiliates

          

          

          

          

          

          

          

          

          

          

          (309,055

          )Distributions paid

          

          

          (6,855,165

          )

          

          

          (3,298,407

          )

          

          

          (302,591

          )Net cash provided by financing activities

          

          

          138,696,930

          

          

          

          231,628,502

          

          

          

          136,820,482Net change in cash and cash equivalents

          

          

          36,516,252

          

          

          

          10,309,105

          

          

          

          19,075,680Cash and cash equivalents, beginning of year

          

          

          29,589,815

          

          

          

          19,280,710

          

          

          

          205,030Cash and cash equivalents, end of year

          

          $

          66,106,067

          

          

          $

          29,589,815

          

          

          $

          19,280,710Cash paid for interest

          

          $

          14,213,869

          

          

          $

          8,696,812

          

          

          $

          2,329,904Dividends declared

          

          $

          9,911,835

          

          

          $

          7,125,331

          

          

          $

          1,101,708Unrealized loss on available for sale securities

          

          $

          (3,013,176

          )

          

          $

          (1,199,278

          )

          

          $

          Non cash purchase of investment property

          

          $

          (5,833,650

          )

          

          $

          

          

          

          $

          Proceeds from shares issued in distribution reinvestment program

          

          $

          5,520,032

          

          

          $

          1,964,848

          

          

          $

          197,831Issuance of units in exchange for investment in unconsolidated affiliated real estate entity

          

          $

          19,600,000

          

          

          $

          

          

          

          $

          

The Companys notes are an integral part of these consolidated financial statements.

63

TABLE OF CONTENTS

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008, 2007 and 2006

1. Organization

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (Lightstone REIT and, together with the Operating Partnership (as defined below), the Company) was formed on June 8, 2004 and subsequently qualified as a real estate investment trust (REIT) during the year ending December 31, 2006. The Company was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States and Puerto Rico.

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Lightstone REITs current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the Operating Partnership). The Lightstone REIT is managed by Lightstone Value Plus REIT, LLC (the Advisor), an affiliate of the Lightstone Group (the Sponsor), under the terms and conditions of an advisory agreement. The Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of the
Companys board of directors and its Chief Executive Officer.

The Company commenced an initial public offering to sell a maximum of 30,000,000 shares of common shares on May 23, 2005, at a price of $10 per share (exclusive of 4 million shares available pursuant to the Companys dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued and 75,000 shares that are reserved for issuance under the Companys stock option plan). The Companys Registration Statement on Form S-11 (the Registration Statement) was declared effective under the Securities Act of 1933 on April 22, 2005, and on May 24, 2005, the Lightstone
REIT began offering its common shares for sale to the public. Lightstone Securities, LLC (the Dealer Manager), an affiliate of the Sponsor, is serving as the dealer manager of the Companys public offering (the Offering).

The Company sold 20,000 shares to the Advisor on July 6, 2004, for $10 per share. The Company invested the proceeds from this sale in the Operating Partnership, and as a result, held a 99.9% general partnership interest in the Operating Partnership. The Advisor also contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

A Post-Effective Amendment to the Lightstone REITs Registration Statement was declared effective on October 17, 2005. The Post-Effective Amendment reduced the minimum offering from 1 million shares of common stock to 200,000 shares of common stock. As of December 31, 2005, the Company had reached its minimum offering by receiving subscriptions for approximately 226,000 of its common shares, representing gross offering proceeds of approximately $2.3 million. On February 1, 2006, cumulative gross offering proceeds of approximately $2.7 million were released to the Company from escrow and invested in the Operating Partnership.

The Offering terminated on October 10, 2008 when all shares offered where sold. However, the shares continued to be sold to existing stockholders pursuant to the dividend reinvestment plan through December 1, 2008. As of December 31, 2008, cumulative gross offering proceeds of approximately $307.0 million, which includes $7.7 million of proceeds from the dividend reinvestment plan have been released to the Lightstone REIT and used for the purchase of a 99.68% general partnership interest in the Operating Partnership.

The Advisor is responsible for offering and organizational costs exceeding 10% of the gross offering proceeds without recourse to the Company. Since its inception, and through December 31, 2008, the Advisor has not allocated any organizational costs to the Company as the offering costs of $30.2 million did not exceed 10% of the total proceeds of $307.0 million.

64

TABLE OF CONTENTS

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008, 2007 and 2006

1. Organization   (continued)

Minority Interest  Partners of Operating Partnership

Lightstone SLP, LLC, an affiliate of the Advisor, periodically purchases special general partner interests (SLP Units) in the Operating Partnership at a cost of $100,000 per unit for each $1.0 million in offering subscriptions. Proceeds from the sale of the SLP Units will be used to fund organizational and offering costs incurred by the Company. As of December 31, 2008, offering costs of $30.2 million were substantially offset by $30.0 million of proceeds from the sale of SLP Units. Through December 31, 2008, the Company has received proceeds related to the SLP Units of $23.0 million. The Advisor paid the remaining obligation of $7.0
million on March 30, 2009.

During the year ended December 31, 2008, the Operating Partnership issued (i) 96,000 units of common limited partnership interest in the Operating Partnership (Common Units) and 18,240 Series A preferred limited partnership units in the Operating Partnership (the Preferred Units) with an aggregate liquidation preference of $18,240,000 to Arbor JRM and (ii) 2,000 Common Units and 380 Preferred Units with an aggregate liquidation preference of $380,000 to Arbor CJ in exchange for an investment in Mill Run (See Note 4). The total aggregate value of the Common Units and Preferred Units issued by the Operating Partnership in
exchange for the Mill Run Interest was $19,600,000. See Note 4 for further discussion.

The Series A Preferred Units shall have no mandatory redemption or maturity date. The Series A Preferred Units shall not be redeemable by the Partnership prior to the Lockout Date of June 26, 2013. On or after the Lockout Date, the Series A Preferred Units may be redeemed at the option of the Partnership (which notice may be delivered prior to the Lockout Date as long as the redemption does not occur prior to the Lockout Date), in whole but not in part, on thirty (30) days prior written notice at the option of the Partnership, at a redemption price per Series A Preferred Unit equal to the sum of the Series A Liquidation Preference plus an
amount equal to all distributions (whether or not earned or declared) accrued and unpaid thereon to the date of redemption, and the redemption price shall be payable in cash. During any redemption notice period, the holders of the Series A Preferred Units shall retain any conversion rights with respect to the Series A Preferred Units. The Series A Preferred Units shall not be subject to any sinking fund or other obligation of the Partnership to redeem or retire the Series A Preferred Units.

Operating Partnership Activity

Through its Operating Partnership, the Company will seek to acquire and operate commercial, residential, and hospitality properties, principally in the United States. The Companys commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties. All such properties may be acquired and operated by the Company alone or jointly with another party. Since inception, the Company has completed the following acquisitions and investments:

2006

The Company completed the acquisition of the Belz Factory Outlet World in St. Augustine, Florida, four multi-family communities in Southeast Michigan, a retail power center and raw land in Omaha, Nebraska and a portfolio of industrial and office properties located in New Orleans, LA (5 industrial and 2 office properties), Baton Rouge, LA (3 industrial properties) and San Antonio, TX (4 industrial properties).

2007

The Company has made an investment in a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, NY, purchased a land parcel in Lake Jackson, TX on which it completed the development of a retail power center in the first quarter of 2008, an 8.5-acre parcel of undeveloped land, including development rights, which is intended to be used for further development of the adjacent Belz Factory Outlet World in St. Augustine, Florida, five apartment communities

65

TABLE OF CONTENTS

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008, 2007 and 2006

1. Organization   (continued)

located in Tampa, FL (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties), and two hotels located in Houston, TX .

2008

The Company has made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company and acquired a 22.54% interest in Mill Run LLC, which consists of two retail properties located in Orlando, Florida. In addition, the Company entered into an agreement to acquire a 25% interest in Prime Outlets Acquisitions Company which has a portfolio of 18 retail outlet malls and four development projects located in 15 different states across the United States. This transaction closed on March 30, 2009.

All of the acquired properties and development activities are managed by affiliates of Lightstone Value Plus REIT Management LLC (the Property Manager).

The Companys Advisor, Property Manager and Dealer Manager are each related parties. Each of these entities will receive compensation and fees for services related to the offering and for the investment and management of the Companys assets. These entities will receive fees during the offering, acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements. (See Note 14
Related Party Transactions).

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which Lightstone REIT exercises financial and operating control). As of December 31, 2008, the Company had a 99.68% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). GAAP requires the Companys management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, revenue recognition, the collectability of trade accounts receivable and the realizability of deferred tax assets. Application
of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

Investments in real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, are accounted for using the equity method. See further discussion in Note 4.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash equivalents are held in commercial paper and money market funds. To date, the Company has not experienced any losses on its cash and cash equivalents.

Marketable Securities

Marketable securities consist of equity securities that are designated as available-for-sale and are recorded at fair value, in accordance with Statement of Financial Accounting Standards (FAS) No. 115, Accounting for

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Certain Investments in Debt and Equity Securities. Unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any
adverse changes in the financial condition of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board has authorized the Company to from time to time to invest the Companys available cash in marketable securities of real estate related companies. The Board of Directors has approved investments up to 30% of the Companys total assets to be made at the Companys discretion, subject to compliance with any REIT or other restrictions. See Note 7.

Revenue Recognition

Minimum rents are recognized on an accrual basis, over the terms of the related leases on a straight-line basis. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term. Percentage rents, which are based on commercial tenants sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants leases. Room revenue for the hotel properties are recognized as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until stays occur.

Accounts Receivable

The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Companys reported net income is directly affected by managements estimate of the collectability of accounts receivable. The total allowance for
doubtful accounts was approximately $0.2 million at December 31, 2008 and 2007.

Investment in Real Estate

Accounting for Acquisitions

Through December 31, 2008, the Company accounted for acquisitions of Properties in accordance with SFAS No. 141, Business Combinations (SFAS No. 141). The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities related to real estate entities acquired based upon the
percentage of interest acquired. Fees incurred related to acquisitions are generally capitalized. Fees incurred in the acquisition of investments in unconsolidated affiliated real estate entities are expensed as incurred.

Upon the acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt in accordance with SFAS No. 141 (through December 31, 2008, at the date of acquisition, based on evaluation of information and estimates available at that date. See New Accounting Pronouncements for discussion of SFAS No. 141R, which is effective beginning January 1, 2009. Based on these estimates, the Company allocates the
initial purchase price to the applicable assets and liabilities. As final information regarding fair value

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of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized within twelve months of the acquisition date.

In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) managements estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are
amortized as an adjustment to rental income over the initial non-cancelable lease term.

The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the remaining lease terms ranging from one month to
approximately 11 years. Optional renewal periods are not considered.

The aggregate value of other acquired intangible assets includes tenant relationships. Factors considered by management in assigning a value to these relationships include: assumptions of probability of lease renewals, investment in tenant improvements, leasing commissions and an approximate time lapse in rental income while a new tenant is located. The value assigned to this intangible asset is amortized over the remaining lease terms ranging from one month to approximately 11 years.

Carrying Value of Assets

The amounts to be capitalized as a result of periodic improvements and additions to real estate property, and the periods over which the assets are depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets can be significant based upon the assumptions made in calculating these estimates.

Impairment Evaluation

Management evaluates the recoverability of its investment in real estate assets in accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that recoverability of the asset is not assured.

The Company evaluates the long-lived assets, in accordance with SFAS No. 144 on a quarterly basis and will record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Companys plans for the respective assets and the Companys views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective Properties and comparable properties,
and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Companys plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial. See Note 15, Impairment of long lived assets.

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Depreciation and Amortization

Depreciation expense for real estate assets is computed using a straight-line method using a weighted average composite life of thirty-nine years for buildings and improvements and five to ten years for equipment and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease, currently one month to 11 years. Maintenance and repairs are charged to expense as incurred.

Deferred Costs

The Company capitalizes initial direct costs in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The costs are capitalized upon the execution of the loan or lease and amortized over the initial term of the corresponding loan or lease. Amortization of deferred loan costs begins in the period during which the loan was originated. Deferred leasing costs are not amortized to expense until the earlier of the store opening date or the date the tenants lease obligation begins.

Income or Losses from Investments in Unconsolidated Affiliated Real Estate Entities

The Company invests in real estate entities and joint ventures that are formed to acquire, develop, and/or sell real estate assets. These entities are not majority owned or controlled by the Company, and are not consolidated in its financial statements. These investments are recorded under either the equity or cost method of accounting as appropriate. Under the equity method, the Company records its share of the net income and losses from the underlying entities on a single line item in the consolidated statement of operations as income or loss from investments in unconsolidated affiliated real estate entities. Under the cost method of accounting,
the dividends earned from the underlying entities are recorded to interest income. The Company determines whether or not consolidation of these entities is recorded through appropriate evaluation of FIN No. 46, Consolidation of Variable Interest.

Income Taxes

The Company made an election in 2006 to be taxed as a real estate investment trust (a REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code), beginning with its first taxable year, which ended December 31, 2005.

The Company elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code in conjunction with the filing of our 2006 federal tax return. To maintain its status as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at
regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Companys net income and net cash available for distribution to stockholders. Through December 31, 2008, the Company has complied with the requirements for maintaining its REIT status.

The Company has net operating loss carryforwards for Federal income tax purposes through the year ended December 31, 2006. The availability of such loss carryforwards will begin to expire in 2026. As the Company does not consider it likely that it will realize any future benefit from its loss carry-forward, any deferred asset resulting from the final determination of its tax losses will be fully offset by a valuation allowance of the same amount.

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2. Summary of Significant Accounting Policies   (continued)

In 2007, to maintain the Companys qualification as a REIT, the Company engages in certain activities through LVP Acquisitions Corp. (LVP Corp), a wholly-owned taxable REIT subsidiary (TRS) (See note 3). As such, the Company is subject to federal and state income and franchise taxes from these activities. For the year ended December 31, 2008, the tax provision recorded related to the TRS was approximately $0.1 million and is included in other income, net in the consolidated statement of operations. For the years ended December 31, 2007 and 2006, there was no tax provision recorded.

Effective January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. The adoption of FIN 48 did not have a material impact on the Companys financial position, results of operation, or cash flows. As of December 31, 2008, the Company had no material uncertain income tax positions. The tax years 2004 through 2008 remain open to examination by the major taxing jurisdictions to which the Company is subject.

Organization and Offering Costs

The Companys organization and offering costs associated with its initial public offering which closed on October 10, 2008 were approximately $30.2 million. Subject to limitations in terms of the maximum percentage of costs to offering proceeds that may be incurred by the Company, third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees, along with selling commissions and dealer manager fees paid to the Dealer Manager, are accounted for as a reduction against additional paid-in capital (APIC) as offering proceeds are released to the Company.

Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short maturity of these instruments. The fair value of the mortgage debt and notes payable as of December 31, 2008 was approximately $239.8 million compared to the book value of approximately $246.7 million. The fair value of the mortgage debt and notes payable as of December 31, 2007 approximated the book value of approximately $243.4 million. The fair value of the mortgage debt and notes payable was determined by discounting the future contractual interest and principal payments by a market rate.

Accounting for Derivative Financial Investments and Hedging Activities

The Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. We may designate these derivative financial instruments as hedges and apply hedge accounting. The Company will account for our derivative and hedging activities, if any, using SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities  Deferral of the Effective Date of FASB Statement No. 133, and SFAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which require all derivative instruments to be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. The Company will formally document all relationships between hedging instruments and hedged items, as well as our risk- management objective and strategy for undertaking each hedge transaction. The Company will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the balance sheet as either an
asset or liability, with a corresponding amount recorded in other comprehensive income within stockholders equity. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges under

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SFAS 133. The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

Stock Compensation

The Company has a stock-based incentive award plan for our directors. The Company accounts for the incentive award plan in accordance with SFAS no. 123R, Share-Based Payment. Awards are granted at the fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. SFAS 123R also requires the tax benefits associated with these share-based payments to be classified as financing
activities in the consolidated statement of cash flows as required under previous regulations. For the year end December 31, 2008 and 2007, the Company had no significant compensation costs related to the incentive award plan.

Concentration of Risk

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Net Loss per Share

Net loss per share is computed in accordance with SFAS No. 128, Earnings per Share by dividing the net loss by the weighted average number of shares of common stock outstanding. The Company has 18,000 options issued and outstanding, and does not have any warrants outstanding. As such, the numerator and the denominator used in computing both basic and diluted net loss per share allocable to common stockholders for each year presented are equal due to the net operating loss. The 18,000 options are not included in the dilutive calculation as they are anti dilutive as a result of the net operating loss applicable to stockholders.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. This statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or risk inherent in the inputs to the valuation technique. This Statement
clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. This Statement also clarifies that a fair value measurement for a liability reflects its nonperformance risk. The statement is effective in the fiscal first quarter of 2008 for financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company adopted the provisions of SFAS No. 157 with respect to only financial assets, which are comprised solely of marketable securities, and financial liabilities. The adoption of SFAS No.157 did not have a material effect on the consolidated results of
operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159). This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is

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effective for the first fiscal year beginning after November 15, 2007. The Company adopted SFAS No. 159 as required effective January 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the consolidated results of operations or financial position.

In December 2007, the FASB issued FASB No. 141(R) which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. One significant change includes expensing acquisition fees instead of capitalizing these fees as part of the purchase price. This will only impact the Companys recording of acquisition fees associated with the purchase of wholly-owned entities on a prospective basis. Prior to FASB 141 (R), the Company expensed acquisition fees
related to investments in unconsolidated affiliated entities. This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued No. 160, which establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. FASB 160 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of FASB No. 160 is not expected to have a material effect on the consolidated results of operations or financial position.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

3. Acquisitions

The following is summary of the Companys acquisitions during the year ended December 31, 2008 and 2007.

2008 Acquisitions

The Company during 2008 did not have any acquisitions. See Notes 4 and 5 for discussion of the Companys investments in unconsolidated affiliated real estate entities the Company acquired during the year ended December 31, 2008.

2007 Acquisitions

The Company during the year ended December 31, 2007 completed several acquisitions as discussed below. See Note 4 for discussion of the Companys investments in unconsolidated affiliated real estate entities during the year ended December 31, 2007.

Gulf Coast Industrial Portfolio

On February 1, 2007, the Company, through wholly owned subsidiaries of the Operating Partnership, acquired a portfolio of industrial and office properties located in New Orleans, LA (5 industrial and 2 office properties), Baton Rouge, LA (3 industrial properties) and San Antonio, TX (4 industrial properties). As a group, the properties were 92% occupied at the acquisition, and represent approximately 1.0 million leasable square feet principally suitable for flexible industrial (54%), distribution (36%) and office (10%) uses. The properties were independently appraised at $70.7 million.

The acquisition price for the properties was $63.9 million, exclusive of approximately $1.9 million of closing costs, escrow funding for immediate repairs ($0.9 million) and insurance ($0.1 million), and financing related costs of approximately $0.6 million. In connection with the transaction, the Advisor received an acquisition fee equal to 2.75% of the purchase price, or approximately $1.8 million. The acquisition was funded

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3. Acquisitions   (continued)

through a combination of $14.4 million in offering proceeds and approximately $53.0 million in loan proceeds from a fixed rate mortgage loan secured by the properties. The Company does not intend to make significant renovations or improvements to the properties.

Brazos Crossing Mall

On June 29, 2007, a subsidiary of the Operating Partnership acquired a 6.0 acre land parcel in Lake Jackson, Texas for immediate development of a 61,287 square foot power center. The land was purchased for $1.65 million cash and was funded 100% from the proceeds of the Companys offering. In addition, the Company in 2007 entered into a construction loan to the fund the development of the power center for up to $8.2 million (See Note 10). Upon completion of development in March 2008, the center opened and is 100% occupied by three triple net tenants: Pet Smart, Office Depot and Best Buy.

The purchase and sale agreement (the Land Agreement) for this transaction was negotiated between Lake Jackson Crossing Limited Partnership (formerly an affiliate of the Sponsor) and Starplex Operating, LP, an unaffiliated entity (the Land Seller). Prior to the closing, a 99% limited partnership interest in the Lake Jackson Limited Partnership was assigned to the Operating Partnership and the membership interests in Brazos Crossing LLC (the 1% general partner of the Lake Jackson Limited Partnership) were assigned to the Company.

The land parcel was acquired at what represents a $2.1 million discount from the expressed $3.75 million purchase price, with such difference being subsidized and funded by a retail affiliate of the Sponsor. The sale of the land parcel was a condition of the Sellers agreement to execute a new movie theater lease at the Sponsor affiliates nearby retail mall. The Company owns a 100% fee simple interest in the land parcel and retail power center. The Sponsors affiliate will receive no future benefit or ownership interests from this transaction.

Houston Extended Stay Hotels

On October 17, 2007, the Company, through TLG Hotel Acquisitions LLC, a wholly owned subsidiary of our operating partnership (together with such subsidiary, the Houston Partnership), acquired two hotels located in Houston, TX (the Katy Hotel) and Sugar Land, TX (the Sugar Land Hotel and together with the Katy Hotel, the Hotels) from Morning View Hotels  Katy, LP, Morning View Hotels  Sugar Land, LP and Point of Southwest Gardens, Ltd., pursuant to an Asset Purchase and Sale Agreement. The seller is not an affiliate of the Company or its subsidiaries.

Prior to the acquisition of the Hotels, our board of directors expanded the Companys eligible investments to include the acquisition, holding and disposition of hotels (primarily extended stay hotels). The reasons for such change include the expertise of our sponsor who acquired the Extended Stay Hotels group of companies (ESH) and control of its management company (HVM L.L.C.) which operates 686 extended stay hotels. The ability to draw upon their expertise, the intense competition in the real estate market for all types of assets and the ability to better diversify the Companys portfolio, caused our board of directors to
review the Companys investment objectives and expand them to include lodging facilities.

The acquisition price for the Hotels was $16 million inclusive of closing costs. In connection with the transaction, the Companys advisor received an acquisition fee equal to 2.75% of the contract price ($15.2 million), or approximately $0.4 million. The acquisition was funded through a combination of $6.0 million in offering proceeds and approximately $10 million in loan proceeds from a floating rate mortgage loan secured by the Hotels. At the time of acquisition, the Hotels were recently remodeled by the previous owner; however the Company planned to make a $2.8 million dollar investment in capital expenditures to convert the Hotels to
Extended Stay Deluxe (ESD) brand properties. The ESD brand is under license from an affiliate within the Extended Stay Hotels group of companies.

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3. Acquisitions   (continued)

In connection with the acquisition of the Hotels, the Houston Partnership along with ESD #5051  Houston  Sugar Land, LLC and ESD #5050  Houston  Katy Freeway, LLC, its wholly owned subsidiaries (the Houston Borrowers) secured a mortgage loan from Bank of America, N.A. in the principal amount of $12.85 million, which includes up to an additional $2.8 million of renovation proceeds. The renovations include implementing ESDs national reservation system, new carpeting, new paint, new signage, exterior façade improvements, re-striping parking lot, guest room upgrades,
landscaping and constructing pools. As of December 31, 2008, the Company has invested an additional $1.9 million See Note 9.

In addition, the Companys TRS, LVP Corp, entered into operating lease agreements with each of the Katy Hotel and the Sugar Land Hotel, respectively, and LVP Corp. has entered into management agreements with HVM L.L.C., a controlled affiliate of our sponsor, for the management of the hotels.

Camden Properties

On November 16, 2007, the Company through wholly owned subsidiaries of the partnership acquired five apartment communities (Camden Properties) located in Tampa, Florida (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties) from Camden Operating, L.P. (the Seller). The Seller is not affiliated with the Company or its subsidiaries.

The Properties, built between 1980 and 1987, are comprised of 1,576 apartment units, in the aggregate, contain a total of 1,124,249 net rentable square feet, and were 94% occupied at acquisition.

The aggregate acquisition price for the Camden Properties was approximately $99.3 million, including acquisition-related transaction costs. Approximately $20.0 million of the acquisition cost was funded with offering proceeds from the sale of the Companys common stock and approximately $79.3 million was funded with five substantially similar fixed rate loans with Fannie Mae secured by each of the Camden Properties.

In connection with the acquisition of the properties, our Advisor received an acquisition fee of 2.75% of the gross contract price for the Camden Properties or approximately $2.65 million.

Sarasota, Florida

On March 1, 2007, the Company entered into an option agreement to participate in a joint-venture with its Sponsor (the JV Option with respect to the potential joint venture, the Joint Venture) for the purchase of a property located at 2150 Whitfield Avenue, Sarasota, Florida (the Sarasota Property). On November 15, 2007, the Company exercised the JV Option and, through a wholly-owned subsidiary of the Companys operating partnership, entered into the Joint Venture and acquired the Sarasota Property.

In July, 2007, CAD Funding, LLC (CAD), an affiliate of Park Avenue Funding, LLC, had the highest bid on the Sarasota Property in a foreclosure action. Park Avenue Funding, LLC, is a real estate lending company founded in 2004 and an affiliate of the Companys Advisor and Sponsor. CAD initiated the foreclosure action following the default of an unaffiliated third party on a loan made to the third party by CAD, for which the Sarasota Property served as security. Prior to the entry of the foreclosure judgment, the Sponsor expressed an interest in bidding at the foreclosure sale in anticipation that the Registrant would exercise the JV
Option. On August 6, 2007, the Sarasota Property was indirectly acquired by the Sponsor. The Sarasota Property was contributed to the Joint Venture prior to the Registrants exercise of the JV Option. The contribution to the Joint Venture by the Company was $13.1 million of offering proceeds used to acquire the Sarasota Property. The property was independently appraised in May of 2006 for $17.4 million. As December 31, 2007, the Company owned 100% of the Sarasota property and its operations are fully consolidated in the Companys financial statements.

In evaluating the Sarasota Property as a potential acquisition, the Company has considered a variety of factors, and determined that the acquisition cost was at a substantial discount to current market value. The Sarasota Property is subject to competition from similar properties within its market area, and economic

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3. Acquisitions   (continued)

performance could be affected by changes in local economic conditions. See Note 15 for discussion of impairment of long-lived asset related to the Sarasota Property.

2006 Acquisitions

The Company during the year ended December 31, 2006 completed several acquisitions as discussed below.

St. Augustine Retail Outlet Mall

On November 30, 2005, Prime Outlets Acquisition Company LLC (Prime), an affiliate of the Advisor, entered into a Purchase and Sale Agreement with St. Augustine Outlet World, Ltd, an unaffiliated third party, to purchase Belz Outlets at St. Augustine, Florida. On March 31, 2006, Prime assigned its interest in the Purchase and Sale Agreement to LVP St. Augustine Outlets, LLC (LVP St. Augustine), a single purpose, wholly owned subsidiary of the Operating Partnership, and LVP St. Augustine simultaneously completed the acquisition of the property. The total acquisition price, including acquisition-related transaction costs, was
$26,921,450. In connection with the transaction, the Advisor received an acquisition fee equal to 2.75% of the purchase price, or $715,000.

Approximately $22.4 million of the total acquisition cost was funded by a mortgage loan from Wachovia Bank, National Association (Wachovia) and approximately $4.5 million was funded with offering proceeds from the sale of the Companys common stock. Loan proceeds from Wachovia were also used to fund approximately $4.8 million of escrows for future leasing-related expenditures, real estate taxes, insurance and debt service.

As of December 31, 2008, the Company has substantially completed an expansion and renovation of the St. Augustine center. The total project costs through December 31, 2008 were approximately $25.6 million. The Company funded the costs of this project using a portion of the proceeds from our offering.

Southeastern Michigan Multi-Family Properties

On April 26, 2006, the Sponsor entered into a Purchase and Sale Agreement with Home Properties, L.P. and Home Properties WMF I, LLC, affiliates of Home Properties, Inc., a New York Stock Exchange listed real estate investment trust (collectively, Sellers), each an unaffiliated third party, to purchase 19 multifamily apartment communities. On June 29, 2006, the Sponsor assigned the purchasers interest in the Purchase and Sale Agreement with respect to four of the apartment communities to each of four single purpose, wholly owned subsidiaries of LVP Michigan Multifamily Portfolio LLC (LVP MMP), and the LVP MMP subsidiaries
simultaneously completed the acquisition of the four properties. The Operating Partnership holds a 99% membership interest in LVP MMP, while the Lightstone REIT holds a 1% membership interest in LVP MMP. The properties are located in Southeast Michigan and were valued by an independent third-party appraiser retained by Citigroup Global Markets Realty Corp. (Citigroup) at an aggregate value equal to $54.3 million.

The total acquisition price, excluding acquisition-related transaction costs, was approximately $42.2 million. In connection with the transaction, the Advisor received an acquisition fee equal to 2.75% of the purchase price, or approximately $1.1 million. Other closing and financing related costs totaled approximately $400,000, and net pro ration adjustments for assumed liabilities, prepaid rents, real estate taxes and interest totaled $500,000.

Approximately $40.7 million of the total acquisition cost was funded by a mortgage loan from Citigroup, and approximately $4.6 million was funded with offering proceeds from the sale of the Companys common stock. Loan proceeds from Citigroup were also used to fund approximately $1.1 million of escrows for capital improvements, real estate taxes, and insurance.

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3. Acquisitions   (continued)

Oakview Plaza

On December 21, 2006, the Company, through LVP Oakview Strip Center LLC, a wholly owned subsidiary of the Operating Partnership, acquired a retail shopping mall in Omaha, Nebraska from Oakview Plaza North, LLC (Oakview), Frank R. Krejci, Vera Jane Krejci, George W. Venteicher and Susan J. Venteicher (Oakview, Mr. and Mrs. Krejci and Mr. and Mrs. Venteicher, collectively, Seller), none of whom are affiliated with the Company.

The property was purchased subject to a commitment to acquire a 2.1 acre parcel of land (the Option Land) located immediately adjacent to the property. The unimproved Option Land was subsequently acquired in July of 2007 by a subsidiary of the Operating Partnership from Oakview for a fixed contract price of $650,000. The acquisition price for the property, exclusive of the Option Land, was $33.5 million, including an acquisition fee paid to the Advisor of $0.9 million and $47,000 in other acquisition-related transaction costs. Approximately $6.0 million of the acquisition cost was funded with offering proceeds from the sale of our common
stock and the remainder was funded with a $27.5 million fixed rate loan from Wachovia secured by the property. Offering proceeds were also used to fund financing related costs ($0.2 million) and insurance and tax reserves ($0.2 million), as well as the acquisition of the Option Land. The Property was independently appraised at $38.0 million.

Pro Forma Results

The following unaudited pro forma combined condensed statements of operations set forth the consolidated results of operations for the year ended December 31, 2007, as if the above described acquisitions had occurred at January 1, 2007. The unaudited pro forma information does not purport to be indicative of the results that actually would have occurred if the acquisitions had been in effect for the year ended December 31, 2007, or for any future period.



Year EndedDecember 31, 2007Real estate revenues

          

          $

          39,256,808Net loss

          

          

          (9,993,332

          )Basic and diluted loss per share

          

          $

          (0.71

          )

4. Investments in Unconsolidated Affiliated Real Estate Entities

As summary of the Companys investments in unconsolidated affiliated real estate entities as of as of December 31, 2008 and 2007 is as follows:



As ofReal Estate Entity

          

          Ownership %

          

          December 31, 2008

          

          December 31, 2007Mill Run LLC

          

          

          22.54

          %

          

          $

          19,279,406

          

          

          $

          1407 Broadway Mezz II LLC

          

          

          49.00

          %

          

          

          2,096,502

          

          

          

          6,284,675Total Investment in unconsolidated affiliated real estate entities

          

          

          

          

          

          $

          21,375,908

          

          

          $

          6,284,675



Mill Run Interest

On June 26, 2008, the Company, through the Operating Partnership, entered into Contribution and Conveyance Agreements between the Operating Partnership and (i) Arbor Mill Run JRM LLC, a Delaware limited liability company (Arbor JRM) and (ii) Arbor National CJ, LLC, a New York limited liability company (Arbor CJ), pursuant to which Arbor JRM and Arbor CJ contributed to the Operating Partnership an aggregate 22.54% membership interest (the Mill Run Interest) in Mill Run LLC. The Mill Run Interest is a Class

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4. Investments in Unconsolidated Affiliated Real Estate Entities   (continued)

A member and a non-managing interest, with consent rights with respect to certain major decisions. The Companys sponsor is the managing member and owns 55% of Mill Run. Profit and cash distributions will be allocated in accordance with each investors ownership percentage of the venture after consideration of Class B members adjusted capital balance. The acquisition price for the Mill Run Interest was approximately $85 million, $19.6 million of which was in the form of equity and $65.4 million in the form of indebtedness secured by the Mill Run Properties. As the Company has recorded this investment in accordance with the equity method of
accounting, the indebtedness is not included in the Companys investment. In connection with this transaction, Lightstone Value Plus REIT LLC, our advisor, received an acquisition fee equal to 2.75% of the acquisition price, or approximately $2.4 million. Additional closing costs totaled approximately $1.7 million. These costs are included in general and administrative expenses.

In exchange for the Mill Run Interest, the Operating Partnership issued (i) 96,000 units of common limited partnership interest in the Operating Partnership (Common Units) and 18,240 Series A preferred limited partnership units in the Operating Partnership (the Series A Preferred Units) with an aggregate liquidation preference of $18,240,000 to Arbor JRM and (ii) 2,000 Common Units and 380 Preferred Units with an aggregate liquidation preference of $380,000 to Arbor CJ. The total aggregate value of the Common Units and Series A Preferred Units issued by the Operating Partnership in exchange for the Mill Run Interest was
$19,600,000, which is classified within minority interests on the Consolidated Balance Sheet as of December 31, 2008. In connection with the contribution of the Mill Run Interest, the Company made loans to Arbor JRM and Arbor CJ in the aggregate principal amount of $17.6 million (the Mill Loans), which is classified as reduction to minority interest in partnership. The Mill Loans are payable semi-annually and shall accrue interest at an annual rate of 4%. The Mill Loans mature on July 1, 2016 and contain customary events of default and default remedies. The Mill Loans require Arbor JRM and Arbor CJ to prepay their respective loans in full upon the redemption of the Series A Preferred Units by the Operating Partnership. The Mill Loans are secured by the Preferred Units and Common Units issued in connection with the acquisition of the Mill Interest. Accrued interest related to this loan totaled $0.4 million at December 31, 2008, and is included in prepaid expenses and other
assets in the consolidated balance sheet. See Note 19, Commitments and Contingencies for discussion of tax protection agreement.

The Company within its June 30, 2008 and September 30, 2008 quarterly reports, filed on Form 10-Q, misclassified the Common Units and Preferred Units issued as well as the Mill Loans as part of stockholders equity within the Consolidated Balance Sheet instead of as a part of minority interest. The Company concluded that this misclassification was not material, both qualitatively or quantitatively, to the Companys financial position and, accordingly reclassified these items to minority interest on the Consolidated Balance Sheet as of December 31, 2008. There was no impact on the consolidated statements of operations or cash flows. The
reclassification amounted to a $2.0 million reduction in stockholders equity and an increase of $2.0 million to minority interest in partnership.

The Company accounted for the investment in this unconsolidated affiliated real estate entity under the equity method of accounting as the Company exercises significant influence, but does not control this entity. In accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock , paragraph 19b., the difference of $20.6 million between the cost of the Mill Run Interest and the amount of underlying equity in net assets of the Company has been accounted for as if the investee were a consolidated subsidiary, and additional depreciation and amortization will be recorded over the lives of the appropriate assets, in
accordance with the allocation of the difference between land, building and intangible assets of Mill Run. For the year ended December 31, 2008, the Companys results included $0.3 million loss from investment in this unconsolidated affiliated real estate entity for the period June 26, 2008 through December 31, 2008 resulting in a net investment balance of approximately $19.3 million as of December 31, 2008.

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4. Investments in Unconsolidated Affiliated Real Estate Entities   (continued)

The following table represents the unaudited condensed income statement for this unconsolidated affiliated real estate entity for the following period June 26, 2008 through December 31, 2008:



For the Period June 26, 2008 Through December 31, 2008Revenue

          

          $

          20,578,725Property operating expenses

          

          

          6,578,144Depreciation and amortization

          

          

          5,025,800Operating income

          

          

          8,974,781Interest expense and other, net

          

          

          (7,639,803

          )Net income

          

          $

          1,334,978Company's share of net income (22.54%)

          

          $

          300,904Additional depreciation and amortization expense(1)

          

          

          (621,647

          )Company's loss from investment

          

          $

          (320,743

          )




(1)

          Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the Mill Run Interest and the amount of the underlying equity in net assets of the Company.The following table represents the unaudited condensed balance sheet for this unconsolidated affiliated real estate entity as of December 31, 2008:



As of December 31, 2008Real estate, at cost (net)

          

          $

          270,591,378Intangible assets

          

          

          1,266,969Cash and restricted cash

          

          

          7,836,738Other assets

          

          

          26,557,746Total Assets

          

          $

          306,252,831Mortgage note payable

          

          $

          283,261,676Other liabilities

          

          

          25,494,446Member capital

          

          

          (2,503,291

          )Total liabilities and members' capital

          

          $

          306,252,831

1407 Broadway

On January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned subsidiary of the Operating Partnership, entered into a joint venture with an affiliate of the Sponsor (the Joint Venture). On the same date, an indirect, wholly owned subsidiary acquired a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway, New York, New York (the Sublease Interest).

The Company accounted for the investment in this unconsolidated joint venture under the equity method of accounting as the Company exercises significant influence, but does not control these entities. Initial equity from the Sponsor, our co-venturer totaled $13.5 million (representing a 51% ownership interest). Our initial capital investment, funded with proceeds from our common stock offering, was $13.0 million (representing a 49% ownership interest). The acquisition was funded through a combination of $26.5 million of capital and a $106.0 million advance on a $127.3 million variable rate mortgage loan funded by Lehman Brothers Holding,

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4. Investments in Unconsolidated Affiliated Real Estate Entities   (continued)

Inc. (Lehman). This mortgage loan matures on January 9, 2010. The mortgage loan has two one-year extension options for a fee of 0.125% of the amount of the respective loan for each extension. Additionally, Lehman will receive a 35% net profit interest in the project, which is contingent upon a capital transaction, as defined as any transaction involving the sale, assignment, transfer, liquidation, condemnation or settlement in lieu thereof, disposition, financing, refinancing or any other conversion to cash of all or any portion of the property or equity or membership interests in Borrower, directly, other than the leasing of space for
occupancy and/or any other transaction with respect to the Property or the direct or indirect ownership interests in Borrower outside the ordinary course of business. To date, the Lender did not share in any net profits of the project. All other income and cash distributions will be allocated in accordance with each investors ownership percentage of the venture. The Joint Venture plans to continue an ongoing renovation project at the property that consists of lobby, elevator and window redevelopment projects.

Under the mortgage loan, the Joint Venture has available credit of approximately $13.5 million, as of December 31, 2008, to be used for capital improvements to the property. Due to the financial condition of Lehman Brothers Holding, Inc. there is uncertainty as to whether the full amount of this credit is readily available to the Joint Venture. The Joint Venture is currently investigating other financing to meet its capital expenditure needs. See Note 19.

The original investment was $13.0 million and will be subsequently adjusted for cash contributions and distributions, and the Companys share of earnings and losses. The Company and the co-Venturer contributed an additional $0.6 million in 2007. In addition, during 2008, the Company and the co-Venturer each received a distribution of approximately $1.2 million. Earnings for each investment are recognized in accordance with this investment agreement and where applicable, based upon an allocation of the investments net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

The following table represents the condensed income statement derived from audited financial statements for this unconsolidated affiliated real estate entity for the year ended December 31, 2008 and for the period from January 4, 2007 (date of inception) through December 31, 2007:



For the Year Ended December 31, 2008

          

          For the Period January 4, 2007 (Date of Inception) Through December 31, 2007Total Revenue

          

          $

          39,598,698

          

          

          $

          37,447,442Property operating expenses

          

          

          27,385,058

          

          

          

          26,701,479Depreciation & Amortization

          

          

          11,448,474

          

          

          

          16,214,919Operating income/(loss)

          

          

          765,166

          

          

          

          (5,468,956

          )Interest Expense and other, net

          

          

          6,962,154

          

          

          

          9,363,592Net operating income/(loss)

          

          $

          (6,196,988

          )

          

          $

          (14,832,548

          )Company's share of net operating loss (49%)

          

          $

          (3,036,524

          )

          

          $

          (7,267,949

          )

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4. Investments in Unconsolidated Affiliated Real Estate Entities   (continued)

The following table represents the condensed balance sheet derived from audited financial statements for this unconsolidated affiliated real estate entity as of December 31, 2008 and December 31, 2007:



As of December 31, 2008

          

          As of December 31, 2007Real estate, at cost (net)

          

          $

          110,425,157

          

          

          $

          111,361,237Intangible assets

          

          

          4,233,365

          

          

          

          9,009,676Cash and restricted cash

          

          

          10,309,580

          

          

          

          11,458,097Other assets

          

          

          8,178,293

          

          

          

          9,475,857Total Assets

          

          $

          133,146,395

          

          

          $

          141,304,867Mortgage note payable

          

          $

          113,709,491

          

          

          $

          110,847,201Other liabilities

          

          

          15,166,588

          

          

          

          17,640,362Member capital

          

          

          4,270,316

          

          

          

          12,817,304Total liabilities and members' capital

          

          $

          133,146,395

          

          

          $

          141,304,867

5. Investment in Affiliate

Park Avenue Funding

On April 16, 2008, the Company made a preferred equity contribution of $11,000,000 (the Contribution) to PAF-SUB LLC (PAF), a wholly-owned subsidiary of Park Avenue Funding LLC (Park Avenue), in exchange for membership interests of PAF with certain rights and preferences described below (the Preferred Units). Park Avenue is a real estate lending company making loans, including first or second mortgages, mezzanine loans and collateral pledges of mortgages, to finance real estate transactions. Property types considered include multi-family, office, industrial, retail, self-storage, parking and land. Both
PAF and Park Avenue are affiliates of our Sponsor.

PAFs limited liability company agreement was amended on April 16, 2008 to create the Preferred Units and admit the Company as a member. The Preferred Units are entitled to a cumulative preferred distribution at the rate of 10% per annum, payable quarterly. In the event that PAF fails to pay such distribution when due, the preferred distribution rate will increase to 17% per annum. The Preferred Units are redeemable, in whole or in part, at any time at the option of the Company upon at least 180 days prior written notice (the Redemption). In addition, the Preferred Units are entitled to a liquidation preference senior to any
distribution upon dissolution with respect to other equity interests of PAF in an amount equal to (x) the Contribution plus any accrued but unpaid distributions less (y) any Redemption payments.

In connection with the Contribution, the Company and Park Avenue entered into a guarantee agreement on April 16, 2008, whereby Park Avenue unconditionally and irrevocably guarantees payment of the Redemption amounts when due (the Guarantee). Also, Park Avenue agrees to pay all costs and expenses incurred by the Company in connection with the enforcement of the Guarantee.

The Company does not have any voting rights for this investment, and does not have significant influence over this investment. The Company accounted for this investment under the cost method. Total accrued distributions related to this investment totaled $0.3 million at December 31, 2008, and are included in prepaid expenses and other assets. During 2008, the Company received redemption payment from PAF of $850,000. As of December 31, 2008, the Companys investment in PAF is $10,150,000 and is included in investment in affiliate, at cost in the consolidated balance sheet.

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6. Notes Receivable

On June 26, 2008, the Company, through the Operating Partnership, entered into a Contribution and Conveyance Agreement with AR Prime Holdings LLC, a Delaware limited liability company (AR Prime), pursuant to which AR Prime will contribute to the Operating Partnership a 25% membership interest (the Prime Interest) in Prime Outlets Acquisitions Company (Prime). Prime Interest is a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of The Lightstone Group, the Companys sponsor, is the majority owner and manager of Prime. The acquisition price for the Prime Interest,
excluding acquisition and closing costs, is approximately $356 million, $56 million of which will be in the form of equity and $300 million of which will be in the form of indebtedness secured by the Prime Properties (18 retail outlet malls, and two development projects). As the Company would account for this investment in accordance with the equity method of accounting, the indebtedness would not be included in the Companys investment. In connection with the transaction, upon closing our advisor will receive an acquisition fee equal to 2.75% of the acquisition price, or approximately $9.8 million. Through December 31, 2008, the Company incurred acquisition costs of approximately $2.2 million related to accounting and legal fees. These costs are included in general and administrative expenses.

The closing of the acquisition of the Prime Interest is subject to customary closing conditions, and is scheduled for the earlier of December 15, 2008 or a maximum 30 days after the Operating Partnership obtains audited financial statements of Prime for the last three fiscal years ending December 31, 2007, 2006 and 2005 (the Financial Statements), but in no event later than June 26, 2009. If the Operating Partnership does not obtain the Financial Statements by June 26, 2009 and does not close the transaction, it would be required to pay liquidated damages in the amount of $6.08 million. However, AR Prime cannot specifically enforce the
Contribution and Conveyance Agreement if the Operating Partnership does not obtain the Financial Statements. Subject to the fulfillment of the closing conditions, the Operating Partnership will issue to AR Prime (i) 275,000 Common Units and 52,250 Series A Preferred Units with an aggregate liquidation preference of $52,250,000 (this amount will be reduced by the amount of any distributions by Prime to AR Prime prior to closing) and (ii) Common Units with a value equal to 5% of the Adjustment Amount and additional Series A Preferred Units with a liquidation preference equal to 95% of the Adjustment Amount. The Adjustment Amount is the amount of interest that would have accrued on a loan in the principal amount of $52,250,000, at an interest rate of 4.6316%, from June 26, 2008 until the closing. See Note 19, Commitments and Contingencies for discussion of tax protection agreement. This transaction closed on March 30, 2009 and the Financial Statements are expected to be completed by June
26, 2009 in accordance with the agreement. See note 20, Subsequent Events.

In connection with the contribution of the Prime Interest, the Company made a loan to AR Prime in the principal amount of $49.5 million (the Prime Loan). The Prime Loan is payable semi-annually and accrues interest at an annual rate of 4%. The Prime Loan matures on July 1, 2016 and contains customary events of default and default remedies. The Prime Loan contains provisions requiring AR Prime to prepay the Prime Loan (i) in full upon the redemption by the Operating Partnership of the Series A Preferred Units to be issued to AR Prime in connection with the closing of the acquisition of the Prime Interest and (ii) in part, with the proceeds
of any distribution received by AR Prime from Prime prior to such closing. The Prime Loan is secured by AR Primes interest in the Prime Interest. Upon the closing, the Common Units and Preferred Units issued to AR Prime will replace the Prime Interest as the security for the Prime Loan. Also, upon the closing, the Company will make an additional loan to AR Prime, on the same terms and conditions as the Prime Loan, in the principal amount equal to 90% of the Adjustment Amount. This additional loan made at closing on March 30, 2009 was approximately $1.7 million.

Subsequent to June 26, 2008, AR Prime received a distribution from Prime of $1.0 million. As per the Prime Loan provisions, AR Prime repaid $1.0 million of the principal portion of the Prime Loan. As of December 31, 2008, the note receivable principal balance due from AR Prime is $48.5 million and the

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6. Notes Receivable   (continued)

accrued interest related to this loan is $1.0 million and are included in note receivable, related party and interest receivable from related parties, respectively in the consolidated balance sheet.

7. Marketable Securities and Fair Value Measurements

As summary of marketable securities as of as of December 31, 2008 and 2007 is as follows.



As ofDecember 31, 2008

          

          December 31, 2007Equity Securities, primarily REITs

          

          $

          1,794,065

          

          

          $

          10,752,910Corporate bonds

          

          

          9,656,500

          

          

          

          Marketable Securities  available for sale

          

          $

          11,450,565

          

          

          $

          10,752,910

During the year ended December 31, 2008, the Company recorded a write-down of $9.8 million, of which $9.7 million and $0.1 million was recorded during the quarters ended September 30, 2008 and December 31, 2008, respectively, compared to $0 for the year ended December 31, 2007 for other than temporary declines on certain available-for-sale securities, which are included in Other than temporary impairment  marketable securities on the consolidated statement of operations. The Companys marketable securities and the overall REIT market experienced significant declines during 2008, which increased the duration and magnitude of the
Companys unrealized losses. The overall challenges in the economic environment, including near term prospects for certain of the Companys securities makes a recovery period difficult to project. Although the Company has the ability to hold these securities until potential recovery, the Company believes certain of the losses for these securities are other than temporary. During 2008, subsequent to the Company recording the other than temporary impairment, the Company sold one of the securities for a loss of $1.8 million. This loss was reflected in the impairment charge of $9.8 million.

At December 31, 2008 and 2007, the Company has included $4.2 million and $1.2 million of net unrealized losses in accumulated other comprehensive loss, respectively.

The following is a summary of the Companys available for sale securities at December 31, 2008 and 2007:



As of December 31, 2008

          

          Adjusted Cost

          

          Unrealized Gain/(Loss)

          

          Fair ValueCorporate Bonds

          

          $

          9,508,760

          

          

          $

          147,740

          

          

          $

          9,656,500Equity Securities, primarily REITs

          

          

          6,154,259

          

          

          

          (4,360,194

          )

          

          

          1,794,065Total Marketable Securities  available for sale

          

          $

          15,663,019

          

          

          $

          (4,212,454

          )

          

          $

          11,450,565



As of December 31, 2007

          

          Adjusted Cost

          

          Unrealized Gain/(Loss)

          

          Fair ValueEquity Securities, primarily REITs

          

          $

          11,952,188

          

          

          $

          (1,199,278

          )

          

          $

          10,752,910

The Company has two corporate bonds outstanding as of December 31, 2008. One bond valued at $4.9 million matures on August 1, 2009 and the other bond valued at $4.7 million is callable on June 16, 2009 and has a maturity date of December 31, 2037.

Fair Value Measurements

Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of

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7. Marketable Securities and Fair Value Measurements   (continued)

unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:



          Level 1  Quoted prices in active markets for identical assets or liabilities.

          Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

          Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.Assets measured at fair value on a recurring basis as of December 31, 2008 are as follows:



Fair Value Measurement Using

          

          TotalAs of December 31, 2008

          

          Level 1

          

          Level 2

          

          Level 3Corporate bonds

          

          $

          9,656,500

          

          

          $

          

          

          

          $

          

          

          

          $

          9,656,500Equity Securities, primarily REITs

          

          

          1,794,065

          

          

          $

          

          

          

          $

          

          

          

          $

          1,794,065Total Marketable securities  available for sale

          

          $

          11,450,565

          

          

          $

          

          

          

          $

          

          

          

          $

          11,450,565

The Company did not have any other significant financial assets or liabilities, which would require revised valuations under SFAS No. 157 that are recognized at fair value.

8. Accounts Payable and Accrued Expenses

A summary of accounts payable and accrued expenses as of as of December 31, 2008 and 2007 is as follows.



As of December 31,2008

          

          2007Mortgage Interest payable

          

          $

          958,171

          

          

          $

          960,318Accrued construction in process payable

          

          

          1,160,972

          

          

          

          Accrued acquisiton fees

          

          

          607,835

          

          

          

          Accrued Real Estate and other taxes

          

          

          1,145,364

          

          

          

          1,102,487Due to affiliates

          

          

          1,062,828

          

          

          

          974,557Accounts payable and other accrued expenses

          

          

          3,583,105

          

          

          

          2,774,173Total accounts payable and accrued expenses

          

          $

          8,518,275

          

          

          $

          5,811,535

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9. Mortgages Payable

Mortgages payable, totaling approximately $239.2 million and $237.6 million at December 31, 2008 and 2007, respectively, consists of the following:



Interest Rate

          

          Maturity Date

          

          Amount Due at Maturity

          

          Loan Amount as ofProperty

          

          December 31, 2008

          

          December 31, 2007St. Augustine

          

          

          6.09%

          

          

          

          April 2016

          

          

          $

          23,747,523

          

          

          $

          26,738,211

          

          

          $

          27,051,571Southeastern Michigan Multi Family Properties

          

          

          5.96%

          

          

          

          July 2016

          

          

          

          38,138,605

          

          

          

          40,725,000

          

          

          

          40,725,000Oakview Plaza

          

          

          5.49%

          

          

          

          January 2017

          

          

          

          25,583,137

          

          

          

          27,500,000

          

          

          

          27,500,000Gulf Coast Industrial Portfolio

          

          

          5.83%

          

          

          

          February 2017

          

          

          

          49,556,985

          

          

          

          53,025,000

          

          

          

          53,025,000Houston Extended Stay Hotels (Two Individual Loans)

          

          

          LIBOR + 1.75%

          

          

          

          April 2009

          

          

          

          11,729,489

          

          

          

          11,986,971

          

          

          

          10,040,000Camden Multi Family Properties  (Five Individual Loans)

          

          

          5.44%

          

          

          

          December 2014

          

          

          

          74,955,771

          

          

          

          79,268,800

          

          

          

          79,268,800Total mortgage obligations

          

          

          

          

          

          

          

          

          

          $

          223,711,510

          

          

          $

          239,243,982

          

          

          $

          237,610,371

LIBOR at December 31, 2008 and 2007 was 0.43625% and 4.60%, respectively. Monthly installments of principal and interest are required throughout the remainder of its stated term for the St. Augustine loan and the Houston Extended Stay Hotels loans. Monthly installments of interest only are required through the first 60 months (through July 2011) for the Southeastern Michigan multi-family properties, through the first 60 months (through November 2012) for the Oakview Plaza loan, through the first 60 months (through March 2012) for the Gulf Coast Industrial Portfolio loan, and through the first 48 months (through December 2010) for the Camden
Multi-Family properties loans and monthly installments of principal and interest are required throughout the remainder of its stated term. Each of the loans is secured by acquired real estate and is non-recourse to the Company.

The following table shows the mortgage debt maturing during the next five years and thereafter at December 31, 2008:



2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          Total$12,325,023

          

          $

          359,526

          

          

          $

          1,586,957

          

          

          $

          2,781,012

          

          

          $

          3,107,355

          

          

          $

          219,084,109

          

          

          $

          239,243,982

Pursuant to the Companys loan agreements, escrows in the amount of approximately $7.8 million were held in restricted escrow accounts at December 31, 2008. These escrows will be released in accordance with the loan agreements as payments of real estate taxes, insurance and capital improvement transactions, as required. Our mortgage debt also contains clauses providing for prepayment penalties.

Lightstone Holdings, LLC (Guarantor), a company wholly owned by the Advisor, has guaranteed to the extent of a $27.2 million mortgage loan on the St. Augustine, Florida property, the payment of losses that the lender (Wachovia) may sustain as a result of fraud, misappropriation, misuse of loan proceeds or other acts of misconduct by the Company and/or its principals or affiliates. Such losses are recourse to the Guarantor under the guaranty regardless of whether Wachovia has attempted to procure payment from the Company or any other party. Further, in the event of the Company's voluntary bankruptcy, reorganization or
insolvency, or the interference by the Company or its affiliates in any foreclosure proceedings or other remedy exercised by Wachovia, the Guarantor has guaranteed the payment of any unpaid loan amounts. The Company has agreed, to the maximum extent permitted by its Charter, to indemnify Guarantor for any liability that it incurs under this guaranty.

In connection with the acquisition of the Hotels, the Houston Partnership along with ESD #5051  Houston  Sugar Land, LLC and ESD #5050  Houston  Katy Freeway, LLC, its wholly owned subsidiaries (the Houston Borrowers) secured a mortgage loan from Bank of America, N.A. in the principal amount of $12.85 million, which includes up to an additional $2.8 million of renovation proceeds which will

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9. Mortgages Payable   (continued)

be borrowed as the renovation proceeds. The mortgage loan has a term of one year with the option of a 6-month term extension, bears interest on a daily basis expressed as a floating rate equal to the lesser of (i) the maximum non-usurious rate of interest allowed by applicable law or (ii) the British Bankers Association Libor Daily Floating Rate plus one hundred seventy-five basis points (1.75%) per annum rate and requires monthly installments of interest only through the first 12 months. The mortgage loan matured on October 16, 2008 and the Company exercised its 6-month extension option, as described above. During the extension period, monthly
installments of principal and interest payments are due. Principal payments will be equal to the principal component of an amortization of the principal of the loan on the basis of an assumed interest rate of 8.0% per annum on a 360 months term. The remaining principal balance, together with all accrued and unpaid interest and all other amounts payable there under will be due on April 16, 2009. The Company intends to repay or refinance this loan upon its maturity in April of 2009. The mortgage loan is secured by the Hotels and will be nonrecourse to the Company. The weighted average interest rate related to this variable interest rate loan for year ended December 31, 2008 was 4.49%.

On November 16, 2007, in connection with the acquisition of the Camden Properties, the Company through its wholly owned subsidiaries obtained from Fannie Mae five substantially similar fixed rate mortgages aggregating $79.3 million (the Loans). The Loans have a 30 year amortization period, mature in 7 years, and bear interest at a fixed rate of 5.44% per annum. The Loans require monthly installments of interest only through the first three years and monthly installments of principal and interest throughout the remainder of their stated terms. The Loans will mature on December 1, 2014, at which time a balance of approximately $75.0 million
will be due. Although the loans were allocated among the Camden Properties, the aggregate loan amount is secured by all of the Properties.

The Company is required to maintain minimum debt service coverage ratios as defined in the loan documents for the St. Augustine; Houston extended stay hotels, Gulf Coast Industrial Portfolio and Southeastern Michigan multifamily properties. The Company was in compliance with its financial covenants at December 31, 2008.

Interest costs capitalized related to the renovation and expansion projects during the years ended December 31, 2008 and 2007 amounted to $824,981 and $28,383, respectively.

10. Note Payable

On December 5, 2007, the Company entered into a construction loan to fund the development of the Brazos Crossing Power Center, in Lake Jackson, Texas Location. The loan allowed the Company to draw up to $8.2 million, and requires monthly installments of interest only through the first 12 months and bears interest at the greater of 6.75% or 150 basis points (1.5%) in excess of LIBOR. For the second twelve months, principal payments shall be made in monthly installments in amounts equal to one-twelfth of the principal component of an annual amortization of the principal of the loan on the basis of an assumed interest rate of 6.82% and a thirty year
term. The loan is secured by acquired real estate and is guaranteed by the Company. The balance at December 31, 2008 and 2007 was $7.4 million and $5.8 million, respectively. The construction phase of the loan matured on December 4, 2008. The Company exercised its right to convert the loan from the construction phase to the term phase. The term phase of the loan matures on December 4, 2009. The weighted average interest rate for year ended December 31, 2008 was 6.90%.

The agreement also required the Company to obtain an interest rate cap of LIBOR at 6.0% for the term of the loan. Due to the fact that interest rates during 2008 and 2007 were below the 6.0% interest rate cap, the interest rate cap had a zero fair value.

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11. Intangible Assets

At December 31, 2008 and 2007, the Company had intangible assets relating to above-market leases from property acquisitions, intangible assets related to leases in place at the time of acquisition, intangible assets related to leasing costs, and intangible liabilities relating to below-market leases from property acquisitions.

The following table sets forth the Companys intangible assets as of December 31, 2008 and December 31, 2007:



At December 31, 2008

          

          At December 31, 2007Cost

          

          Accumulated Amortization

          

          Net

          

          Cost

          

          Accumulated Amortization

          

          NetAcquired in-place lease intangibles

          

          $

          2,990,772

          

          

          $

          (1,849,234

          )

          

          $

          1,141,538

          

          

          $

          4,628,921

          

          

          $

          (2,646,629

          )

          

          $

          1,982,292Acquired above market lease intangibles

          

          

          1,150,659

          

          

          

          (710,720

          )

          

          

          439,939

          

          

          

          1,203,902

          

          

          

          (373,175

          )

          

          

          830,727Acquired leasing costs

          

          

          1,527,840

          

          

          

          (832,824

          )

          

          

          695,016

          

          

          

          1,758,805

          

          

          

          (605,093

          )

          

          

          1,153,712Acquired below market lease intangibles

          

          

          (3,462,455

          )

          

          

          2,258,021

          

          

          

          (1,204,434

          )

          

          

          (4,266,726

          )

          

          

          1,874,843

          

          

          

          (2,391,883

          )

During 2008, the Company wrote off fully amortized acquired intangible assets of approximately $2.7 million resulting in a reduction of cost and accumulated amortization of intangible assets at December 31, 2008 compared to the December 31, 2007. There were no additions during 2008.

The following table presents the projected amortization benefit of the acquired above market lease costs and the below market lease costs during the next five years and thereafter at December 31, 2008:



Amortization of:

          

          2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          TotalAcquired above market lease value

          

          $

          202,726

          

          

          $

          97,974

          

          

          $

          53,943

          

          

          $

          23,379

          

          

          $

          14,425

          

          

          $

          47,492

          

          

          $

          439,939Acquired below market lease value

          

          

          (554,504

          )

          

          

          (264,968

          )

          

          

          (125,966

          )

          

          

          (87,922

          )

          

          

          (86,625

          )

          

          

          (84,449

          )

          

          

          (1,204,434

          )Projected future net rental income increase

          

          $

          (351,778

          )

          

          $

          (166,994

          )

          

          $

          (72,023

          )

          

          $

          (64,543

          )

          

          $

          (72,200

          )

          

          $

          (36,957

          )

          

          $

          (764,495

          )

Amortization benefit of acquired above and below market lease values is included in total revenues in our statement of operations was $0.8 million, $0.6 million and $0.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The following table presents the projected amortization expense of the acquired in-place lease intangibles and acquired leasing costs during the next five years and thereafter at December 31, 2008:



Amortization of:

          

          2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          TotalAcquired in-place leases value

          

          $

          500,573

          

          

          $

          222,620

          

          

          $

          111,900

          

          

          $

          72,871

          

          

          $

          66,883

          

          

          $

          166,691

          

          

          $

          1,141,538Acquired leasing costs value

          

          

          282,161

          

          

          

          143,566

          

          

          

          80,977

          

          

          

          46,641

          

          

          

          41,219

          

          

          

          100,452

          

          

          

          695,016Projected future amortization expense

          

          $

          782,734

          

          

          $

          366,186

          

          

          $

          192,877

          

          

          $

          119,512

          

          

          $

          108,102

          

          

          $

          267,143

          

          

          $

          1,836,554

Actual total amortization expense included in depreciation and amortization expense in our statement of operations was $1.4 million, $1.9 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

12. Distributions Payable

As of December 31, 2008, the Company paid all dividends declared through December 31, 2008.

On September 24, 2007, the Companys Board of Directors declared a dividend for the three-month period ending December 31, 2007. The dividend was calculated based on stockholders of record each day

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12. Distributions Payable   (continued)

during this period at a rate of $0.0019178 per day. If paid each day for a 365-day period, the dividend represented a 7.0 percent annualized rate based on a share price of $10.00. The dividend in the amount of $2.2 million was paid in full in January 2008 using a combination of cash ($1.3 million), and pursuant to the Companys Distribution Reinvestment Program, shares of the Companys stock at a discounted price of $9.50 per share ($0.9 million). On September 24, 2007, the Companys Board of Directors also declared dividends for its special general partner interests. The distribution for the fourth quarter 2007 in the amount of $0.2
million was included in distributions payable at December 31, 2007 and was paid in January 2008.

13. Stockholders Equity

Preferred Shares

Shares of preferred stock may be issued in the future in one or more series as authorized by the Lightstone REITs board of directors. Prior to the issuance of shares of any series, the board of directors is required by the Lightstone REITs charter to fix the number of shares to be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series. Because the Lightstone REITs board of directors has the power to establish the preferences, powers and rights of each series of
preferred stock, it may provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Lightstone REIT, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of the Lightstone REITs common stock. As of December 31, 2008 and 2007, the Lightstone REIT had no outstanding preferred shares.

Common Shares

All of the common stock being offered by the Lightstone REIT will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of its charter regarding the restriction on the ownership and transfer of shares of our stock, holders of the Lightstone REITs common stock will be entitled to receive distributions if authorized by the board of directors and to share ratably in the Lightstone REITs assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up.

Each outstanding share of the Lightstone REITs common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding common stock can elect all of the directors then standing for election, and the holders of the remaining common stock will not be able to elect any directors.

Holders of the Lightstone REITs common stock have no conversion, sinking fund, redemption or exchange rights, and have no preemptive rights to subscribe for any of its securities. Maryland law provides that a stockholder has appraisal rights in connection with some transactions. However, the Lightstone REITs charter provides that the holders of its stock do not have appraisal rights unless a majority of the board of directors determines that such rights shall apply. Shares of the Lightstone REITs common stock have equal dividend, distribution, liquidation and other rights.

Under its charter, the Lightstone REIT cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, (3) its reorganization, and (4) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in

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13. Stockholders Equity   (continued)

which the Lightstone REIT is the acquirer, however, do not require stockholder approval. The Lightstone REIT had approximately 31.0 million and 13.6 million shares of common stock outstanding as of December 31, 2008 and 2007, respectively.

Dividends

The Board of Directors of the Company declared a dividend for each quarter in 2008, 2007, and 2006 and for the quarter ending March 31, 2009. The dividends have been calculated based on stockholders of record each day during this three-month period at a rate of $0.0019178 per day, which, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. Total dividends declared during year ended December 31, 2008, 2007 and 2006 were $9.9 million, $7.1 million and $1.1 million, respectively.

On January 8, 2009, the Companys Board of Directors declared the dividend for the three-month period ending December 31, 2008 of $5.5 million. The dividend was paid during January 2009 using a combination of cash ($3.1 million), and shares ($2.4 million) which represents approximately 251,337 shares of the Companys common shares issued pursuant to the Companys Distribution Reinvestment Program, at a discounted price of $9.50 per share.

On March 30, 2009, the Companys Board of Directors declared the quarterly dividend for the three-month period ended March 31, 2009 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business each day during the quarter, which will be paid, in April 2009.

The amount of dividends to be distributed to stockholders in the future will be determined by the Board of Directors and are dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code.

Stock-Based Compensation

The Lightstone REIT has adopted a stock option plan under which its independent directors are eligible to receive annual nondiscretionary awards of nonqualified stock options. The Lightstone REITs stock option plan is designed to enhance the Lightstone REITs profitability and value for the benefit of stockholders by enabling the Lightstone REIT to offer independent directors stock-based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Lightstone REITs
stockholders.

The Lightstone REIT has authorized and reserved 75,000 shares of its common stock for issuance under the stock option plan. The board of directors may make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under the stock option plan to reflect any change in the Lightstone REITs capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of its assets.

The Lightstone REITs stock option plan provides for the automatic grant of a nonqualified stock option to each of the Lightstone REITs independent directors, without any further action by the board of directors or the stockholders, to purchase 3,000 shares of the Lightstone REITs common stock on the date of each annual stockholders meeting. At our annual stockholder meeting in July 2007 and August 2008, options were granted to each of our three independent directors. As of December 31, 2008 and 2007, options to purchase 18,000 and 9,000 shares of stock, respectively, were outstanding, none of which are fully vested, at an exercise
price of $10 per share. During the year ended December 31, 2008 and 2007, there were no forfeitures related to stock options previously granted.

The exercise price for all stock options granted under the stock option plan will be fixed at $10 per share until the termination of the Lightstone REITs initial public offering which occurred in October 2008, and

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13. Stockholders Equity   (continued)

thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option will be 10 years. Options granted to non-employee directors will vest and become exercisable on the second anniversary of the date of grant, provided that the independent director is a director on the board of directors on that date. Notwithstanding any other provisions of the Lightstone REITs stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would
jeopardize the Lightstone REITs status as a REIT under the Internal Revenue Code.

Effective January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with, FAS No. 123(R), Share-Based Payment(FAS 123(R)). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. The Company has applied the modified prospective method of adoption, under which prior periods are not restated for comparative purposes. Under the modified prospective method, FAS 123(R) applies to new awards and to
awards that were outstanding as of December 31, 2005 that are subsequently modified, repurchased or cancelled. There were no options grants prior to 2007, and as such, there was no compensation expense recognized prior to 2007. The compensation expense included in general and administrative expenses for the year ended December 31, 2008 and 2007, was insignificant. Stock-based compensation is classified within general and administrative expense in the consolidated statements of operations. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures, which is an immaterial adjustment. FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

14. Related Party Transactions

The Lightstone REIT has agreements with the Dealer Manager, Advisor and Property Manager to pay certain fees, as follows, in exchange for services performed by these entities and other affiliated entities. The Lightstone REITs ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager, Dealer Manager and their affiliates to perform such services as provided in these agreements.



Fees

          

          AmountSelling Commission

          

          The Dealer Manager will be paid up to 7% of the gross offering proceeds before reallowance of commissions earned by participating broker-dealers. Selling commissions are expected to be approximately $21,000,000 if the maximum offering of 30 million shares is sold.Dealer Management Fee

          

          The Dealer Manager will be paid up to 1% of gross offering proceeds before reallowance to participating broker-dealers. The estimated dealer management fee is expected to be approximately $3,000,000 if the maximum offering of 30 million shares is sold.Soliciting Dealer Warrants

          

          The Dealer Manager may buy up to 600,000 warrants at a purchase price of $.0008 per warrant. Each warrant will be exercisable for one share of the Lightstone REITs common stock at an exercise price of $12.00 per share.

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14. Related Party Transactions   (continued)

Fees

          

          AmountReimbursement of Offering Expenses

          

          Reimbursement of all offering costs, including the commissions and dealer management fees indicated above, up to $30 million based upon maximum offering of 30 million shares. The Lightstone REIT will sell a special general partnership interest in the Operating Partnership to Lightstone SLP, LLC (an affiliate of the Sponsor) and apply all the sales proceeds to offset such costs.Acquisition Fee

          

          The Advisor will be paid an acquisition fee equal to 2.75% of the gross contract purchase price (including any mortgage assumed) of each property purchased. The Advisor will also be reimbursed for expenses that it incurs in connection with the purchase of a property. The Lightstone REIT anticipates that acquisition expenses will be between 1% and 1.5% of a property's purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of the property. The actual amounts of these fees and reimbursements depend upon results of operations and, therefore, cannot be determined at the present time. However, $33,000,000 may be paid as an acquisition fee and for the reimbursement of acquisition expenses if the maximum offering is sold, assuming aggregate long-term permanent leverage of approximately 75%.Property Management   Residential/Retail/ Hospitality

          

          The Property Manager will be paid a monthly management fee of up to 5% of the gross revenues from residential, hospitality and retail properties. Lightstone REIT may pay the Property Manager a separate fee for i) the development of, ii) the one-time initial rent-up or iii) the leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arms length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.Property Management   Office/Industrial

          

          The Property Manager will be paid monthly property management and leasing fees of up to 4.5% of gross revenues from office and industrial properties. In addition, the Lightstone REIT may pay the Property Manager a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arms length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.Asset Management Fee

          

          The Advisor or its affiliates will be paid an asset management fee of 0.55% of the Lightstone REITs average invested assets, as defined, payable quarterly in an amount equal to 0.1375 of 1% of average invested assets as of the last day of the immediately preceding quarter.

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14. Related Party Transactions   (continued)

Fees

          

          AmountReimbursement of Other Expenses

          

          For any year in which the Lightstone REIT qualifies as a REIT, the Advisor must reimburse the Lightstone REIT for the amounts, if any, by which the total operating expenses, the sum of the advisor asset management fee plus other operating expenses paid during the previous fiscal year exceed the greater of 2% of average invested assets, as defined, for that fiscal year, or, 25% of net income for that fiscal year. Items such as property operating expenses, depreciation and amortization expenses, interest payments, taxes, non-cash expenditures, the special liquidation distribution, the special termination distribution, organization and offering expenses, and acquisition fees and expenses are excluded from the definition of total operating expenses, which otherwise includes the aggregate expense of any kind paid or incurred by the Lightstone REIT.The Advisor or its affiliates will be reimbursed for expenses that may include costs of goods and services, administrative services and non-supervisory services performed directly for the Lightstone REIT by independent parties.

Lightstone SLP, LLC, an affiliate of our Sponsor, has purchased special General partner interests in the Operating Partnership. These special general partner interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership. During the year ended December 31, 2008, distributions of $1.0 million were declared and paid. Distributions of $0.7 million were declared and $0.5 million were paid during the year ended December 31, 2007. The distribution for the fourth quarter 2008
was declared in January 2009 in the amount of $0.5 million. Such distributions, paid current at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2008 and will always be subordinated until stockholders receive a stated preferred return, as described below.

The special general partner interests will also entitle Lightstone SLP, LLC to a portion of any liquidating distributions made by the Operating Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Lightstone REIT and, therefore, cannot be determined at the present time. Liquidating distributions to Lightstone SLP, LLC will always be subordinated until stockholders receive a distribution equal to their initial investment plus a stated preferred return, as described below:



Operating Stage Distributions

          

          Amount of Distribution7% Stockholder Return Threshold

          

          Once a cumulative non-compounded return of 7% return on their net investment is realized by stockholders, Lightstone SLP, LLC is eligible to receive available distributions from the Operating Partnership until it has received an amount equal to a cumulative non-compounded return of 7% per year on the purchase price of the special general partner interests. Net investment refers to $10 per share, less a pro rata share of any proceeds received from the sale or refinancing of the Lightstone REITs assets.12% Stockholder Return Threshold

          

          Once a cumulative non-compounded return of 12% per year is realized by stockholders on their net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC.

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14. Related Party Transactions   (continued)

Operating Stage Distributions

          

          Amount of DistributionReturns in Excess of12%

          

          After the 12% return threshold is realized by stockholders and Lightstone SLP, LLC, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC.



Liquidating Stage Distributions

          

          Amount of Distribution7% Stockholder Return Threshold

          

          Once stockholders have received liquidation distributions, and a cumulative non-compounded 7% return per year on their initial net investment, Lightstone SLP, LLC will receive available distributions until it has received an amount equal to its initial purchase price of the special general partner interests plus a cumulative non-compounded return of 7% per year.12% Stockholder Return Threshold

          

          Once stockholders have received liquidation distributions, and a cumulative non-compounded return of 12% per year on their initial net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC.Returns in Excess of 12%

          

          After stockholders and Lightstone LP, LLC have received liquidation distributions, and a cumulative non-compounded return of 12% per year on their initial net investment, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC.

The Lightstone REIT pursuant to the related party arrangements described above has recorded the following amounts the years ended December 31, 2008, 2007 and 2006:



2008

          

          2007

          

          2006Acquisition fees

          

          $

          2,336,565

          

          

          $

          6,551,896

          

          

          $

          2,771,992Asset management fees

          

          

          2,203,563

          

          

          

          1,033,371

          

          

          

          274,724Property management fees

          

          

          1,783,275

          

          

          

          1,057,272

          

          

          

          328,532Acquisition expenses reimbursed to Advisor

          

          

          1,265,528

          

          

          

          635,848

          

          

          

          Development fees

          

          

          932,783

          

          

          

          71,901

          

          

          

          Leasing commissions

          

          

          1,001,324

          

          

          

          176,041

          

          

          

          33,706Total

          

          $

          9,523,038

          

          

          $

          9,526,329

          

          

          $

          3,408,954

In July of 2007, the Company purchased a $16.0 million certificate of deposit with an affiliate of the Advisor. The certificate of deposit matured in less than three months, and earned interest at 10 percent. The Company redeemed the certificate of deposit in September of 2007, and has included $0.3 million in interest income from this investment.

See Notes 4, 5 and 6 for other related party transactions.

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15. Impairment of Long-Lived Assets

For the year ended December 31, 2008, the Company recorded an asset impairment charge of $4.9 million primarily related to impairment on one its industrial properties located in Sarasota, Florida. The Company identified certain indicators of impairment related to this property such as the property is currently vacate and is experiencing negative cash flows and the difficulty in leasing space. The Company performed a cash flow valuation analysis and determined that the carrying value of the property exceeded its undiscounted cash flows. Therefore, the Company has recorded an impairment charge related to the property consisting of the excess carrying
value of the asset over its estimated fair values within the accompanying consolidated statement of operations. For the years ended December 31, 2007 and 2006, the Company did not record an impairment charge.

16. Leases

As of December 31, 2008, the approximate fixed future minimum rental from the Companys commercial real estate properties, are as follows:



2009

          

          2010

          

          2011

          

          2012

          

          2013

          

          Thereafter

          

          Total$12,342,362

          

          $

          9,466,244

          

          

          $

          7,320,928

          

          

          $

          5,953,428

          

          

          $

          4,988,647

          

          

          $

          18,571,755

          

          

          $

          58,643,364

Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or all of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recovery income on the accompanying consolidated statements of operations.

17. Segment Information

The Company currently operates in four business segments as of December 31, 2008: (i) retail real estate, (ii) residential real estate, (iii) industrial real estate and (iv) hospitality. The Companys advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Companys revenues for the years ended December 31, 2008, 2007 and 2006 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of December 31,
2008, 2007 and 2006. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies, excluding depreciation and amortization. Unallocated assets, revenues and expenses relate to corporate related accounts.

The Company evaluates performance based upon net operating income from the combined properties in each real estate segment.

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17. Segment Information   (continued)

Selected results of operations for the years ended December 31, 2008, 2007 and 2006, and total assets as of December 31, 2008, 2007 and 2008 regarding the Companys operating segments are as follows:



For the Year Ended December 31, 2008Retail

          

          Multi Family

          

          Industrial

          

          Hospitality

          

          Unallocated

          

          TotalTotal revenues

          

          $

          8,812,248

          

          

          $

          20,304,214

          

          

          $

          8,054,802

          

          

          $

          3,966,838

          

          

          $

          

          

          

          $

          41,138,102Property operating expenses

          

          

          3,197,470

          

          

          

          9,988,742

          

          

          

          2,346,680

          

          

          

          2,223,287

          

          

          

          

          

          

          

          17,756,179Real estate taxes

          

          

          999,531

          

          

          

          2,053,246

          

          

          

          921,537

          

          

          

          213,828

          

          

          

          

          

          

          

          4,188,142General and administrative costs

          

          

          39,394

          

          

          

          1,117,206

          

          

          

          108,283

          

          

          

          35,704

          

          

          

          11,029,054

          

          

          

          12,329,641Net operating income (loss)

          

          

          4,575,853

          

          

          

          7,145,020

          

          

          

          4,678,302

          

          

          

          1,494,019

          

          

          

          (11,029,054

          )

          

          

          6,864,140Depreciation and amortization

          

          

          2,616,341

          

          

          

          2,978,312

          

          

          

          2,923,096

          

          

          

          423,404

          

          

          

          

          

          

          

          8,941,153Impairment of long lived assets and loss on disposal

          

          

          

          

          

          

          

          

          

          

          4,866,437

          

          

          

          

          

          

          

          

          

          

          

          4,866,437Operating income (loss)

          

          $

          1,959,512

          

          

          $

          4,166,708

          

          

          $

          (3,111,231

          )

          

          $

          1,070,615

          

          

          $

          (11,029,054

          )

          

          $

          (6,943,450

          )Total purchases of investment property

          

          $

          30,009,704

          

          

          $

          406,166

          

          

          $

          1,427,859

          

          

          $

          2,398,016

          

          

          $

          

          

          

          $

          34,241,745As of December 31, 2008:Total Assets

          

          $

          107,410,907

          

          

          $

          142,329,673

          

          

          $

          73,794,036

          

          

          $

          18,669,330

          

          

          $

          159,605,294

          

          

          $

          501,809,240





For the Year Ended December 31, 2007Retail

          

          Multi Family

          

          Industrial

          

          Hospitality

          

          Unallocated

          

          TotalTotal revenues

          

          $

          7,947,533

          

          

          $

          9,807,211

          

          

          $

          7,530,709

          

          

          $

          536,342

          

          

          $

          

          

          

          $

          25,821,795Property operating expenses

          

          

          2,735,067

          

          

          

          4,375,567

          

          

          

          1,805,789

          

          

          

          607,439

          

          

          

          

          

          

          

          9,523,862Real estate taxes

          

          

          949,572

          

          

          

          1,056,977

          

          

          

          698,489

          

          

          

          34,828

          

          

          

          

          

          

          

          2,739,866General and administrative costs

          

          

          6,205

          

          

          

          252,591

          

          

          

          5,919

          

          

          

          1,568

          

          

          

          3,444,080

          

          

          

          3,710,363Net operating income

          

          

          4,256,689

          

          

          

          4,122,076

          

          

          

          5,020,512

          

          

          

          (107,493

          )

          

          

          (3,444,080

          )

          

          

          9,847,704Depreciation and amortization

          

          

          2,210,951

          

          

          

          1,306,107

          

          

          

          2,579,386

          

          

          

          66,993

          

          

          

          

          

          

          

          6,163,437Impairment of long lived assets and loss on disposal

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Operating income (loss)

          

          $

          2,045,738

          

          

          $

          2,815,969

          

          

          $

          2,441,126

          

          

          $

          (174,486

          )

          

          $

          (3,444,080

          )

          

          $

          3,684,267Total purchases of investment property

          

          $

          11,983,102

          

          

          $

          96,039,586

          

          

          $

          77,223,815

          

          

          $

          15,839,147

          

          

          $

          

          

          

          $

          201,085,650As of December 31, 2007:Total Assets

          

          $

          79,721,597

          

          

          $

          146,012,732

          

          

          $

          80,552,749

          

          

          $

          16,668,512

          

          

          $

          46,745,764

          

          

          $

          369,701,354





For the Year Ended December 31, 2006Retail

          

          Multi Family

          

          Industrial

          

          Hospitality

          

          Unallocated

          

          TotalTotal Revenues

          

          $

          4,283,221

          

          

          $

          4,155,467

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          8,438,688Property operating expenses

          

          

          1,666,335

          

          

          

          1,967,184

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          3,633,519Real estate taxes

          

          

          400,968

          

          

          

          481,244

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          882,212General and administrative costs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          808,502

          

          

          

          808,502Net operating income

          

          

          2,215,918

          

          

          

          1,707,039

          

          

          

          

          

          

          

          

          

          

          

          (808,502

          )

          

          

          3,114,455Depreciation and amortization

          

          

          1,279,376

          

          

          

          1,395,443

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          2,674,819Impairment of long lived assets and loss on disposal

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Operating income (loss)

          

          $

          936,542

          

          

          $

          311,596

          

          

          $

          

          

          

          $

          

          

          

          $

          (808,502

          )

          

          $

          439,636Total purchases of investment property

          

          $

          60,475,337

          

          

          $

          43,644,740

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          104,120,077As of December 31, 2006:Total Assets

          

          $

          67,390,609

          

          

          $

          44,418,280

          

          

          $

          

          

          

          $

          

          

          

          $

          28,899,328

          

          

          $

          140,708,217

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2008, 2007 and 2006

18. Quarterly Financial Data (Unaudited)

The following table presents selected unaudited quarterly financial data for each quarter during the year ended December 31, 2008 and 2007:



2008Year Ended December 31,

          

          Quarter Ended December 31,

          

          Quarter Ended September 30,

          

          Quarter Ended June 30,

          

          Quarter Ended March 31,Total revenue

          

          $

          41,138,102

          

          

          $

          11,160,021

          

          

          $

          10,266,853

          

          

          $

          9,937,419

          

          

          $

          9,773,809Net loss

          

          

          (28,139,359

          )

          

          

          (8,672,966

          )

          

          

          (11,186,591

          )

          

          

          (6,218,600

          )

          

          

          (2,061,202

          )Net loss per common share, basic and diluted

          

          $

          (1.24

          )

          

          $

          (0.35

          )

          

          $

          (0.44

          )

          

          $

          (0.31

          )

          

          $

          (0.14

          )



2007Year Ended December 31,

          

          Quarter Ended December 31,

          

          Quarter Ended September 30,

          

          Quarter Ended June 30,

          

          Quarter Ended March 31,Total revenue

          

          $

          25,821,795

          

          

          $

          8,200,439

          

          

          $

          6,158,610

          

          

          $

          6,113,114

          

          

          $

          5,349,632Net loss

          

          

          (9,242,390

          )

          

          

          (543,596

          )

          

          

          (1,884,211

          )

          

          

          (2,451,828

          )

          

          

          (4,362,755

          )Net loss per common share, basic and diluted

          

          $

          (1.01

          )

          

          $

          (0.04

          )

          

          $

          (0.17

          )

          

          $

          (0.32

          )

          

          $

          (0.86

          )

19. Commitments and Contingencies

Legal Proceedings

From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes.

On March 29, 2006, Jonathan Gould, a former member of our Board of Directors and Senior Vice-President-Acquisitions, filed a lawsuit against us in the District Court for the Southern District of New York. The suit alleges, among other things, that Mr. Gould was insufficiently compensated for his services to us as director and officer. Mr. Gould sought damages of (i) up to $11,500,000 or (ii) a 2.5% ownership interest in all properties that we acquire and an option to acquire up to 5% of the membership interests of Lightstone SLP, LLC. We filed a motion to dismiss the lawsuit. After review of the motion to dismiss, counsel for Mr. Gould represented
that Mr. Gould was dropping his claim for ownership interest in the properties we acquire and his claim for membership interests. Mr. Goulds counsel represented that he would be suing only under theories of quantum merit and unjust enrichment seeking the value of work he performed. Counsel for the Lightstone REIT made motion to dismiss Mr. Goulds complaint, which was granted by Judge Sweeney. Mr. Gould has filed an appeal of the decision dismissing his case, which is pending. Management believes that this suit is frivolous and entirely without merit and intends to defend against these charges vigorously.

On January 4, 2007, 1407 Broadway Real Estate LLC (Office Owner), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC (Mezz II), consummated the acquisition of a sub-leasehold interest (the Sublease Interest) in an office building located at 1407 Broadway, New York, New York (the Office Property). Mezz II is a joint venture between LVP 1407 Broadway LLC (LVP LLC), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC (Manager), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief
Executive Officer, and Shifra Lichtenstein, his wife.

The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. (Gettinger). In July 2006, Abraham Kamber Company, as Sublessor under the sublease (Sublessor), served two notices of default on Gettinger (the Default Notices). The first alleged

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19. Commitments and Contingencies   (continued)

that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease
Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings. The parties have been directed to engage in and complete discovery. We consider the litigation to be without merit.

Prior to consummating the acquisition of the Sublease Interest, Office Owner received a letter from Sublessor indicating that Sublessor would consider such acquisition a default under the original sublease, which prohibits assignments of the Sublease Interest when there is an outstanding default there under. On February 16, 2007, Office Owner received a Notice to Cure from Sublessor stating the transfer of the Sublease Interest occurred in violation of the Sublease given Sublessor's position that Office Seller is in default. Office Owner will commence and vigorously pursue litigation in order to challenge the default, receive an injunction and toll
the termination period provided for in the Sublease.

On September 4, 2007, Office Owner commenced a new action against Sublessor alleging a number claims, including the claims that Sublessor has breached the sublease and committed intentional torts against Office Owner by (among other things) issuing multiple groundless default notices, with the aim of prematurely terminating the sublease and depriving Office Owner of its valuable interest in the sublease. The complaint seeks a declaratory judgment that Office Owner has not defaulted under the sublease, damages for the losses Office Owner has incurred as a result of Sublessors wrongful conduct, and an injunction to prevent Sublessor from issuing
further default notices without valid grounds or in bad faith.

Office Owner is the borrower under a Loan Agreement dated January 4, 2007 and amended on September 10, 2007 with Lehman Brothers Holdings Inc. (Lehman). Pursuant to that loan agreement, Lehman has loaned a total of $127,250,000, leaving borrowing availability of $13,540,509. Because Lehman did not honor October 2008 and January 2009 draws that are well within Office Owners borrowing limits, Office Owner filed a motion dated February 6, 2009 in Lehmans bankruptcy case, asking the Bankruptcy Court to enter an order compelling Lehman to comply with its obligations to lend, or alternatively, to grant Office Owner relief from the
bankruptcy stay to declare Lehman in default of the loan and related documents, suspend payments under the loan, seek a replacement senior lender for the remaining unfunded portion of the loan, and pursue other remedies. That motion has been consensually adjourned while the parties attempt to resolve the dispute and has not yet been heard by the Bankruptcy Court.

The requested funds will be used to pay for building improvements and tenant build-outs at the Office Property, and Office Owner has also given notice to Lehman that it reserves all rights and claims it may have against Lehman for damages arising from the consequences of Lehmans failure to honor its funding commitments.

As of the date hereof, we are not a party to any other material pending legal proceedings.

Tax Protection Agreement

In connection with the contribution of the Mill Run Interest (see Note 4) and the POAC Interest (See Note 5), the Operating Partnership entered into Tax Protection Agreements with each of Arbor JRM, Arbor CJ and AR Prime (collectively, the Contributors), each dated as of June 26, 2008. Under these Tax Protection

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19. Commitments and Contingencies   (continued)

Agreements, the Operating Partnership is required to indemnify each of Arbor JRM and Arbor CJ with respect to the Mill Run Properties, and AR Prime, with respect to the POAC Properties, for a period of five years from June 26, 2008 for, among other things, certain income tax liability that would result from the income or gain which Arbor JRM and Arbor CJ, on the one hand, or AR Prime, on the other hand, would recognize upon the Operating Partnerships failure to maintain the current level of debt encumbering the Mill Run Properties or the POAC Properties, respectively, or the sale or other disposition by the Operating Partnership of the Mill Run
Properties, the Mill Run Interest, the POAC Properties, or the POAC Interest (each, an Indemnifiable Event). Under the terms of the Tax Protection Agreements, the Operating Partnership is indemnifying the Contributors for certain income tax liabilities based on income or gain which the Contributors are deemed to be required to include in their gross income for federal or state income tax purposes (assuming the Contributors are subject to tax at the highest regional, federal, state and local tax rates imposed on individuals residing in New York City) as a result of an Indemnifiable Event. This indemnity covers income taxes, interest and penalties and is required to be made on a grossed up basis that effectively results in the Contributors receiving the indemnity payment on a net, after-tax basis. The amount of the potential tax indemnity to the Contributors under the Tax Protection Agreements, including a gross-up for taxes on any such payment, using current tax
rates, is estimated to be approximately $11,600,000, $241,000, and $59,000,000 to each of Arbor JRM, Arbor CJ and AR Prime, respectively.

Each Tax Protection Agreement imposes certain restrictions upon the Operating Partnership relating to transactions involving the Mill Run Properties and the POAC Properties which could result in taxable income or gain to the Contributors. The Operating Partnership may not dispose or transfer any Mill Run Property or any POAC Property without first proving that the Operating Partnership possesses the requisite liquidity, including the proceeds from any such transaction, to make any payments that would come due pursuant to the Tax Protection Agreement. However, the Operating Partnership may take the following actions: (i) (A) as to the POAC Properties,
commencing with the period one year following the date of the Tax Protection Agreement, or as may be extended if the contribution of the POAC Interest does not occur by February 26, 2009 (the extension is the number of days between February 26, 2009 and the date of actual contribution), the Operating Partnership can sell on an annual basis part or all of any of the POAC Properties with an aggregate value of ten percent (10%) or less of the total value of the POAC Properties as of the date of contribution (and any amounts of the ten percent (10%) value not sold can be applied to sales in future years); and (B) as to the Mill Run Properties either the same ten percent (10%) test as set forth above in (i)(A) with respect to the Mill Run Properties or the sale of the property known by Design Outlet Center; and (ii) the Operating Partnership can enter into a non-recognition transaction with either the consent of the Contributors or an opinion from an independent law or accounting firm
stating that it is more likely than not that the transaction will not give rise to current taxable income or gain.

20. Subsequent Events

On March 30, 2009, the Company, through its Operating Partnership and as general partner of the Operating Partnership, consummated its transaction with AR Prime to acquire a 25% membership interest in Prime. See Note 6 for further discussion. In exchange for the Prime Interest, the Operating Partnership issued to AR Prime (i) 284,209 Common Units, valued at the closing at $2,842,095, and 53,146 Series A Preferred Units, with an aggregate liquidation preference of $53,146,316. The acquisition price for the Prime Interest is approximately $356 million, $56 million in the form of equity and approximately $300 million in the form of indebtedness secured
by the Prime properties (18 retail outlet malls and two development projects).

In addition, in connection with the transfer of the POAC Interest, on March 30, 2009, the Company made an additional loan to AR Prime in the principal amount of $1,657,708 (the Additional Prime Loan) evidenced by a Promissory Note dated March 30, 2009 (the Additional Prime Note). The terms of the Additional Prime Loan and the Additional Prime Note are substantially identical to the Prime Loan and the

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20. Subsequent Events  (continued)

Prime Note. As security for the Prime Loan and the Additional Prime Loan, on March 30, 2009, pursuant to a Pledge Agreement dated as of such date, AR Prime pledged to the Company all of Common Units and Series A Preferred Units issued to AR Prime in exchange for the Prime Interest.

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Schedule IIIReal Estate and Accumulated Depreciation December 31, 2008



Initial Cost (A)

          

          

          

          Gross Amount at Which Carried at End of PeriodEncumbrance

          

          Land

          

          Buildings and Improvements

          

          Costs Capitalized Subsequent to Acquisition

          

          Land and Improvements

          

          Buildings and Improvements

          

          Total (B)

          

          Accumulated Depreciation (C)

          

          Date Acquired

          

          Depreciable Life (D)Belz Factory Outlet St. Augustine, FL

          

          $

          26,738,211

          

          

          $

          5,384,290

          

          

          $

          22,374,795

          

          

          $

          5,389,517

          

          

          $

          5,384,290

          

          

          $

          27,764,312

          

          

          $

          33,148,602

          

          

          $

          (2,036,431

          )

          

          

          3/29/2006

          

          

          

          (D)Belz Factory Outlet Expansion St. Augustine, FL

          

          

          

          

          

          

          5,821,990

          

          

          

          19,728,279

          

          

          

          

          

          

          

          5,821,990

          

          

          

          19,728,279

          

          

          

          25,550,269

          

          

          

          (98,297

          )

          

          

          10/2/2007

          

          

          

          (D)Four Residential Communities Southeastern Michigan

          

          

          40,725,000

          

          

          

          8,051,125

          

          

          

          34,297,538

          

          

          

          455,149

          

          

          

          8,116,520

          

          

          

          34,687,292

          

          

          

          42,803,812

          

          

          

          (2,210,899

          )

          

          

          6/29/2006

          

          

          

          (D)Oakview Plaza Omaha, Nebraska

          

          

          27,500,000

          

          

          

          6,705,942

          

          

          

          25,462,968

          

          

          

          615,245

          

          

          

          7,355,942

          

          

          

          25,428,213

          

          

          

          32,784,155

          

          

          

          (1,573,419

          )

          

          

          12/21/2006

          

          

          

          (D)Gulfcoast Industrial PortfolioNew Orleans/Baton Rouge, Louisiana & San Antonio, Texas

          

          

          53,025,000

          

          

          

          12,767,476

          

          

          

          51,648,719

          

          

          

          1,242,153

          

          

          

          12,767,476

          

          

          

          52,890,872

          

          

          

          65,658,348

          

          

          

          (3,475,221

          )

          

          

          2/1/2007

          

          

          

          (D)Brazos Crossing Lake Jackson, Texas

          

          

          7,416,941

          

          

          

          1,688,326

          

          

          

          4,337,962

          

          

          

          2,227,918

          

          

          

          1,688,326

          

          

          

          6,565,880

          

          

          

          8,254,206

          

          

          

          (263,493

          )

          

          

          6/29/2007

          

          

          

          (D)Houston ES Hotels Houston, Texas

          

          

          11,986,971

          

          

          

          1,900,546

          

          

          

          14,359,818

          

          

          

          318,158

          

          

          

          1,904,161

          

          

          

          14,674,362

          

          

          

          16,578,523

          

          

          

          (432,340

          )

          

          

          10/17/2007

          

          

          

          (D)Sarasota Sarasota, Florida

          

          

          

          

          

          

          2,000,000

          

          

          

          11,291,586

          

          

          

          35,977

          

          

          

          2,000,000

          

          

          

          11,327,563

          

          

          

          13,327,563

          

          

          

          (4,961,892

          )

          

          

          11/15/2007

          

          

          

          (D)Camden Apartments Tampa, Florida

          

          

          79,268,800

          

          

          

          19,976,387

          

          

          

          79,905,549

          

          

          

          318,679

          

          

          

          20,011,919

          

          

          

          80,188,696

          

          

          

          100,200,615

          

          

          

          (2,235,250

          )

          

          

          11/16/2007

          

          

          

          (D)Total

          

          $

          246,660,923

          

          

          $

          64,296,082

          

          

          $

          263,407,214

          

          

          $

          10,602,796

          

          

          $

          65,050,624

          

          

          $

          273,255,469

          

          

          $

          338,306,093

          

          

          $

          (17,287,242

          )



Notes to Schedule III:

(A) The initial cost to the Company represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated at the time the property was acquired.

(B) Reconciliation of total real estate owned:



2008

          

          2007

          

          2006Balance at beginning of year

          

          $

          302,253,182

          

          

          $

          102,358,472

          

          

          $

          Purchases of investment properties

          

          

          36,052,911

          

          

          

          201,484,789

          

          

          

          104,093,295Acquired in-place lease intangibles

          

          

          

          

          

          

          (1,461,731

          )

          

          

          (3,167,190

          )Acquired in-place lease intangibles (commissions)

          

          

          

          

          

          

          (903,919

          )

          

          

          (677,245

          )Acquired above market lease intangibles

          

          

          

          

          

          

          (526,657

          )

          

          

          (854,886

          )Acquired below market lease intangibles

          

          

          

          

          

          

          1,302,228

          

          

          

          2,964,498Balance at end of year

          

          $

          338,306,093

          

          

          $

          302,253,182

          

          

          $

          102,358,472

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(C) Reconciliation of accumulated depreciation, note amortization is not included for purposes of this disclosure:



For the Years Ended Decmeber 31,2008

          

          2007

          

          2006Balance at beginning of period

          

          $

          5,455,550

          

          

          $

          1,184,590

          

          

          $

          Depreciation expense

          

          

          7,421,450

          

          

          

          4,298,367

          

          

          

          1,184,590Impairment charge(1)

          

          

          4,550,795Disposals

          

          

          (140,553

          )

          

          

          (27,407

          )

          

          

          Balance at end of period

          

          $

          17,287,242

          

          

          $

          5,455,550

          

          

          $

          1,184,590




(1)

          For the year ended December 31, 2008, the Company recorded an asset impairment charge of $4.6 million primarily related to impairment on one our industrial properties located in Sarasota, Florida. We identified certain indicators of impairment related to this property such as the property is currently vacate and is experiencing negative cash flows and the difficulty in leasing space. We performed a cash flow valuation analysis and determined that the carrying value of the property exceeded its undiscounted cash flows. Therefore, we recorded an impairment charge related to the property consisting of the excess carrying value of the asset over its estimated fair values within the accompanying consolidated statement of operations.(D) Depreciation is computed based upon the following estimated lives:



Buildings and improvements

          

          

          15  39 yearsTenant improvements and equipment

          

          

          5  10 years

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no disagreements on accounting or financial disclosure during 2008.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures.  As of December 31, 2008, we conducted an evaluation under the supervision and with the participation of the Advisors management, including the our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be
disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2008 that our disclosure controls and procedures were adequate and effective.

Managements Report on Internal Control over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Interim Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting
purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes policies and procedures that:



          pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets;

          provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

          provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission published in its report entitled Internal Control  Integrated Framework. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

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Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls.  Our Advisors management, including our Chairman and Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within an organization have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.

Item 9B. Other Information

None.

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PART III.

Item 10. Directors and Executive Officers of the Registrant

Directors

The following table presents certain information as of March 13, 2009 concerning each of our directors serving in such capacity:



Name

          

          Age

          

          Principal Occupation and Positions Held

          

          Year Term of Office Will Expire

          

          Served as a Director SinceDavid Lichtenstein

          

          48

          

          Chief Executive Officer, President and Chairman of the Board of Directors

          

          2009

          

          2004Edwin J. Glickman

          

          76

          

          Director

          

          2009

          

          2005George R. Whittemore

          

          59

          

          Director

          

          2009

          

          2006Shawn R. Tominus

          

          49

          

          Director

          

          2009

          

          2006Bruno de Vinck

          

          63

          

          Chief Operating Officer, Senior Vice President, Secretary and Director

          

          2009

          

          2005

David Lichtenstein is the Chairman of our board of directors and our Chief Executive Officer. Mr. Lichtenstein has been a member of our board of directors since June 8, 2004. Since 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of the The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multi-family, lodging, retail and industrial properties located in 27 states, the District of Columbia and Puerto Rico. Mr. Lichtenstein also serves as the Chairman of the board of trustees of Prime Group Realty Trust, a
publicly registered REIT trading on the NYSE, as well as Extended Stay Hotels and Prime Retail, both private companies. Mr. Lichtenstein is a member of the International Council of Shopping Centers and NAREIT.

Edwin J. Glickmanis one of our independent directors and the Chairman of our audit committee. In January 1995, Mr. Glickman co-founded Capital Lease Funding, a leading mortgage lender for properties net leased to investment grade tenants, where he remained as Executive Vice President until May 2003. Mr. Glickman was previously a trustee of publicly traded RPS Realty Trust from October 1980 through May 1996, and Atlantic Realty Trust from May 1996 to March 2006. Mr. Glickman graduated from Dartmouth College.

George R. Whittemore is one of our independent directors. Mr. Whittemore also serves as Audit Committee Chairman of Prime Group Realty Trust, as a Director of Village Bank & Trust in Richmond, Virginia and as a Director of Supertel Hospitality, Inc. in Norfolk, Nebraska, all publicly traded companies. Mr. Whittemore previously served as President and Chief Executive Officer of Supertel Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation,
from October 1996 until October 2001. Mr. Whittemore has also served as a Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond.

Shawn R. Tominus is one of our independent directors. Mr. Tominus is the founder and President of Metro Management, a real estate investment and management company founded in 1994 which specializes in the acquisition, financing, construction and redevelopment of residential, commercial and industrial properties. He also serves as a member of the audit committee of Prime Group Realty Trust, a publicly traded REIT located in Chicago. Mr. Tominus has over 25 years experience in real estate and serves as a national consultant focusing primarily on market and feasibility analysis. Prior to his time at Metro Management, Mr. Tominus held the
position of Senior Vice President at Kamson Corporation, where he managed a portfolio of over 5,000 residential units as well as commercial and industrial properties.

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Bruno de Vinck is our Chief Operating Officer, Senior Vice President, Secretary and a Director. Mr. de Vinck is a Senior Vice President with the Lightstone Group, and has been employed by Lightstone since April 1994. Mr. de Vinck is also presently a Director of the privately held Park Avenue Bank, and Extended Stay Hotels, as well as Prime Group Realty Trust, a publicly registered REIT. Mr. de Vinck was previously General Manager of JN Management Co. from November 1992 to January 1994, AKS Management Co., Inc. from September 1988 to July 1992 and Heritage Management Co., Inc. from May 1986 to September 1988. In addition, Mr. de Vinck
worked as Senior Property Manager at Hekemien & Co. from May 1975 to May 1986, as a Property Manager at Charles H. Greenthal & Co. from July 1972 to June 1975 and in sales and residential development for McDonald & Phillips Real Estate Brokers from May 1970 to June 1972. From July 1982 to July 1984 Mr. de Vinck was the founding president of the Ramsey Homestead Corp., a not-for-profit senior citizen residential health care facility, and, from July 1984 until October 2004, was Chairman of its board of directors. Mr. de Vinck studied Architecture at Pratt Institute and then worked for the Bechtel Corporation from February 1966 to May 1970 in the engineering department as a senior structural draftsman.

Executive Officers

The following table presents certain information as of March 13, 2009 concerning each of our executive officers serving in such capacities:



Name

          

          Age

          

          Principal Occupation and Positions HeldDavid Lichtenstein

          

          48

          

          Chief Executive Officer, President and Chairman of the Board of DirectorsBruno de Vinck

          

          62

          

          Chief Operating Officer, Senior Vice President, Secretary and DirectorStephen Hamrick

          

          56

          

          PresidentJoseph Teichman

          

          35

          

          General CounselDonna Brandin

          

          51

          

          Chief Financial Officer and Treasurer

David Lichtenstein for biographical information about Mr. Lichtenstein, see Management  Directors.

Bruno de Vinck for biographical information about Mr. de Vinck, see Management  Directors.

Stephen H. Hamrickis our President and the President and CEO of our affiliated dealer-manager. Mr. Hamrick previously served as our Vice President of Investor Relations. Mr. Hamrick is also the Vice President of our advisor. Prior to joining Lightstone Securities LLC in July of 2006, Mr. Hamrick served five years as President of Carey Financial Corporation and Managing Director of W.P. Carey & Co. Mr. Hamrick is a member of the Committee on Securities for the American Stock Exchange and The Board of Trustees of The Saratoga Group of Funds. In the 1990s, Mr. Hamrick developed an electronic trading business utilized by the
institutional customers of Cantor Fitzgerald, including brokerage firms and banks, to trade privately held securities; spent two years as CEO of a full-service, investment brokerage business at Wall Street Investor Services, where he executed a turnaround strategy and the ultimate sale of that business; and served as Chairman of Duroplas Corporation, a development stage company building on proprietary technology that enables the production of thermoplastic compounds. From 1988 until 1994, Mr. Hamrick headed up Private Investments at PaineWebber Incorporated and was a member of the firms Management Council. From 1975 until joining PaineWebber, he was associated with E.F. Hutton & Company, holding positions ranging from Account Executive to National Director of Private Placements. Mr. Hamrick has served on the Listings Panel for NASDAQ, as Chairman of the Securities Industry Associations Direct Investment Committee and as Chairman of the Investment Program Association. He
is a Certified Financial Planner and was graduated with degrees in English and Economics from Duke University.

Joseph E. Teichman is our General Counsel and also serves as General Counsel of our Advisor and Sponsor as well as director of Extended Stay Hotels, a private company. Prior to joining us in January 2007, Mr. Teichman had been an Associate with Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman was admitted to the Bar in the State of New York after

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having earned his J.D. from the University of Pennsylvania Law School in May 2001. Mr. Teichman earned a B.A. in Talmudic Law from Beth Medrash Govoha, Lakewood, NJ. Mr. Teichman is licensed to practice law in New York and New Jersey.

Donna Brandinis our Chief Financial Officer and Treasurer since August 2008 and also serves as Chief Financial Officer of our advisor and our sponsor. Prior to the joining the Lightstone Group in April of 2008, Ms. Brandin spent over three years as the Executive Vice President and Chief Financial Officer of Equity Residential, the largest publicly traded apartment REIT in the country. Prior to Equity Residential, Ms. Brandin was the Senior Vice President and Treasurer of Cardinal Health, Inc. Prior to 2000, Ms. Brandin held the Assistant Treasurer roles at Campbell Soup for two years and Emerson Electric Company for seven years. Prior
to Emerson, Ms. Brandin spent 10 years at Peabody Holding Company as manager of financial reporting and the director of planning and analysis. Ms. Brandin earned her Masters in Finance at St. Louis University in Missouri and is a certified public accountant.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission (SEC). Officers, directors and greater than 10% beneficial owners are required by SEC rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2008, or
written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2008, with the exception of those reports disclosed herein. During the fiscal year ended December 31, 2008, Mr. de Vinck inadvertently failed to file on a timely basis to file on a timely basis two Form 4s, each of which reported a single transaction. A late Form 4 was filed with the SEC.

Information Regarding Audit Committee

Our Board established an audit committee in April 2005. The charter of audit committee is available at www.lightstonereit.com or in print to any shareholder who requests it c/o Lightstone Value Plus REIT, 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of Messrs. Edwin J. Glickman, George R. Whittemore and Shawn Tominus, each of whom is independent within the meaning of the NYSE listing standards. The Board determined that Messrs. Glickman and Whittemore are qualified as audit committee financial experts as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional
experience of Messrs. Glickman, Whittemore and Tominus, see Directors.

Item 11. Executive Compensation

Compensation of Executive Officers

We currently have no employees. Our Advisor performs our day-to-day management functions. Our executive officers are all employees of the Advisor. We do not pay any of these individuals for serving in their respective positions.

Compensation of Board of Directors

We pay our independent directors an annual fee of $30,000. Pursuant to our Employee and Director Incentive Share Plan, in lieu of receiving his or her annual fee in cash, an independent director is entitled to receive the annual fee in the form of our common shares or a combination of common shares and cash.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Executive Officers

The following table presents certain information as of March 13, 2009 concerning each of our directors and executive officers serving in such capacities:



Name and Address of Beneficial Owner

          

          Number of Shares of Common Stock of the Lightstone REIT Beneficially Owned

          

          Percent of All Common Shares of the Lightstone REITDavid Lichtenstein

          

          

          20,000

          

          

          

          0.1

          %Edwin J. Glickman

          

          

          

          

          

          

          George R. Whittemore

          

          

          

          

          

          

          Shawn Tominus

          

          

          

          

          

          

          Bruno de Vinck

          

          

          5,470

          

          

          

          0.0

          %Donna Brandin

          

          

          

          

          

          

          Joseph Teichman

          

          

          

          

          

          

          Stephen Hamrick

          

          

          10,000

          

          

          

          0.0

          %Our directors and executive officers as a group (9 persons)

          

          

          35,470

          

          

          

          0.1

          %

Equity Compensation Plan Information

We have adopted a stock option plan under which our independent directors are eligible to receive annual nondiscretionary awards of nonqualified stock options. Our stock option plan is designed to enhance our profitability and value for the benefit of our stockholders by enabling us to offer independent directors stock-based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and our stockholders.

We have authorized and reserved 75,000 shares of our common stock for issuance under our stock option plan. The board of directors may make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under our stock option plan to reflect any change in our capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.

Our stock option plan provides for the automatic grant of a nonqualified stock option to each of our independent directors, without any further action by our board of directors or the stockholders, to purchase 3,000 shares of our common stock on the date of each annual stockholders meeting. The exercise price for all stock options granted under our stock option plan will be fixed at $10 per share until the termination of our initial public offering, and thereafter the exercise price for stock options granted to our independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of
stockholders. The term of each such option will be 10 years. Options granted to non-employee directors will vest and become exercisable on the second anniversary of the date of grant, provided that the independent director is a director on the board of directors on that date. At our annual stockholder meeting in July 2007 and August 2008, options were granted to each of our three independent directors. As of December 31, 2008, options to purchase 18,000 shares of stock were outstanding, none of which are fully vested, at an exercise price of $10 per share.

Notwithstanding any other provisions of our stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Internal Revenue Code.

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The following table sets forth information regarding securities authorized for issuance under our Employee and Director Incentive Share Plan as of December 31, 2008:



Plan Category

          

          Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights

          

          Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights

          

          Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(a)

          

          (b)

          

          (c)Equity Compensation Plans approved by security holders

          

          

          18,000

          

          

          

          $10.00

          

          

          

          57,000Equity Compensation Plans not approved by security holders

          

          

          N/A

          

          

          

          N/A

          

          

          

          N/ATotal

          

          

          18,000

          

          

          

          $10.00

          

          

          

          57,000

Item 13. Certain Relationships and Related Transactions

David Lichtenstein serves as the Chairman of our Board of Directors, our Chief Executive Officer and our President. Our Dealer Manager, Advisor and Property Manager are wholly owned subsidiaries of our Sponsor, The Lightstone Group, which is wholly owned by Mr. Lichtenstein. On April 22, 2005, we entered into agreements with our Dealer Manager, Advisor and Property Manager to pay certain fees, as described below, in exchange for services performed by these and other affiliated entities. As the indirect owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.

We have agreed to pay our Property Manager a monthly management fee of up to 5% of the gross revenues from our residential, hospitality and retail properties. In addition, for the management and leasing of our office and industrial properties, we will pay, to our Property Manager, property management and leasing fees of up to 4.5% of gross revenues from our office and industrial properties. We may pay our Property Manager a separate fee for i) the development of, ii) the one-time initial rent-up or iii) leasing-up of newly constructed office and industrial properties in an amount not to exceed the fee customarily charged in arm's length transactions
by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Our Property Manager will also be paid a monthly fee for any extra services equal to no more than that which would be payable to an unrelated party providing the services. The actual amounts of these fees are dependent upon results of operations and, therefore, cannot be determined at the present time. We have recorded the following amounts related to the Property Manager for the years ended December 31, 2008, 2007 and 2006:



2008

          

          2007

          

          2006Property management fees

          

          $

          1,783,275

          

          

          $

          1,057,272

          

          

          $

          328,532Development fees

          

          

          932,783

          

          

          

          71,901

          

          

          

          Leasing commissions

          

          

          1,001,324

          

          

          

          176,041

          

          

          

          33,706Total

          

          $

          3,717,382

          

          

          $

          1,305,214

          

          

          $

          362,238

We pay the Dealer Manager selling commissions of up to 7% of gross offering proceeds, or approximately $21,000,000 if the maximum offering is sold, before reallowance of commissions earned by participating broker-dealers.

The Dealer Manager expects to reallow 100% of commissions earned for those transactions that involve participating broker-dealers. We also pay to our Dealer Manager a dealer manager fee of up to 1% of gross offering proceeds, or approximately $3,000,000 if the maximum offering is sold, before reallowance to participating broker-dealers. Our Dealer Manager, in its sole discretion, may reallow a portion of its dealer manager fee of up to 1% of the gross offering proceeds to be paid to such participating broker-dealers.

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Finally, our Dealer Manager may buy up to 600,000 warrants at a purchase price of $.0008 per warrant, each of which would be exercisable for one share of the Lightstone REIT's common stock at an exercise price of $12.00 per share. Total fees paid to the dealer manager in 2006 were $3.3 million.

We will pay our Advisor an acquisition fee equal to 2.75% of the gross contract purchase price (including any mortgage assumed) of each property purchased and will reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. We anticipate that acquisition expenses will be between 1% and 1.5% of a property's purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of a property. However, $33,000,000 may be paid as an acquisition fee and for the reimbursement of acquisition expenses if the maximum offering is sold, assuming aggregate long-term permanent leverage of
approximately 75%. The Advisor will also be paid an advisor asset management fee of 0.55% of our average invested assets and we will reimburse some expenses of the Advisor. . We have recorded the following amounts related to the Advisor for the years ended December 31, 2008, 2007 and 2006:



2008

          

          2007

          

          2006Acquisition fees

          

          $

          2,336,565

          

          

          $

          6,551,896

          

          

          $

          2,771,992Asset management fees

          

          

          2,203,563

          

          

          

          1,033,371

          

          

          

          274,724Acquisition expenses reimbursed to Advisor

          

          

          1,265,528

          

          

          

          635,848

          

          

          

          Total

          

          $

          5,805,656

          

          

          $

          8,221,115

          

          

          $

          3,046,716

On April 22, 2005, the Operating Partnership entered into an agreement with Lightstone SLP, LLC pursuant to which the Operating Partnership has issued and will continue to issue special general partner interests to Lightstone SLP, LLC in an amount equal to all expenses, dealer manager fees and selling commissions that we incur in connection with our organization and the offering of our common stock. As of December 31, 2008, 2007 and 2006, Lightstone SLP, LLC had contributed $23.0 million, $13.0 million and $4.3 million, respectively to the Operating Partnership in exchange for special general partner interests. As the sole member of our Sponsor,
which wholly owns Lightstone SLP, LLC, Mr. Lichtenstein is the indirect, beneficial owner of such special general partner interests and will thus receive an indirect benefit from any distributions made in respect thereof.

These special general partner interests will entitle Lightstone SLP, LLC to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to Lightstone SLP, LLC, as holder of the special general partner interests, could be substantial.

In July of 2007, the Company purchased a $16.0 million certificate of deposit with an affiliate of the Advisor. The certificate of deposit matured in less than three months, and earned interest at 10 percent. The Company redeemed the certificate of deposit in September of 2007, and has included $0.3 million in interest income from this investment.

From time to time, Lightstone purchases title insurance from an agent in which our sponsor owns a fifty percent limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by Lightstone of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to
those that would be negotiated at an arms-length basis.

On January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned subsidiary of the Operating Partnership, entered into a joint venture with an affiliate of the Sponsor (the Joint Venture). The Company accounted for the investment in this unconsolidated joint venture under the equity method of accounting as the Company exercises significant influence, but does not control these entities. Initial equity from our co-venturer totaled $13.5 million (representing a 51% ownership interest). Our initial capital investment, funded with proceeds from our common stock offering, was $13.0 million (representing a 49% ownership interest).
On the same date, an indirect, wholly owned subsidiary acquired a sub-leasehold interest

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in a ground lease to an office building located at 1407 Broadway, New York, New York (the Sublease Interest). The seller of the Sublease Interest, Gettinger Associates, L.P., is not an affiliate of the Company, its Sponsor or its subsidiaries. The property, a 42 story office building built in 1952, fronts on Broadway, 7th Avenue and 39th Street in midtown Manhattan. The property has approximately 915,000 leasable square feet, and as of the acquisition date, was 87.6% occupied (approximately 300 tenants) and leased by tenants generally engaged in the female apparel business. The ground lease, dated as of January 14,
1954, provides for multiple renewal rights, with the last renewal period expiring on December 31, 2048. The Sublease Interest runs concurrently with this ground lease.

On April 16, 2008, the Company made a preferred equity contribution of $11,000,000 (the Contribution) to PAF-SUB LLC (PAF), a wholly-owned subsidiary of Park Avenue Funding LLC (Park Avenue), in exchange for membership interests of PAF with certain rights and preferences described below (the Preferred Units). Park Avenue is a real estate lending company making loans, including first or second mortgages, mezzanine loans and collateral pledges of mortgages, to finance real estate transactions. Property types considered include multi-family, office, industrial, retail, self-storage, parking and land. Both
PAF and Park Avenue are affiliates of our Sponsor.

In connection with the Contribution, the Company and Park Avenue entered into a guarantee agreement on April 16, 2008, whereby Park Avenue unconditionally and irrevocably guarantees payment of the Redemption amounts when due (the Guarantee). Also, Park Avenue agrees to pay all costs and expenses incurred by the Company in connection with the enforcement of the Guarantee.

Item 14. Principal Accountant Fees and Services

Amper, Politziner & Mattia LLP audited our financial statements for the year ended December 31, 2008 and 2007. Amper, Politziner & Mattia LLP report directly to our audit committee.

Principal Accounting Firm Fees

The following table presents the aggregate fees billed to the Lightstone REIT for the year ended December 31, 2007 and 2006 by the Lightstone REITs principal accounting firm of Amper, Politziner & Mattia LLP:



2008

          

          2007Audit Fees(a)

          

          $

          199,500

          

          

          $

          215,300Audit-Related Fees(b)

          

          

          58,925

          

          

          

          7,750Tax Fees(c)

          

          

          

          

          

          

          0All Other Fees(d)

          

          

          204,750

          

          

          

          0Total Fees

          

          $

          463,175

          

          

          $

          223,050




(a)

          Fees for audit services in 2008 and 2007 consisted of the audit of the Lightstone REITs annual financial statements, and reviews of the Lightstone REITs quarterly financial statements.(b)

          Fees for audit-related services in 2008 related to registration statement consents and additional audit procedures on our investment in the Mill Run LLC (see note 4 of notes to consolidated financial statements).(c)

          There were no fees for tax services billed in 2008 and 2007.(d)

          Fees under all other fees in 2008 relate to a three year audit of Prime Outlet Acquisition Company. (see note 5 of notes to consolidated financial statements). There were no fees for other services billed in 2007.In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and Lightstone REIT management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.

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AUDIT COMMITTEE REPORT

To the Directors of Lightstone Value Plus Real Estate Investment Trust, Inc.:

We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust, Inc.s audited financial statements as of and for the year ended December 31, 2008.

We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended by Statement on Auditing Standards No. 90, Audit Committee Communications, by the Auditing Standards Board of the American Institute of Certified Public Accountants.

We have received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and have discussed with the auditors the auditors independence.

Based on the reviews and discussions referred to above, we recommend to the board of directors that the financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust, Inc.s Annual Report on Form 10-K for the year ended December 31, 2008.

Audit Committee George R. Whittemore Edwin J. Glickman Shawn R. Tominus

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PART IV.

Item 15. Exhibits and Financial Statement Schedules

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2008

EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report on Form 10-K or incorporated by reference herein:



Exhibit No.

          

          Description3.1*

          

          Amended and Restated Charter of Lightstone Value Plus Real Estate Investment Trust, Inc.3.2*

          

          Bylaws of Lightstone Value Plus Real Estate Investment Trust, Inc.10.1*

          

          Escrow Agreement by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Trust Company of America and Lightstone Securities.10.2*

          

          Advisory Agreement by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LLC.10.3*

          

          Management Agreement, by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus REIT Management LLC.10.4*

          

          Form of the Companys Stock Option Plan.10.5*

          

          Form of Indemnification Agreement by and between The Lightstone Group and the directors and executive officers of Lightstone Value Plus Real Estate Investment Trust, Inc.10.6*

          

          Agreement by and among Lightstone Value Plus REIT LP, Lightstone SLP, LLC, and David Lichtenstein10.7*

          

          Purchase and Sale Agreement between St. Augustine Outlet World, Ltd. and Prime Outlets Acquisition Company LLC10.8*

          

          Assignment and Assumption of Purchase and Sale Agreement by and between Prime Outlets Acquisition Company LLC and LVP St. Augustine Outlets LLC10.9*

          

          Note and Mortgage Modification Agreement Evidencing Renewal Promissory Note Including Future Advance and Amended and Restated Mortgage, Security Agreement and Fixture Filing by LVP St. Augustine Outlets LLC in favor of Wachovia Bank, National Association10.10*

          

          Renewal Promissory Note Including Future Advance by LVP St. Augustine Outlets LLC to the order of Wachovia Bank, National Association10.11*

          

          Guaranty by Lightstone Holdings, LLC for the benefit of Wachovia Bank, National Association10.12*

          

          Purchase and Sale Agreement among Home Properties, L.P., Home Properties WMF I, LLC and The Lightstone Group, LLC10.13*

          

          First Amendment to Purchase and Sale Agreement among Home Properties, L.P., Home Properties WMF I, LLC and The Lightstone Group, LLC10.14*

          

          Second Amendment to Purchase and Sale Agreement among Home Properties, L.P., Home Properties WMF I, LLC and The Lightstone Group, LLC10.15*

          

          Contribution Agreement among Scotsdale Borrower, LLC, Carriage Park MI LLC, LLC, Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty Corp.10.16*

          

          Assignment and Assumption of Agreement for Purchase and Sale of Interests between The Lightstone Group, LLC and LVP Michigan Multifamily Portfolio LLC10.17*

          

          Loan and Security Agreement among Scotsdale MI LLC, Carriage Park MI LLC, Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty Corp.

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Exhibit No.

          

          Description10.18*

          

          Promissory Note by Scotsdale MI LLC, Carriage Park MI LLC, Macomb Manor MI LLC and Carriage Hill MI LLC in favor of Citigroup Global Markets Realty Corp.10.19*

          

          Mortgage by Scotsdale MI LLC in favor of Citigroup Global Markets Realty Corp.10.20*

          

          Mortgage by Carriage Park MI LLC in favor of Citigroup Global Markets Realty Corp.10.21*

          

          Mortgage by Macomb Manor MI LLC in favor of Citigroup Global Markets Realty Corp.10.22*

          

          Mortgage by Carriage Hill MI LLC in favor of Citigroup Global Markets Realty Corp.10.23*

          

          Environmental Indemnity Agreement among Scotsdale MI LLC, Carriage Park MI LLC, Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty Corp.10.24*

          

          Exceptions to Non-Recourse Guaranty by Lightstone Value Plus Real Estate Investment Trust, Inc. and Lightstone Value Plus REIT LP for the benefit of Citigroup Global Markets Realty Corp.10.25*

          

          Conditional Assignment of Management Agreement among Scotsdale MI LLC, Carriage Park MI LLC, Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty Corp.10.26**

          

          Purchase and Sale Agreement among Oakview Plaza North, LLC, the other sellers identified therein and Lightstone Value Plus REIT LP10.27**

          

          First Amendment to Purchase and Sale Agreement among Oakview Plaza North, LLC, the other sellers identified therein and Lightstone Value Plus REIT LP10.28**

          

          Second Amendment to Purchase and Sale Agreement among Oakview Plaza North, LLC, the other sellers identified therein and Lightstone Value Plus REIT LP10.29***

          

          Promissory Note by LVP Oakview Strip Center LLC in favor of Wachovia Bank, National Association10.30***

          

          Guaranty by Lightstone Value Plus Real Estate Investment Trust, Inc. in favor of Wachovia Bank, National Association10.31***

          

          Assignment of Leases and Rents and Security Deposits by LVP Oakview Strip Center LLC in favor of Wachovia Bank, National Association10.32***

          

          Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing by LVP Oakview Strip Center LLC in favor of Wachovia Bank, National Association10.33***

          

          Consent and Agreement of Beacon Property Management, LLC10.34+

          

          Assignment and Assumption of Sellers Interest in Operating Lease between Gettinger Associates, L.P. and 1407 Broadway Real Estate LLC10.35+

          

          Participation Agreement between Gettinger Associates, L.P. and 1407 Broadway Real Estate LLC10.36+

          

          Property Management Agreement between 1407 Broadway Real Estate LLC and Trebor Management Corp.10.37+

          

          Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Financing Statement by 1407 Broadway Real Estate LLC in favor of Lehman Brothers Holdings Inc.10.38+

          

          Promissory Note by 1407 Broadway Real Estate LLC in favor of Lehman Brothers Holdings Inc.10.39+

          

          Guaranty of Recourse Obligations by Lightstone Holdings LLC in favor of Lehman Brothers Holdings Inc.10.40+

          

          Net Profits Agreement between 1407 Broadway Real Estate LLC in favor and Lehman Brothers Holdings Inc.10.41++

          

          Agreement of Purchase and Sale10.42++

          

          First Amendment to Agreement of Purchase and Sale

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Exhibit No.

          

          Description10.43+++

          

          Assignment and Assumption of Agreement of Purchase and Sale10.44+++

          

          Mortgage and Security Agreement by LVP Gulf Coast Industrial Portfolio LLC in favor of Wachovia Bank, National Association10.45+++

          

          Promissory Note by LVP Gulf Coast Industrial Portfolio LLC and the other borrowers identified therein in favor of Wachovia Bank, National Association10.46#

          

          Form of Limited Liability Company Agreement of 1407 Broadway Mezz II LLC10.47##

          

          Limited Liability Company Agreement of Whitfield Sarasota LLC.10.48##

          

          Improved Commercial Property Earnest Money Contract between Camden Operating, L.P. and Lightstone Value Plus REIT, L.P.10.49##

          

          Form of Multifamily Mortgage, Assignment of Rents and Security Agreement for the Camden Portfolio (each property in the Camden Portfolio had substantially similar mortgages).10.50###

          

          Consolidated Financial Statements for 1407 Broadway Mezz II, LLC and Subsidiaries as of December 31, 2007.10.51####

          

          Promissory Note made as of June 26, 2008 by Arbor Mill Run JRM, LLC in favor of Lightstone Value Plus Real Estate Investment Trust, Inc. in the original principal amount of $17,280.00.10.52###

          

          Promissory Note made as of June 26, 2008 by Arbor National CJ LLC in favor of Lightstone Value Plus Real Estate Investment Trust, Inc. in the original principal amount of $360,000.00.10.53####

          

          Promissory Note made as of June 26, 2008 by AR Prime Holdings, LLC in favor of Lightstone Value Plus Real Estate Investment Trust, Inc. in the original principal amount of 49,500,000.00.10.54####

          

          Exchange Rights Agreement, dated as of June 26, 2008, by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT, LP and the persons named therein.10.55####

          

          First Amendment to Amended and Restated Agreement of Limited Partnership of Lightstone Value Plus REIT LP, dated as of June 26, 2008, by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LLC, Lightstone SLP, LLC10.56####

          

          Tax Protection Agreement, dated as of June 26, 2008, by and between Lightstone Value Plus REIT, LP and Arbor Mill Run JRM, LLC.10.57####

          

          Tax Protection Agreement, dated as of June 26, 2008, by and between Lightstone Value Plus REIT, LP and Arbor Mill National CJ, LLC.10.58####

          

          Tax Protection Agreement, dated as of June 26, 2008, by and between Lightstone Value Plus REIT, LP, Prime Outlets Acquisition Company LLC and AR Prime Holdings, LLC.10.59####

          

          Contribution and Conveyance Agreement, dated as of June 26, 2008, by and between Arbor Mill Run JRM LLC and Lightstone Value Plus REIT, LP.10.60####

          

          Contribution and Conveyance Agreement, dated as of June 26, 2008, by and between Arbor National CJ, LLC and Lightstone Value Plus REIT, LP.10.61####

          

          Contribution and Conveyance Agreement, dated as of June 26, 2008, by and among AR Prime Holdings, LLC, Lightstone Value Plus REIT, LP and Lightstone Value Plus Real Estate Investment Trust, Inc.21.1###

          

          Subsidiaries of the Registrant31.1

          

          Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

          

          Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

          

          Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Exhibit No.

          

          Description32.2

          

          Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299*

          

          Letter from Lightstone Securities to Subscribers




*

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Registration Statement on Form S-11 (File No. 333-117367)**

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 6, 2006***

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 27, 2006+

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 10, 2007++

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 18, 2007+++

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 7, 2007#

          Incorporated by reference from Lightstone Value Plus Real Estate Invest Trust, Incs Annual Report on Form 10-K For The Fiscal Year Ended December 31, 2006.##

          Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.s Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 12 to the Registration Statement on Form S-11 filed with the Securities and Exchange Commission on January 15, 2007.###

          Incorporated by reference from Lightstone Value Plus Real Estate Invest Trust, Incs Annual Report on Form 10-K For The Fiscal Year Ended December 31, 2007.####

          Incorporated by reference from Lightstone Value Plus Real Estate Invest Trust, Incs Quarterly Report on Form 10-Q For The Quarter Ended June 30, 2008.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.Date: March 31, 2009

          

          By:/s/ David LichtensteinDavid LichtensteinChief Executive Officer and Chairman of the Board of Directors(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.



Name

          

          Capacity

          

          Date/s/ David LichtensteinDavid Lichtenstein

          

          Chief Executive Officer and Chairman of the Board of Directors

          

          March 31, 2009/s/ Donna BrandinDonna Brandin

          

          Chief Financial Officer and Treasurer

          

          March 31, 2009/s/ Bruno de VinckBruno de Vinck

          

          Director

          

          March 31, 2009/s/ Shawn R. TominusShawn R. Tominus

          

          Director

          

          March 31, 2009/s/ Edwin J. GlickmanEdwin J. Glickman

          

          Director

          

          March 31, 2009/s/ George R. WhittemoreGeorge R. Whittemore

          

          Director

          

          March 31, 2009