UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K





o Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For
The Fiscal Year Ended December 31, 2009





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 333-151532





LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Maryland
              83-0511223(State
      or other jurisdiction
              (I.R.S.
      Employer Identification No.)of
      incorporation or organization)





1985
      Cedar Bridge Avenue, Suite 1, Lakewood, NJ
              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  ̈
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  ̈
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
 ̈




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  ̈   Accelerated
filer  ̈   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  ̈ No
x





As of
June 30, 2009, the aggregate market value of the common shares held by
non-affiliates of the registrant was $0. 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 15, 2010, there were 1.7
million shares of common stock held by non-affiliates of the
registrant.





DOCUMENTS
INCORPORATED BY REFERENCE


None.





LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.





Table
of Contents


PagePART IItem 1.
                      Business
                      2Item
      1A.
                      Risk
      Factors
                      7Item
      1B.
                      Unresolved
      Staff Comments
                      32Item
      2.
                      Properties
                      32Item
      3.
                      Legal
      Proceedings
                      32Item
      4.
                      Removed
      and Reserved
                      33PART IIItem 5.
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
      Purchases of Equity Securities
                      33Item 6.
                      Selected
      Financial Data
                      35Item 7.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      36Item
      7A.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      45Item
      8.
                      Financial
      Statements and Supplementary Data
                      46Item
      9.
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      65Item
      9A (T).
                      Controls
      and Procedures
                      65Item
      9B.
                      Other
      Information
                      65PART
      IIIItem 10.
                      Directors
      and Executive Officers of the Registrant
                      66Item
      11.
                      Executive
      Compensation
                      68Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management
                      69Item
      13.
                      Certain
      Relationships and Related Transactions
                      70Item
      14.
                      Principal
      Accounting Fees and Services
                      71PART
      IVItem 15.
                      Exhibits
      and Financial Statement Schedules
                      73Signatures
                      74


1


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 II,
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. 333-151532) of Lightstone Value
Plus Real Estate Investment Trust II, Inc. filed with the Securities and
Exchange Commission (the “SEC”), as the same may be amended and supplemented
from time to time.





PART I.





ITEM
1. BUSINESS:





General
Description of Business





The
Lightstone REIT, a Maryland corporation, was formed on April 28, 2008 primarily
for the purpose of engaging in the business of investing in and owning
commercial and residential real estate properties located principally in North
America. 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, industrial and office
properties, and residential properties located either in or near major
metropolitan areas. In addition, the Lightstone REIT may further diversify its
portfolio by investing up to 20% of its net assets in collateralized debt
obligations, commercial mortgage-backed securities and mortgage and mezzanine
loans secured, directly or indirectly, by the same types of properties which it
may acquire directly.





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 II,
L.P., a Delaware limited partnership formed on April 30, 2008 (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 II, 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 170 properties containing approximately 10,620
multifamily units, 5.2 million square feet of office space, 2.8 million square
feet of industrial space, and 12.5 million square feet of retail space. These
residential, office, industrial and retail properties are located in 25 states,
the District of Columbia and Puerto Rico. Based in New York, and supported by
regional offices in New Jersey, Illinois and Maryland, our sponsor employs
approximately 1,050 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. Our Sponsor, on
December 8, 2009, entered into a definitive agreement to dispose
of all of its outlet centers interests, which comprises of approximately 8
million square feet of the $12.5 million square feet of retail space
owned.




Offering
and Structure





The
Lightstone REIT commenced an initial public offering to sell a maximum of
51,000,000 shares of common shares on April 24, 2009, at a price of $10 per
share (exclusive of 6.5 million shares available pursuant to our dividend
reinvestment plan, 75,000 shares reserved for issuance under the Company’s stock
option plan and 255,000 shares reserved for issuance under the Company’s
employee and director incentive restricted share plan). The Lightstone REIT’s
Registration Statement on Form S-11 (the “Registration Statement”) was declared
effective under the Securities Act of 1933 on February 17, 2009, and on April
24, 2009, 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”).


2


The
Lightstone REIT issued 20,000 shares to the Advisor on May 20, 2008, for $10 per
share. As of September 30, 2009, the Lightstone REIT had reached its minimum
offering by receiving subscriptions of its common shares, representing gross
offering proceeds of approximately $6.5 million. Through December 31, 2009,
cumulative gross offering proceeds of $11.5 million were released to the
Lightstone REIT.  The Lightstone REIT invested the proceeds from this
sale and proceeds from the Advisor in the Operating Partnership, and as a
result, held a 99.98% general partnership interest at December 31, 2009 and
99.01% general partnership interest at December 31, 2008 in the Operating
Partnership’s common units.  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 the Offering and its ongoing
Dividend Reinvestment Plan in the Operating Partnership.





The
Lightstone REIT will utilize a portion of offering proceeds towards funding the
dealer manager fees, selling commissions and other offering
costs.  Our Sponsor will purchase subordinated general partner
participation units (“subordinated profits interests”) to offset a portion of
these costs.




Noncontrolling
Interest – Partners of Operating Partnership





On May
20, 2008, 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.





Lightstone
SLP II, LLC, which is wholly owned and controlled by our Sponsor, will purchase
subordinated profits interests in the Operating Partnership at a cost of
$100,000 per unit.  Lightstone SLP II, LLC may elect to purchase the
subordinated profits interests with either cash or an interest in real property
of equivalent value.  The proceeds received from the cash sale of the
subordinated profits interests will be used to offset payments made by
Lightstone REIT from offering proceeds to pay the dealer manager fees and
selling commissions and other offering costs.    As of
December 31, 2009, Lightstone SLP II, LLC had not purchase any subordinated
profits interests.





Operations
- Operating Partnership Activity





Through
its Operating Partnership, the Company will seek to acquire and operate
commercial, residential, and hospitality properties, principally in North
America. The Company’s commercial holdings will consist of retail (primarily
multi-tenanted shopping centers), lodging, industrial and office
properties.   All such properties may be acquired and operated by
the Company alone or jointly with another party. In addition, the Company may
invest up to 20% of its net assets in collateralized debt obligations,
commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans
secured, directly or indirectly, by the same types of properties which it may
acquire directly.  Since inception, the Company has completed the
following acquisitions and investments:





2008


During
2008, the Company did not have any acquisitions or investments.





2009


During
November 2009, the Operating Partnership acquired for approximately $1.7 million
a 32.42% Class D Member Interest in HG CMBS Finance, LLC, a real estate limited
liability company that primarily invests in commercial mortgage-backed
securities (“CMBS”).





Affiliates
of Lightstone Value Plus REIT Management LLC (the “Property Manager”) will
manage all of our properties and development activities.





The
Company’s Advisor, Property Manager and Dealer Manager are each related parties.
Each of these entities have or will receive compensation and fees for services
related to the offering and will continue to receive compensation and fees and
services 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.


3


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 commercial and residential real estate properties located principally
in North America. Our acquisitions may include both portfolios and individual
properties, with our commercial holdings expected to consist of retail
(primarily multi-tenanted shopping centers), lodging, industrial and office
properties, and residential properties located either in or near major
metropolitan areas. We generally intend to hold each property for seven to ten
years.





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





·
            Fee
      interests in market-rate multifamily properties located either in 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 “power” shopping centers and malls located in highly
      trafficked retail corridors, in selected high-barrier to entry markets and
      sub-markets.  “Power” shopping centers are large retail
      complexes that are generally unenclosed and located in suburban areas that
      typically contain one or more large brand name retailers rather than a
      department store anchor tenants.  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-tenant, industrial properties and properties
      that contain industrial and office space located near major transportation
      arteries and distribution corridors with limited management
      responsibilities.





·
            Fee
      interests in improved, multi-tenant, office properties located near major
      transportation arteries with limited management
      responsibilities.





·
            Fee
      interests in lodging properties located near major transportation arteries
      in urban and suburban areas.





Our
advisor and its affiliates may purchase properties in their own name, assume
loans in connection with the purchase or loan and temporarily hold title to
properties for the purpose of facilitating acquisition or financing by us, the
completion of rehabilitation of the property or any other purpose related to our
business.





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 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.





In
addition, we may further diversify our portfolio by investing up to 20% of our
net assets in collateralized debt obligations, commercial mortgage-backed
securities and mortgage and mezzanine loans secured, directly or indirectly, by
the same types of properties which we may acquire directly.





We may
also acquire majority or minority interest in other entities (or business units
of such entities) with investment objectives similar to ours or with management,
investment or development capabilities that our board of directors deems
desirable or advantageous to acquire.


4


Not more
than 10% of our total assets will be invested in unimproved real property (and
will only invest in unimproved real property intended to be developed) or in
mortgage loans on unimproved real property.  We will not invest in
contracts for the sale of real estate unless in recordable form and
appropriately recorded. Additionally, we will not make or invest in mortgage
loans or mezzanine loans unless an appraisal is obtained concerning the
underlying property, except for those loans insured or guaranteed by a
government or government agency.





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. We are not limited as to the geographic area where we may conduct our
operations, and may expand our focus to include properties located outside of
North America. We do not anticipate that these international investments would
comprise more than 10% of our portfolio.





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. There is no
limitation on the amount we may invest in any single property or on the amount
we can borrow for the purchase of any property.    Our
charter restricts the aggregate amount we may borrow, both secured and
unsecured, to 300% of net assets in the absence of a satisfactory showing that a
higher level is appropriate, the approval of the board of directors and
disclosure to the stockholders.  In addition, our charter limits our
aggregate long-term permanent borrowings (having a maturity greater than two
years) 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.  Our charter also prohibits us from
making or investing in mortgage loans, including construction loans, on any one
property if the aggregate amount of all mortgage loans outstanding on the
property, including our loans, would exceed 85% of the property’s appraised
value.





We may
finance our property acquisitions through a variety of means, including but not
limited to single property mortgages, as well as, mortgages cross-collateralized
by a pool of property and through exchange of an interest in the property for
limited partnership units of the Operating Partnership.  Generally,
though not exclusively, we intend to seek to finance our properties with debt
which will be on a non-recourse basis.  However, we may, secure
recourse financing or provide a guarantee to lenders, if we believe this may
result in more favorable terms.





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.





On
November 3, 2009, our board of directors declared our first dividend for the
three-month period ending December 31, 2009 in the amount of $0.00178082191 per
share per day to stockholders of record at the close of each business day during
the applicable period.  The annualized rate declared was equal to
6.5%, 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.





Total
dividends declared during the years ended December 31, 2009 and 2008 were $0.2
million and zero, respectively.





On March
23, 2010, the Company’s Board of Directors declared the quarterly dividend for
the three-month period ended March 31, 2010 in the amount of
$0.00178082191  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
2010.





Tax
Status





We will
elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code in conjunction with the filing of our 2009 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. It is our intention to
adhere to these requirements and obtain as well as maintain our REIT
status.  As of the date of this Annual Report on Form 10-K, we are not
qualified as a REIT. Once we qualify for taxation as a REIT, we generally will
not be subject to corporate federal income tax to the extent we distribute our
taxable income to our shareholders.  If we fail to qualify as a REIT
in any taxable year, we will be subject to federal income tax at regular
corporate rates.


5


Competition





The
retail, lodging, 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, lodging, office, industrial and residential real estate.
The continued development of new retail, lodging, 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 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 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 also other
REITs with asset acquisition objectives similar to ours and others 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.





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
February 17, 2009, 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 will be 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 (732) 367-0129. Our web site is
www.LightstoneREIT.com.


6


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 3. 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 Offering and the Common Stock





Because this is
initially a blind pool offering, you
may not have the opportunity to evaluate our investments before we make them,
which makes your investment more speculative.We
do not currently own properties or other investments, with the exception of one
investment purchase of $1.7 million, we have not obtained any financing and we
do not currently conduct any operations. Because we have not yet acquired or
identified any investments that we may make, we are not able to provide you with
information to evaluate our investments prior to acquisition. You will be unable
to evaluate the economic merit of real estate projects before we invest in them
and will be relying entirely on the ability of our advisor to select
well-performing investment properties. Furthermore, our board of directors will
have broad discretion in implementing policies regarding tenant or mortgagor
creditworthiness, and you will not have the opportunity to evaluate potential
tenants, managers or borrowers. These factors increase the risk that your
investment may not generate returns comparable to our competitors.





We are a newly
formedcompany with no
operating history upon which to evaluate our likely performance.We
do not currently own properties or other investments, with the exception of one
investment purchase of $1.7 million, we have not obtained any financing and we
do not currently conduct any operations. Therefore, we do not have an operating
history upon which to evaluate our likely performance. We may not be able to
implement our business plan successfully.





Iflenders are not
willing to make loans to our sponsor because of recent defaults on some of the
sponsor’s properties,
lenders may be less inclined to make loans to us and we may not be able to
obtain financing for our acquisitions.U.S. and international
markets are currently experiencing increased levels of volatility due to a
combination of factors, including decreasing values of residential and
commercial real estate, limited access to credit, the collapse or near collapse
of certain financial institutions, higher energy costs, decreased consumer
spending and fears of a national and global recession. Certain of our sponsor’s
program and non-program properties have been adversely affected by recent market
conditions and their impact on the real estate market. After an analysis of
these factors and other factors, taking into account the increased costs of
borrowing, the dislocation in the credit markets and that certain properties are
not generating sufficient cash flow to cover their fixed costs, the sponsor has
elected to stop paying payments on the non-recourse debt obligations for certain
program and non-program properties. As a result, lenders may be less willing to
make loans to our sponsor or its affiliates. If lenders are unwilling to make
loans to us, we may be unable to purchase certain properties or may be required
to defer capital improvements or refurbishments to our properties. Additionally,
sellers of real property may be less inclined to enter into negotiations with us
if they believe that we may be unable to obtain financing. The inability to
purchase certain properties may increase the time it takes for us to generate
funds from operations. Additionally, the inability to improve our properties may
cause such property to suffer from a greater risk of obsolescence or a decline
in value, which could result in a decrease in our cash flow from the inability
to attract tenants.





Our dealer
manager has limited experience in public offerings.Our
dealer manager, Lightstone Securities, LLC, which we sometimes refer to as
“Lightstone Securities,” was formed in 2004 and has conducted one public
offering such as this. This lack of experience may affect the way in which
Lightstone Securities conducts the offering. Since it was formed in 2004,
Lightstone Securities does not have well established relationships with
registered broker dealers, registered investment advisors and bank trust
departments, which increase the risk that we will not achieve the minimum
offering.





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.





The dealer
manager has not made an independent review of us or this prospectus.Our
dealer manager, Lightstone Securities, is one of our affiliates and has not and
will not make an independent due diligence review of us or the offering.
Therefore, you will not have the benefit of a due diligence review conducted by
an unaffiliated managing dealer in connection with your investment in this
offering.





Our common stock
is not currently listed on an exchange or trading market andisilliquid. There
is currently no public trading market for the shares.Following
this offering, our common stock will not be 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.


7


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 as offering proceeds become available, 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:





·
            Some
      of the properties we may acquire may be adversely affected by the recent
      adverse market conditions that are affecting real property.  If
      our properties are adversely affected by the recent adverse market
      conditions, our cash flows from operations will decrease and we will have
      less cash available for
distributions.





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





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





·
            A
      substantial period of time (i.e. up to one year) may pass between the sale
      of the common stock through this offering and our purchase of real
      properties.  During that time, we may invest in lower yielding
      short term instruments, which could result in a lower yield on your
      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 you.  If we issue additional shares, that
      issuance could reduce the cash available for distributions to
      you.





·
            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.  Difference 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
cash
flows from real estate investments may become insufficient to pay our operating
expenses and to cover the distributions we have paid and/or
declared.We
cannot assure you that we will be able to maintain sufficient cash flows to fund
operating expenses and distributions at any particular level, if at all. As
we raise proceeds from this offering, the sufficiency of cash flow to fund
future distributions with respect to an increased number of outstanding shares
will depend on the pace at which we are able to identify and close on suitable
cash-generating real property investments. Because the accrual of offering
proceeds may outpace the investment of these funds in real property
acquisitions, cash generated from such investments may become insufficient to
fund operating expenses and distributions.





If we pay
distributions from sources other than our cash flow from operations, we will
have fewer funds available for the acquisition of properties and real
estate-related investments, which may adversely affect your overall
return.We
may pay distributions from sources other than from our cash flow from
operations. Until we acquire properties or real estate-related investments, we
will not generate sufficient cash flow from operations to pay distributions and
we intend to fund our distributions, in part, by proceeds of this offering. If
we fund distributions from the proceeds of this offering, we will have less
funds available for acquiring properties or real estate-related investments. Our
inability to acquire properties or real estate-related investments may have a
negative effect on our ability to generate sufficient cash flow from operations
to pay distributions. As a result, the return you realize on your investment may
be reduced. Additionally, we may fund our distributions from borrowings, the
sale of assets, or the sale of additional securities if we do not generate
sufficient cash flow from operations to pay distributions. Funding distributions
from borrowings could restrict the amount we can borrow for investments, which
may affect our profitability. Funding distributions with the sale of assets may
affect our ability to generate cash flows. Funding distributions from the sale
of additional securities could dilute your interest in us if we sold shares of
our preferred or common stock to third party investors. Payment of distributions
from these sources would restrict out ability to generate sufficient cash flow
from operations or would affect the distributions payable to you upon a
liquidity event, which may have an adverse affect on your
investment.





Our board of
directors may amend or terminate our distribution reinvestment
program.The
directors, including a majority of independent directors, may by majority vote
amend or terminate the distribution reinvestment program upon 30 days notice to
participants. If our directors terminate our distribution reinvestment program,
you will not be able to reinvest your distributions to purchase our shares at a
lower price, which may have a material effect on your investment.





You may not be
able to receive liquidity on your investment through our share repurchase
program.Limitations
on participation in our share repurchase program, and the ability of our board
of directors to modify or terminate the plan, may restrict your ability to
participate in and receive liquidity on your investment through this
program.


8





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, or to sellers of properties we directly or indirectly acquire
instead of, or in addition to, cash consideration. In addition, we may also
issue shares under our Employee and Director Incentive Restricted Share Plan.
Investors purchasing common stock in this offering who do not participate in any
future stock issues will experience dilution in the percentage of the issued and
outstanding stock they own.





Our charter
permits our board of directors to issue stock with terms that may subordinate
the rights of common stockholders.Our
charter permits our board of directors to issue up to 100,000,000 shares of
stock, including 10,000,000 shares of preferred stock. In addition, our board of
directors, without any action by our stockholders, may amend our charter from
time to time to increase or decrease the aggregate number of shares or the
number of shares of any class or series of stock that we have authority to
issue. Our board of directors may classify or reclassify any unissued common
stock or preferred stock and establish the preferences, conversion or other
rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption of any such stock. Thus, if
also approved by a majority of our independent directors not otherwise
interested in the transaction, our board of directors could authorize the
issuance of preferred stock with terms and conditions that could have a priority
as to distributions and amounts payable upon liquidation over the rights of the
holders of our common stock. Preferred stock could also 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.





Your investment
return may be reduced if we are required to register as an investment company
under the Investment Company Act.We are not registered, and do not
intend to register ourselves or any of our subsidiaries, as an investment
company under the Investment Company Act. If we become obligated to register the
Company or any of its subsidiaries as an investment company, the registered
entity would have to comply with a variety of substantive requirements under the
Investment Company Act imposing, among other things:





•
            limitations
      on capital structure;


•
            restrictions
      on specified investments;


•
            prohibitions
      on transactions with affiliates;
and


•
            compliance
      with reporting, record keeping, voting, proxy disclosure and other rules
      and regulations that would significantly change our
      operations.





The
Company intends to conduct its operations, directly and through wholly or
majority-owned subsidiaries, so that the Company and each of its subsidiaries
are exempt from registration as an investment company under the Investment
Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company
is deemed to be an “investment company” if it is, or holds itself out as being,
engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the
Investment Company Act, a Company is deemed to be an “investment company” if it
is engaged, or proposes to engage, in the business of investing, reinvesting,
owning, holding or trading in securities and owns or propose to acquire
“investment securities” having a value exceeding 40% of the value of its total
assets on an unconsolidated basis, which we refer to as the “40%
test.”


Since we
will be primarily engaged in the business of acquiring real estate, we believe
that the company and most, if not all, of its wholly and majority-owned
subsidiaries will not be considered investment companies under either Section
3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If the Company
or any of its wholly or majority-owned subsidiaries would ever inadvertently
fall within one of the definitions of “investment company,” we intend to rely on
the exception provided by Section 3(c)(5)(C) of the Investment Company
Act.





Under
Section 3(c)(5)(C), the SEC staff generally requires the Company to maintain at
least 55% of its assets directly in qualifying assets and at least 80% of the
entity’s assets in qualifying assets and in a broader category of real estate
related assets to qualify for this exception.  Mortgage-related
securities may or may not constitute such qualifying assets, depending on the
characteristics of the mortgage-related securities, including the rights that we
have with respect to the underlying loans.  The Company’s ownership of
mortgage-related securities, therefore, is limited by provisions of the
Investment Company Act and SEC staff interpretations.


The
method we use to classify our assets for purposes of the Investment Company Act
will be based in large measure upon no-action positions taken by the SEC staff
in the past.  These no-action positions were issued in accordance with
factual situations that may be substantially different from the factual
situations we may face, and a number of these no-action positions were issued
more than ten years ago.  No assurance can be given that the SEC staff
will concur with our classification of our assets.  In addition, the
SEC staff may, in the future, issue further guidance that may require us to
re-classify our assets for purposes of qualifying for an exclusion from
regulation under the Investment Company Act.  If we are required to
re-classify our assets, we may no longer be in compliance with the exclusion
from the definition of an “investment company” provided by Section 3(c)(5)(C) of
the Investment Company Act.


A change
in the value of any of our assets could cause us or one or more of our wholly or
majority-owned subsidiaries to fall within the definition of “investment
company” and negatively affect our ability to maintain our exemption from
regulation under the Investment Company Act.  To avoid being required
to register the company or any of its subsidiaries as an investment company
under the Investment Company Act, we may be unable to sell assets we would
otherwise want to sell and may need to sell assets we would otherwise wish to
retain.  In addition, we may have to acquire additional income- or
loss-generating assets that we might not otherwise have acquired or may have to
forgo opportunities to acquire interests in companies that we would otherwise
want to acquire and would be important to our investment
strategy.


9





If we
were required to register the company as an investment company but failed to do
so, we would be prohibited from engaging in our business, and criminal and civil
actions could be brought against us. In addition, our contracts would be
unenforceable unless a court required enforcement, and a court could appoint a
receiver to take control of us and liquidate our business.





The subordinated
profits interests will entitle
Lightstone SLP II LLC, which is controlled and directly owned by The Lightstone
Group, our sponsor, to certain payments and distributions that will
significantly reduce the distributions available to you after a 7%
return.Lightstone
SLP II LLC will receive returns on its subordinated profits 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 II LLC in connection with
its subordinated profits interests that will be issued as more proceeds are
raised in this offering. In addition, if the advisory agreement is terminated we
may repay Lightstone SLP II LLC up to $51,000,000 for its investment in the
subordinated profits interests, which will result in a smaller pool of assets
available for distribution to you.





Conflicts
of Interest





There are
conflicts of interest between our dealer manager, 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 owns our advisor,
our property managers, our operating partnership, our dealer manager and
affiliates, except for us, although as of December 31, 2009, he owns
1.6%  of our shares indirectly through our advisor. Our advisor does
not advise any entity other than us.  However, employees of our
advisor are also employed by Lightstone Value Plus REIT, LLC, the advisor to
Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), the
sponsor’s other public program. Mr. Lichtenstein is one of our non-independent
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.





We do not have
employees and we will rely on the employees of our sponsor and its affiliates,
which may create a conflict of interest.We
will rely on the employees of our sponsor and its affiliates to manage and
operate our business. Our sponsor and its affiliates are general partners,
managing members and sponsors of other real estate programs having similar
investment objectives to ours. The employees of our sponsor and its affiliates
currently control and/or operate other entities that own properties in the many
markets in which we may seek to invest, and they spend a material amount of time
managing these properties and other assets that are unrelated to our business.
Each of our executive officers is also an officer of our sponsor and/or its
affiliates, and as a result these individuals owe fiduciary duties to these
other entities and their stockholders, members and limited partners. Because our
sponsor and its affiliates have these interests in other real estate programs
and engage in other business activities, the employees of our sponsor and its
affiliates may experience a conflict of interest in allocating their time and
resources among our business and these other activities. Some of these
individuals could make substantial profits as a result of investment
opportunities allocated to entities other than us. As a result, these
individuals could pursue transactions that may not be in our best interest,
which could have a material effect on our operations and your
investment.





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 following the final closing of
this offering, and after 75% of the total gross proceeds from the offering of
the shares offered for sale pursuant to this offering have been invested or
committed for investment in real properties.





Our
Sponsor’s other public
program, Lightstone I,may
be engaged in competitive activities.Our
advisor, property managers and their respective affiliates through activities of
Lightstone I may be engaged in other activities that could result in
potential conflicts of interest with the services that they will provide to us,
including Lightstone I may compete with us for both the acquisition and/or
refinancing of properties of a type suitable for our investment.





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.


10


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 may experience a conflict between
our current interests and its interest in preserving any ongoing business
relationship with these sellers. As a result of this conflict, the terms of any
transaction between us and such third parties may not reflect the terms that we
would receive in the market on an arm’s length basis. If the terms we receive in
a transaction are less favorable to us, our results from operations may be
adversely affected.





Property
management services are being provided by an affiliated party.Our
property managers are controlled 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 managers 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 feesand 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 conflictsof 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 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.





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, which could result in a
conflict of interest.Proskauer
Rose LLP acts as legal counsel to us and also represents our sponsor and some of
its affiliates. There is a possibility in the future that the interests of the
various parties may become adverse and, under the Code of Professional
Responsibility of the legal profession, Proskauer Rose LLP may be precluded
from representing any one or all of such parties. If any situation arises in
which our interests appear to be in conflict with those of our advisor or its
affiliates, additional counsel may be retained by one or more of the parties to
assure that their interests are adequately protected. Moreover, should a
conflict of interest not be readily apparent, Proskauer Rose LLP may
inadvertently act in derogation of the interest of the parties which could
affect our ability to meet our investment objectives.





Each member of
our Board of Directors is also on the Board of Directors of Lightstone Value
Plus Real Estate Investment Trust, Inc.Each of our directors
is also a director of Lightstone Value Plus Real Estate Investment Trust,
Inc.(“Lightstone I”)Accordingly, our Board of Directors will owe fiduciary
duties and duties of loyalty to Lightstone I and its stockholders. The loyalties
of our directors to Lightstone I 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 I 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 I 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 I.


11


Risks
Related to our Organization, Structure and Management





Limitations on
Changes in Control (Anti-Takeover Provisions).Because
of the way we are organized, we would be 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 which 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 any class or series of our
stock, including our common stock. Our board of directors may exempt a person
from the 9.8% ownership limit upon such conditions as the board 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 owing
      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,
conversion or other rights, voting powers, restrictions, and limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption 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.





If our advisor
loses or is unable to obtain key personnel, our ability to implement our
investment strategies could be hindered, which could adversely affect our
ability to make distributions and the value of your investment.Our
success depends to a significant degree upon the contributions of certain of our
executive officers and other key personnel of our advisor. In particular, we
depend on the skills and expertise of David Lichtenstein, the architect of our
investment strategies. We cannot guarantee that all, or any particular one, of
our employees will remain affiliated with us or our advisor. If any of our key
personnel were to cease their affiliation with our advisor, our operating
results could suffer.





Further,
we do not intend to separately maintain key person life insurance that would
provide us with proceeds in the event of death or disability of Mr. Lichtenstein
or any of our key personnel. We believe our future success depends upon our
advisor’s ability to hire and retain highly skilled managerial, operational and
marketing personnel. Competition for such personnel is intense, and we cannot
assure you that our advisor will be successful in attracting and retaining such
skilled personnel. If our advisor loses or is unable to obtain the services of
key personnel, our ability to implement our investment strategies could be
delayed or hindered, and the value of your investment may decline.





Theoperating
partnership agreement contains provisions that may discourage a third party from
acquiring us.A
limited partner in Lightstone Value Plus REIT II LP, a Delaware limited
partnership and our 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.


12


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 may
have limited voting rights. 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 acquisition by any
person of shares of our stock, however, this provision may be amended or
eliminated at any time in the future.





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.





Our rights and
the rights of our stockholders to take action against the directors and the
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
and officers, and the advisory agreement, in the case of the advisor, require us
to indemnify our directors and officers and the advisor for actions taken on our
behalf, determined 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. We may, with the approval of our board of directors,
provide indemnification to any of our employees or agents. As a result, we and
the stockholders may have more limited rights against our directors, officers,
employees and agents, and the 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 the advisor in some
cases.





Stockholders have
limited control over changes in our investment objectives and
strategies.Our
board of directors determines our investment objectives, financing, growth, debt
capitalization, REIT qualification and distributions. Subject to the investment
objectives and limitations set forth in our charter, our board of directors may
amend or revise these and other objectives and strategies. Although stockholders
will have limited control over changes in our objectives and strategies, our
charter requires the affirmative vote of a majority of all votes entitled to be
cast on the matter in order for the board of directors to amend our charter
(except for amendments that do not adversely affect stockholders’ rights,
preferences and privileges or are permitted to be made without stockholder
approval under Maryland law or our charter), sell all or substantially all of
our assets, cause our merger or other reorganization, or dissolve
us.





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 managers, management and affiliates and their employees. In
addition, our affiliates, Lightstone Securities LLC and Lightstone Value Plus
REIT II LLC, will receive compensation for acting, respectively, as our dealer
manager and advisor (although we will pay dealer manager fees and selling
commissions with the proceeds from the sale of the subordinated profits
interests in our operating partnership to the 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 our
stockholders and none of these payments are subordinated to a specified return
to our stockholders. Also, although our property managers, affiliates of our
sponsor, will receive compensation under management agreements, in general this
compensation would be dependent on our gross revenues. In addition, other
affiliates of our sponsor may from time to time provide services to us if
approved by the disinterested directors. It is possible that we could obtain
such goods and services from unrelated persons at a lesser price.





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 any indemnitee for
any loss or liability that we suffer unless certain conditions are
met.





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. Our advisor and its affiliates may be indemnified and held
harmless from liability only if it has been determined in good faith that its
actions were in our best interests and it has acted in a manner not constituting
negligence or misconduct. 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
stockholders.


13


Risks
Associated with Our Properties and the Market





Real
Estate Investment Risks





Failure to
generate sufficient cash
flows may reduce distributions to stockholders.We
intend to rely primarily on our cash flow from our investments to make
distributions to you. 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. The revenue generated and expenses
incurred in operating the properties depend on many factors, some of which are
beyond our control. For instance, rents from our properties may not increase as
expected or the real estate-related investments we buy may not generate the
anticipated returns. If our properties do not generate revenue sufficient to
meet operating expenses, debt service, and capital expenditures, our cash flows
and ability to make distributions to you 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, higher
unemployment, less consumer spending and 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 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 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. The continued rise in energy costs could result in higher operating
costs, which may affect our results from operations. Our income will be
adversely affected if a significant number of tenants are unable to pay rent or
if our properties cannot be rented on favorable terms. Additionally, if tenants
of properties that we lease on a triple-net basis fail to pay required
tax, utility and other impositions, we could be required to pay those
costs, which would adversely affect funds available for future acquisitions or
cash available for distributions. Our performance is linked to economic
conditions in the regions where our properties 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
you.





The profitability
of our 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 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.Our
properties 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-lease 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-lease
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.





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 may experience substantial
influxes 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.


14


The bankruptcy or
insolvency of a major commercial tenant would adverselyimpact
us.Any
or all of our commercial tenants, 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 which would mean a reduction in our cash flow and
the amount available for distributions to you.





Generally,
under bankruptcy law, a tenant has the option of continuing or terminating any
unexpired lease. In the event of a bankruptcy, we cannot assure you 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 you 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.





We may depend on
commercial tenants for our revenue and therefore our revenue may depend on the
success and economic viability of our commercialtenants. 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.





Even if
the tenants of our properties 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. 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,
we cannot assure you 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 our properties 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) is 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 you. In addition, the resale value of the property could be
diminished because the market value of a particular property will depend
principally upon the value of the leases of such property.


15


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 aproperty.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, your ability to
recover all or any portion of your investment under such circumstances will
depend on the amount of funds so realized and claims to be satisfied there
from.





Our properties
may not be diversified.Our
properties may not be well diversified and their economic performance could be
affected by changes in local economic conditions.





If we are
unable to diversify our investments by industry, a downturn in any particular
industry may have more pronounced effects on the amount of cash available to us
for distribution or on the value of our assets than if we had diversified our
investments.





If we are
unable to diversify our investments by region, our performance will be linked to
a greater extent to economic conditions in the regions in which we acquire
properties. Therefore, to the extent that there are adverse economic conditions
in the regions in which our properties are located and in the market for real
estate properties, such conditions could result in a reduction of our income and
cash to return capital and thus affect the amount of distributions we can make
to you.





We may incur
liabilities in connection with propertiesweacquire.
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, offices and others
      indemnified by the former owners of the
  properties.


16


Competition with
third parties in acquiring and operating properties may reduce our profitability
and the return on your 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,
lodging, industrial and other properties that will be seeking investments and
tenants for these 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 you may experience a lower
return on your investment. In addition, our properties may be located in close
proximity to other properties that will compete against our properties for
tenants. 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 you.





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. Increased costs of fuel may reduce
discretionary spending on luxury retail items, which may adversely affect our
retail tenants if we purchase retail properties. Our revenues will be dependent
upon payment of rent by retailers, which may be particularly vulnerable to
uncertainty in the local economy and rising costs of energy for their customers.
Such adverse economic conditions could affect the ability of our tenants to
pay rent, which could have a material adverse effect on our operating results
and financial condition, as well as our ability to pay distributions to
you.





We have limited
experience with internationalinvestments.Neither
we nor our sponsor, The Lightstone Group, or any of its affiliates have any
substantial experience investing in properties or other real estate-related
assets located outside the United States. We may acquire real estate assets
located outside the United States and may make or purchase mortgage or mezzanine
loans made by a buyer located outside of the United States or secured by
property located outside of the United States. We may not have the expertise
necessary to maximize the return on our international investments.





Your investment
may be subject to additional risks if we make international
investments.We
may purchase real estate assets located outside the United States and may make
or purchase mortgage or mezzanine loans or joint venture interests in mortgage
or mezzanine loans made by a borrower located outside the United States or
secured by property located outside the United States. Any international
investments may be affected by factors peculiar to the laws of the jurisdiction
in which the borrower or the property is located. These laws may expose us to
risks that are different from and in addition to those commonly found in the
United States. Foreign investments could be subject to the following
risks:





·
            governmental
      laws, rules and policies, including laws relating to the foreign ownership
      of real property or mortgages and laws relating to the ability of foreign
      persons or corporations to remove profits earned from activities within
      the country to the person’s or corporation’s country of
      origin;


·
            variations
      in currency exchange rates or exchange controls or other currency
      restrictions and fluctuations in exchange ratios related to foreign
      currency;


·
            adverse
      market conditions caused by inflation or other change in national or local
      economic conditions;


·
            changes
      in relative interest rates;


·
            change
      in the availability, cost and terms of mortgage funds resulting from
      varying national economic policies;


·
            changes
      in real estate and other tax rates, the tax treatment of transaction
      structures and other changes in operating expenses in a particular country
      where we have an investment;


·
            lack
      of uniform accounting standards (including availability of information in
      accordance with U.S. generally accepted accounting
      principles);


·
            changes
      in land use and zoning laws;


17


·
            more
      stringent environmental laws or changes in these
  laws;


·
            changes
      in the social stability or other political, economic or diplomatic
      developments in or affecting a country where we have an
      investment;


·
            legal
      and logistical barriers to enforcing our contractual rights;
      and


·
            expropriation,
      confiscatory taxation and nationalization of our assets located in the
      markets where we operate;





Any of
these risks could have an adverse effect on our business, results of operations
and ability to pay distributions to our stockholders.





We may acquire
properties with lock-out provisions which may prohibit us from selling a
property, or may require us to maintain specified debt levels for a period of
yearson someproperties.  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. Lock-out provisions may restrict sales or refinancings for
a certain period in order to comply with the applicable government regulations.
Lock-out 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
you. Lock-out provisions could impair our ability to take actions during the
lock-out 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 lock-out provisions did
not exist. In particular, lock-out 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.





We may be
affected by foreign government regulations and actions
and foreign conditions.If
we pursue investment opportunities in international markets, foreign laws and
governmental regulations may be applicable to us, our affiliates and our
investors. Changes in these laws and governmental regulations, or their
interpretation by agencies or the courts, could occur. Further, economic and
political factors, including civil unrest, governmental changes and restrictions
on the ability to transfer capital across borders in the United States, but
primarily in the foreign countries in which we may invest, can have a major
impact on us.





Retail
Industry Risks





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 which 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 which 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 your
investment.We
do not currently own properties or other investments, we have not obtained any
financing and we do not currently conduct any operations. However, our 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 and
other forms of direct marketing, discount shopping clubs, internet websites and
telemarketing. Other retail centers within the market area of our properties
will compete with our properties for customers, affecting their tenants’ cash
flows and thus affecting their ability to pay rent. In addition, some of our
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.


18


Residential
Industry Risks





The short-term
nature of our residential leases may adversely impact our income.If
our residents 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.





Theeconomic
downturnhasadversely
affectedthe residential
industry and may affect operations for the residential properties that we
acquire.As a
result of the effects of the current economic downturn, including increased
unemployment rates, the residential industry has experienced a decline in
business caused by a reduction in overall renters. The current economic downturn
and increase in unemployment rates may have an adverse affect on our operations
if the tenants occupying the residential and office properties we acquire cease
making rent payments to us or if there a change in spending patterns resulting
in reduced traffic at the retail properties we acquire. Moreover, low
residential mortgage interest rates could accompany an economic downturn and
encourage potential renters to purchase residences rather than lease them. The
residential properties we acquire 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;





·
            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.


19





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, such as financial disagreements between
the third party manager and the owner, disagreements about marketing between the
third party manager and the owner and the third party manager’s brand falls out
of favor. 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.
There can be no assurance that our affiliate continues to manage any lodging
properties we acquire.





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 (“TRS”), or 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. 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.





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:





·
            wages
      and benefit costs;


·
            repair
      and maintenance expenses;


·
            energy
      costs;


·
            property
      taxes;


·
            insurance
      costs; and


·
            other
      operating expenses.


20





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.





We do not
directly employ or manage the employees managing our lodging
properties.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 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
current economic slowdown, terrorist attacks, military activity in the Middle
East, natural disasters and other world events impacting the global economy
has 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. If there is less travelling due to the current economic
slowdown, increased unemployment rates or rise in fuel prices, the
lodging properties we may acquire may be adversely affected. As a result
events such as  terrorist attacks around the world, the war in Iraq
and the effects of the economic recession, 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.


21


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.





Expanding use of
internet travel websites by customers can adversely affect our
profitability.The
increasing use of internet travel intermediaries by consumers may
cause 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 asTravelocity.com
,Expedia.com
,Orbitz.com
,Hotels.com  andPriceline.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.





Industrial
Industry Risks





Potential
liability as the result of, and the cost of compliance with, environmental
matters is greater if we invest in industrial properties or lease
our properties to tenants that engage in industrial activities.Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
cost of removal or remediation of hazardous or toxic substances on such
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances.





We may
invest in properties historically used for industrial, manufacturing and
commercial purposes. Some of these properties are more likely to contain, or may
have contained, underground storage tanks for the storage of petroleum products
and other hazardous or toxic substances. All of these operations create a
potential for the release of petroleum products or other hazardous or toxic
substances.





Leasing
properties to tenants that engage in industrial, manufacturing, and commercial
activities will cause us to be subject to increased risk of liabilities under
environmental laws and regulations. The presence of hazardous or toxic
substances, or the failure to properly remediate these substances, may adversely
affect our ability to sell, rent or pledge such property as collateral
for future borrowings.





Our industrial
properties are subject to fluctuations in manufacturing activity in the United
States.Our
industrial properties may be adversely affected if manufacturing activity
decreases in the United States. Trade agreements with foreign countries have
given employers the option to utilize less expensive non-US manufacturing
workers. The outsourcing of manufacturing functions could lower the demand for
our industrial properties. Moreover, an increase in the cost of raw materials
or decrease in the demand of housing could cause a slowdown in
manufacturing activity, such as furniture, textiles, machinery and chemical
products, and our profitability may be adversely affected.





Office
Industry Risks





The loss of
anchor tenants for our office properties
could adversely affect our profitability.We
may acquire office properties and, as with our retail properties, we are subject
to the risk that tenants may be unable to make their lease payments or may
decline to extend a lease upon its expiration. A lease termination by a tenant
that occupies a large area of space in one of our office properties (commonly
referred to as an anchor tenant) could impact leases of other tenants. Other
tenants may be entitled to modify the terms of their existing leases in the
event of a lease termination by an anchor tenant or the closure of the business
of an anchor tenant that leaves its space vacant, even if the anchor tenant
continues to pay rent. Any such modifications or conditions could be unfavorable
to us as the property owner and could decrease rents or expense recoveries.
In the event of default by an anchor tenant, we may experience delays and costs
in enforcing our rights as landlord to recover amounts due to us under the terms
of our agreements with those parties.


22





Declines in
overall activity in our markets may adversely affect the performance of our
office properties.Rental
income from office properties fluctuates with general market and economic
conditions. Our office properties may be adversely affected during periods of
diminished economic growth and a decline in white-collar employment. We may
experience a decrease in occupancy and rental rates accompanied by increases in
the cost of re-leasing space (including for tenant improvements) and in
uncollectible receivables. Early lease terminations may significantly contribute
to a decline in occupancy of our office properties and may adversely affect our
profitability. While lease termination fees increase current period income,
future rental income may be diminished because, during periods in which market
rents decline, it is unlikely that we will collect from replacement tenants the
full contracted amount which had been payable under the terminated
leases.





Risks
Related to Real Estate-Related Investments





Risks
Associated with Investments in Mezzanine and Mortgage Loans





Our advisor does
not have substantial experience investing in mezzanine and mortgage loans, which
could result in losses to us.Neither
our advisor nor any of its affiliates have substantial experience investing in
mezzanine or mortgage loans. If we make or acquire such loans, or participations
in them, we may not have the necessary expertise to maximize the return on our
investment in these types of loans.





The risk of
default on mezzanine and
mortgage loans is caused by many factors beyond our control, and our ability to
recover our investment in foreclosure may be limited.The
default risk on mezzanine and mortgage loans is caused by factors beyond our
control, including local and other economic conditions affecting real estate
values, interest rate changes, rezoning and failure by the borrower to maintain
the property. We do not know whether the values of the property securing the
loans will remain at the levels existing on the dates of origination of the
loans. If the values of the underlying properties drop, our risk will increase
because of the lower value of the security associated with such
loans.





In the
event that there are defaults under these loans, we may not be able to quickly
repossess and sell the properties securing such loans. An action to foreclose on
a property securing a loan is regulated by state statutes and regulations and is
subject to many delays and expenses typical of any foreclosure action. In the
event of default by a mortgagor, these restrictions, among other things, may
impede our ability to foreclose on or sell the mortgaged property or to obtain
proceeds sufficient to repay all amounts due to us on the loan, which could
reduce the value of our investment in the defaulted loan.





The mezzanine
loans in which we may invest involve greater risks of loss than senior loans
secured by income-producing real properties.We
may invest in mezzanine loans that take the form of subordinated loans secured
by second mortgages on the underlying real property or loans secured by a pledge
of the ownership interests of either the entity owning the real property or the
entity that owns the interest in the entity owning the real property. These
types of investments involve a higher degree of risk than long-term senior
mortgage lending secured by income producing real property because the
investment may become unsecured as a result of foreclosure by the senior lender.
In the event of a bankruptcy of the entity providing the pledge of its ownership
interests as security, we may not have full recourse to the assets of the
entity, or the assets of the entity may not be sufficient to satisfy our
mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to
our loan, or in the event of a borrower bankruptcy, our mezzanine loan will
be satisfied only after the senior debt. As a result, we may not recover some or
all of our investment.





Our mortgage or
mezzanine loans will be subject to interest rate fluctuations,which could
reduce our returns as compared to market interest rates and reduce the value of
the loans in the event we sell them.If
we invest in fixed-rate, long-term mortgage or mezzanine loans and interest
rates rise, the loans could yield a return lower than then-current market rates.
If interest rates decrease, we will be adversely affected to the extent that
mortgage or mezzanine loans are prepaid, because we may not be able to make new
loans at the previously higher interest rate. If we invest in variable-rate
loans and interest rates decrease, our revenues will also decrease. Fluctuations
in interest rates adverse to our loans could adversely affect our returns on
such loans.





The liquidation
of our assets may be delayed as a result of our investmentin mortgage or
mezzanine loans, which could delay distributions to our
stockholders.The
mezzanine and mortgage loans we may purchase will be illiquid investments due to
their short life, their unsuitability for securitization and the greater
difficulty of recoupment in the event of a borrower’s default. If we enter into
mortgage or mezzanine loans with terms that expire after the date we intend to
have sold all of our properties, any intended liquidation of us may be delayed
beyond the time of the sale of all of our properties until all mortgage or
mezzanine loans expire or are sold.





Risks
Related to Investments in Real Estate-Related Securities





We may invest in
various types of real estate-related securities.We
may invest in real estate-related securities, including securities issued by
other real estate companies, commercial mortgage-backed securities (“CMBS ”) or collateralized
debt obligations (“CDOs ”). We may also invest in real estate-related securities of both
publicly traded and private real estate companies. Neither we nor our advisor
may have the expertise necessary to maximize the return on our investment in
real estate-related securities. If our advisor determines that it is
advantageous to us to make the types of investments in which our advisor or
its affiliates do not have experience, our advisor intends to employ persons,
engage consultants or partner with third parties that have, in our advisor’s
opinion, the relevant expertise necessary to assist our advisor in evaluating,
making and administering such investments.


23


Investments in
real estate-related securities will be subject to specific risks relating to the
particular issuer of the securities and may be subject to the general risks of
investing in subordinated real estate securities, which may
result in losses to us.Our
investments in real estate-related securities will involve special risks
relating to the particular issuer of the securities, including the financial
condition and business outlook of the issuer. Issuers of real estate-related
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 in this prospectus, including risks relating to rising interest
rates.





Real
estate-related securities are often unsecured and also may be subordinated to
other obligations of the issuer. As a result, investments in real estate-related
securities are subject to risks of (1) limited liquidity in the secondary
trading market in the case of unlisted or thinly traded securities, (2)
substantial market price volatility resulting from changes in prevailing
interest rates in the case of traded equity securities, (3) subordination to the
prior claims of banks and other senior lenders to the issuer, (4) the operation
of mandatory sinking fund or call/redemption provisions during periods of
declining interest rates that could cause the issuer to reinvest redemption
proceeds in lower yielding assets, (5) the possibility that earnings of the
issuer may be insufficient to meet its debt service and distribution obligations
and (6) the declining creditworthiness and potential for insolvency of the
issuer during periods of rising interest rates and economic slowdown or
downturn. These risks may adversely affect the value of outstanding real
estate-related securities and the ability of the issuers thereof to repay
principal and interest or make distribution payments.





The mortgage
loans in which we may invest and the commercial mortgage loans
underlying the
commercial mortgage backed securities in which we may investment will be subject
to delinquency, foreclosure and loss, which could result in losses to
us.Commercial
mortgage loans are secured by multifamily or other types of commercial property,
and are subject to risks of delinquency and foreclosure and risks of loss that
are greater than similar risks associated with loans made on the security of
single family residential property. The ability of a borrower to repay a loan
secured by a property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower. If the net operating income of the property is
reduced, the borrower’s ability to repay the loan may be impaired. Net operating
income of an income producing property can be affected by, among other things:
tenant mix, success of tenant businesses, property management decisions,
property location and condition, competition from comparable types of
properties, changes in laws that increase operating expense or limit rents that
may be charged, any need to address environmental contamination at the property,
the occurrence of any uninsured casualty at the property, changes in national,
regional or local economic conditions and/or specific industry segments,
declines in regional or local real estate values, declines in regional or local
rental or occupancy rates, increases in interest rates, real estate tax rates
and other operating expenses, changes in governmental rules, regulations and
fiscal policies, including environmental legislation, acts of God, terrorism,
social unrest and civil disturbances.





In the
event of any default under a mortgage loan held directly by us, we will bear a
risk of loss of principal to the extent of any deficiency between the value of
the collateral and the principal and accrued interest of the mortgage loan,
which could have a material adverse effect on our cash flow from operations and
limit amounts available for distribution to our stockholders. In the event of
the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower
will be deemed to be secured only to the extent of the value of the underlying
collateral at the time of bankruptcy (as determined by the bankruptcy court),
and the lien securing the mortgage loan will be subject to the avoidance powers
of the bankruptcy trustee or debtor-in-possession to the extent the lien is
unenforceable under state law. Foreclosure of a mortgage loan can be an
expensive and lengthy process which could have a substantial negative
effect on our anticipated return on the foreclosed mortgage loan.





The CMBS and CDOs
in which we may invest are subject to several types of risks.CMBS
are bonds which evidence interests in, or are secured by, a single commercial
mortgage loan or a pool of commercial mortgage loans. CDOs are a type of
collateralized debt obligation that is backed by commercial real estate assets,
such as CMBS, commercial mortgage loans, B-notes, or mezzanine paper.
Accordingly, the CMBS and CDOs we invest in are subject to all the risks of the
underlying mortgage loans.





In a
rising interest rate environment, the value of CMBS and CDOs may be adversely
affected when payments on underlying mortgages do not occur as anticipated,
resulting in the extension of the security’s effective maturity and the related
increase in interest rate sensitivity of a longer-term instrument. The value of
CMBS and CDOs may also change due to shifts in the market’s perception of
issuers and regulatory or tax changes adversely affecting the mortgage
securities markets as a whole. In addition, CMBS and CDOs are subject to the
credit risk associated with the performance of the underlying mortgage
properties. In certain instances, third party guarantees or other forms of
credit support can reduce the credit risk.





CMBS and
CDOs are also subject to several risks created through the securitization
process. Subordinate CMBS and CDOs are paid interest only to the extent that
there are funds available to make payments. To the extent the collateral pool
includes a large percentage of delinquent loans, there is a risk that interest
payment on subordinate CMBS and CDOs will not be fully paid. Subordinate
securities of CMBS and CDOs are also subject to greater credit risk than those
CMBS and CDOs that are more highly rated.


24


If we use
leverage in connection with our investment in CMBS or CDOs, the risk of loss
associated with this type of investment will increase.We
may use leverage in connection with our investment in CMBS or CDOs. Although the
use of leverage may enhance returns and increase the number of investments that
can be made, it may also substantially increase the risk of loss. There can be
no assurance that leveraged financing will be available to us on favorable terms
or that, among other factors, the terms of such financing will parallel the
maturities of the underlying securities acquired. Therefore, such financing may
mature prior to the maturity of the CMBS or CDOs acquired by us. If alternative
financing is not available, we may have to liquidate assets at unfavorable
prices to pay off such financing. We may utilize repurchase agreements as a
component of our financing strategy. Repurchase agreements economically resemble
short-term, variable-rate financing and usually require the maintenance of
specific loan-to-collateral value ratios. If the market value of the CMBS or
CDOs subject to a repurchase agreement decline, we may be required to provide
additional collateral or make cash payments to maintain the loan to collateral
value ratio. If we are unable to provide such collateral or cash repayments, we
may lose our economic interest in the underlying securities.





Investments in
real estate-related preferred equity securities involve a greater risk of loss
than traditional debt financing.We
may invest in real estate-related preferred equity securities, which may involve
a higher degree of risk than traditional debt financing due to several factors,
including that such investments are subordinate to traditional loans and are not
secured by property underlying the investment. If the issuer defaults on our
investment, we would be only be able to take action against the entity in which
we have an interest, not the property owned by such entity underlying our
investment. As a result, we may not recover some or all of our investment, which
could result in losses to us.





Recent market
conditions and the risk of continued market deterioration may cause a decrease
in the value of our real estate securities.The
U.S. credit markets and the sub-prime residential mortgage market have recently
experienced severe dislocations and liquidity disruptions. Sub-prime mortgage
loans have recently experienced increased rates of delinquency, foreclosure and
loss. These and other related events have had a significant impact on the
capital markets associated not only with sub-prime mortgage-backed securities
and asset-backed securities and CDOs, but also with the U.S. credit and
financial markets as a whole.





We may
invest in any real estate securities, including CMBS and CDOs, that contain
assets that could be classified as sub-prime residential mortgages. The values
of many of these securities are sensitive to the volatility of the credit
markets, and many of these securities may be adversely affected by future
developments. In addition, to the extent that turmoil in the credit markets
continues and/or intensifies, it has the potential to materially affect both the
value of our real estate related securities investments and/or the availability
or the terms of financing that we may anticipate utilizing in order to leverage
our real estate related securities investments.





The
recent market volatility has also made the valuation of these securities more
difficult, particularly the CMBS and CDO assets. Management’s estimate of the
value of these investments incorporates a combination of independent pricing of
agency and third-party dealer valuations, as well as comparable sales
transactions. However, the methodologies that we will use in valuing individual
investments are generally based on a variety of estimates and assumptions
specific to the particular investments, and actual results related to the
investments therefore often vary materially from such assumptions or
estimates.





Because
there is significant uncertainty in the valuation of, or in the stability of the
value of, certain of these securities holdings, the fair values of such
investments as reflected in our results of operations may not reflect the prices
that we would obtain if such investments were actually sold. Furthermore, due to
the recent market events, many of these investments are subject to rapid changes
in value caused by sudden developments which could have a material adverse
effect on the value of these investments.





A portion of our
real estate securities investments may be illiquid and we may not be able to
adjust our portfolio in response to changes in economic and other
conditions.Certain
of the real estate securities that we may purchase in the future in connection
with privately negotiated transactions may not be registered under the relevant
securities laws, resulting in a prohibition against their sale, transfer pledge
or other disposition except in a transaction exempt from the registration
requirements of those laws. As a result, our ability to vary our portfolio in
response to changes in economic and other conditions may be relatively
limited.





Interest rate and
related risks may cause the value of our real estate securities investments
tobe reduced.Interest
rate risk is the risk that fixed income securities will decline in value because
of changes in market interest rates. Generally, when market interest rates rise,
the market value of such securities will decline, and vice versa. Our investment
in such securities means that the net asset value and market price of the common
shares may tend to decline if market interest rates rise.





During
periods of rising interest rates, the average life of certain types of
securities may be extended because of slower than expected principal repayments.
This may lock in a below-market interest rate, increase the security’s duration
and reduce the value of the security. This is known as extension risk. During
periods of declining interest rates, an issuer may be able to exercise an option
to prepay principal earlier than scheduled, which is generally known as call or
prepayment risk. If this occurs, we may be forced to reinvest in lower yielding
securities. This is known as reinvestment risk. An issuer may redeem an
obligation if the issuer can refinance the debt at a lower cost due to declining
interest rates or an improvement in the credit standing of the issuer. These
risks may reduce the value of our real estate securities
investments.


25


Real
Estate Financing Risks





General
Financing Risks





We plan to incur
mortgage indebtedness and other borrowings, which may increase our business
risks.We
intend 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.





Any
mortgage debt which we place on properties may contain 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, if we enter into financing arrangements involving balloon payment
obligations, such financing arrangements will 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 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 one of our properties does not renew its lease or
otherwise vacates its space in one of our buildings, 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.We
do not currently own properties or other investments, with the exception of one
investment purchase of $1.7 million, we have not obtained any financing and we
do not currently conduct any operations. Our charter limits the aggregate amount
we may borrow, absent approval by our independent directors and 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;


26





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





·
            resulting
      in the loss of property if, for example, financing was necessary to repay
      a default on a mortgage.





Any
excess borrowing over 300% of our net assets 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 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 II 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 will 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. Some of our commercial tenants may be responsible for
insuring their goods and premises and, in some circumstances, may be required to
reimburse us for a share of the cost of acquiring comprehensive insurance for
the property, including casualty, liability, fire and extended coverage
customarily obtained for similar properties in amounts which our advisor
determines are sufficient to cover reasonably foreseeable losses. 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. Mortgage lenders in some cases have
begun to insist that specific coverage against terrorism be purchased by
commercial owners 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. We cannot assure you
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.


27


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, we cannot assure 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 above-ground 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.





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.





Properties’
values may also be affected by their proximity 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.


28





Limited
quantities of asbestos-containing materials are present in various building
materials such as floor coverings, ceiling texture material, acoustical tiles
and decorative treatment. 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.





We cannot
assure you 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
lodging and 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. Although we do not currently own properties or
other investments, we have not obtained any financing and we do not currently
conduct any operations, 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 our residential 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 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 lodging or 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
you.





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.





Changes in
applicable laws and regulations 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 and 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). For example, the properties we will acquire will be subject to real and
personal property taxes that may increase as property tax rates change and as
the properties are assessed or reassessed by taxing authorities. We anticipate
that most of our leases will generally provide that the property taxes, or
increases therein, are charged to the lessees as an expense related to the
properties that they occupy. As the owner of the properties, however, we are
ultimately responsible for payment of the taxes to the government. If
property taxes increase, our tenants may be unable to make the required tax
payments, ultimately requiring us to pay the taxes. In addition, we will
generally be responsible for property taxes related to any vacant space. If
we purchase residential properties, the leases for such properties
typically will not allow us to pass through real estate taxes and other taxes to
residents of such properties. Consequently, any tax increases may adversely
affect our results of operations at such properties.


29





Failure
to comply with applicable laws and regulations where we invest could result in
fines, suspension of personnel of our advisor, or other sanctions. Compliance
with new laws or regulations or stricter interpretation of existing laws may
require us to incur material expenditures, which could reduce the available cash
flow for distributions to our stockholders. Additionally, future laws,
ordinances or regulations may impose material environmental liability, which may
have a material adverse effect on our results of operations.





Risks
Related to General Economic Conditions and Terrorism





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 the 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.





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 ofdebt
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





Your investment
has various federal income tax risks.We
strongly urge you to consult your own tax advisor concerning the effects of
federal, state and local income tax law on an investment and on your individual
tax situation.





If we
fail to qualify as a REIT or to maintain our REIT status, our dividends will not
be deductible to us, and our income will be subject to taxation. We intend to
qualify as a REIT under the Internal Revenue Code which will afford us
significant tax advantages. The requirements for 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 your
yield on your 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 your investment
by causing a loss of common stock value.


30


Investment in
lodging facilities requires special REIT compliance.As
discussed above in “Risk Factors — Real Estate Investment
Risks — Lodging Industry Risks”, we expect to invest in lodging
facilities. The Internal Revenue Code restricts the way in which a REIT can own,
operate and manage lodging facilities in order for it to qualify as a REIT. In
general, subject to some very complex rules, a lodging facility owned by a REIT
must be leased to a taxable REIT subsidiary. In addition, the lodging facility
must also be operated and managed by a third-party management company that meets
certain independent contract requirements; primarily that it not be a related
party with respect to the taxable REIT subsidiary or the REIT. As a result, the
rental income from such lease would be good income to the REIT. However, failure
to maintain the proper operation and management of lodging facilities, as
required by the Internal Revenue Code, could jeopardize our REIT status
subjecting you to the consequences described in the previous
paragraph.





You may have tax
liability on distributions you elect to reinvest in common stock.If
you participate in our distribution reinvestment program, you 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 you are a tax-exempt entity, you
may have to use funds from other sources to pay your 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.Our
legal counsel, Proskauer Rose LLP, has rendered its opinion that we will qualify
as a REIT, based upon our representations as to the manner in which we are and
will be owned, invest in assets and operate, among other things. Our
qualification as a REIT depends upon our ability to meet, through investments,
actual operating results, distributions and satisfaction of specific stockholder
rules, the various tests imposed by the Internal Revenue Code. 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 represents Proskauer Rose LLP’s legal judgment based on the law in
effect as of the date of this 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 your investment and its yield to you 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 your 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.





Non-U.S. income
or other taxes, and a requirement to withhold any non-U.S. taxes, may apply,
which would reduce our net cash from operations.From
time to time, we may acquire real property located outside the U.S. and may
invest in securities of entities owning real property located outside the U.S.
As a result, we may be subject to foreign (i.e., non-U.S.) income taxes, stamp
taxes, real property conveyance taxes, withholding taxes, and similar foreign
taxes in connection with U.S. ownership of foreign real property or foreign
securities. The country in which real property is located may impose these taxes
regardless of whether we are profitable and in addition to any U.S. income tax
or other U.S. taxes imposed on profits from our investments in foreign real
property or foreign securities. As a result, you may be subject to taxes imposed
by the foreign country plus any U.S. federal income taxes imposed on taxable
income from any foreign real property or foreign securities. If a foreign
country imposes income taxes on profits from our investments in foreign real
property or foreign securities, you may be eligible to claim a tax credit in the
U.S. to offset the income taxes paid to the foreign country. However, there is
no guarantee that tax credits will be available or that they will fully
eliminate the double taxation of a given real property or other security. The
imposition of any foreign country taxes in connection with our ownership and
operations of foreign real property or our investment in securities of foreign
entities will reduce the amounts distributable to you. Similarly, the imposition
of withholding taxes by a foreign country will reduce the amounts distributable
to you. We expect the organizational costs associated with non-U.S. investments,
including costs to structure the investments so as to minimize the impact of
foreign taxes, will be higher than those associated with the U.S. investments.
Moreover, if we invest in foreign real property or in securities of an
entity owning foreign real property, we may be required to file income tax or
other information returns in the foreign jurisdiction to report any income
attributable to ownership of real properties or other securities in the other
country. Any organizational costs and reporting requirements will increase our
administrative expenses and reduce the amount of cash available for distribution
to you. You are urged to consult with your own tax advisors with respect to the
impact of applicable non-U.S. taxes and tax withholding requirements on an
investment in our common stock.





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.


31





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.





Employee
Benefit Plan Risks





An investment in
our common stock may not satisfy therequirements 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, individual retirement account (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 eighteen months following the completion of this 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.





ITEM
2. PROPERTIES:





The
Company currently has no investments in real estate assets or
properties.





ITEM 3. LEGAL PROCEEDINGS:




From time
to time in the ordinary course of business, the Company may become subject to
legal proceedings, claims or disputes. As of the date hereof, we are not a party
to any material pending legal proceedings.


32


ITEM
4. REMOVED AND RESERVED





PART II.




ITEM
5. MARKETS FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS:




As of
March 15, 2010, we had approximately 1.7 million common shares outstanding, held
by a total of 1,018 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 current offering period, $9.00 per share.  This is a
      reduction of $1.00 from the $10.00 offering price per
    share;





·
            during
      the 18 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;
    and





·
            after
      18 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.




Redemption
of shares, when requested, will be made quarterly. Subject to funds being
available, we will limit the number of shares repurchased during any 12-month
period 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, change the price per
share under the share repurchase program, 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 Financial Industry Regulatory Authority (“FINRA”) 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 FINRA rules to disclose in  each annual report
distributed to our shareholders 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, 2009. The basis for this valuation is the fact that we
are currently conducting a public offering of our common shares 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 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.





On
November 3, 2009, our board of directors declared our first dividend for the
three-month period ending December 31, 2009 in the amount of $0.00178082191 per
share per day to stockholders of record at the close of each business day during
the applicable period.  The annualized rate declared was equal to
6.5%, 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.   This dividend was paid January 15, 2010 and was
funded from cash from uninvested proceeds.


33


Total
dividends declared during the years ended December 31, 2009 and 2008 were $0.2
million and zero, respectively.





On March
23, 2010, the Company’s Board of Directors declared the quarterly dividend for
the three-month period ended March 31, 2010 in the amount of
$0.00178082191  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
2010.





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 sold 20,000 shares to our Advisor on
May 20, 2008 which were not registered under the Securities Act of
1933.  All other equity securities sold were registered under the
Securities Act of 1933.  Through March 15, 2010, we have not
repurchased any of our securities.





Use of Initial Public Offering
Proceeds





On
February 17, 2009, our Registration Statement on Form S-11 (File No.
333-151532), covering a public offering, which we refer to as the “Offering,” of
up to 51,000,000 common shares for $10 per share (exclusive of 6,500,000 shares
available pursuant to the Company’s dividend reinvestment plan, 75,000 shares
that are reserved for issuance under the Company’s stock option plan and 255,000
shares reserved for issuance under the Company’s employee and director incentive
restricted share plan) was declared effective under the Securities Act of
1933.





We issued
20,000 shares to the Advisor on May 20, 2008, for $10 per share.  In
addition, as of September 30, 2009, we had reached its minimum offering by
receiving subscriptions of its common shares, representing gross offering
proceeds of approximately $6.5 million. Through December 31, 2009, cumulative
gross offering proceeds of $11.5 million were released to the Lightstone
REIT.  The Lightstone REIT invested the proceeds from this sale and
proceeds from the Advisor in the Operating Partnership, and as a result, held a
99.98% general partnership interest at December 31, 2009 and 99.01% general
partnership interest at December 31, 2008 in the Operating Partnership’s common
units.





Lightstone
SLP II, LLC will purchase subordinated profits interests in the Operating
Partnership at a cost of $100,000 per unit.  Lightstone SLP II, LLC
may elect to purchase the subordinated profits interests with either cash or an
interest in real property of equivalent value.  The proceeds received
from the cash sale of the subordinated profits interests will be used to offset
payments made by us from offering proceeds to pay the dealer manager fees and
selling commissions and other offering costs.    As of
December 31, 2009, Lightstone SLP II, LLC had not purchase any subordinated
profits interests.





We will
utilize a portion of offering proceeds towards funding the dealer manager fees,
selling commissions and other offering costs.


Below is
a summary of the expenses we have incurred in connection with the issuance and
distribution of the registered securities.





Type
      of Expense AmountUnderwriting
      discounts and commissions
                  
                  $
                  1,041,470Other
      expenses incurred to be paid non-affiliates
                  
                  
                  2,670,295Total  offering
      expenses  incurred as of December 31, 2009
                  
                  $
                  3,711,765





As of
December 31, 2009, the total costs of raising capital associated with our
offering which we have funded, including fees paid to our Dealer Manager was
approximately 31% of total proceeds.  As a significant amount of
offering costs associated with accounting, legal and marketing costs are
incurred prior to the sale of shares, the percentage of proceeds utilized
towards commissions, dealer manager fees and other offering costs is higher than
our estimate of  approximately 10% of offering proceeds.  As
we sell more shares, this percentage will decline over time.


34





Cumulatively,
we have used the net offering proceeds of $8.6 million, after deduction of
offering expenses incurred, as follows:





At December 31, 2009Construction
      of plant, building and facilities
                    
                    $
                    -Purchase
      of real estate interests
                    
                    
                    -Repayment
      of indebtedness
                    
                    
                    -Investment
      in real estate securities
                    
                    
                    1,690,000Cash
      and cash equivalents (as of December 31, 2009)
                    
                    
                    8,596,008Gross
      Temporary investments (as of December 31, 2009)
                    
                    
                    -Subscriptions
      Receivable
                    
                    
                    665,882Other
      uses (primarily timing of payables)
                    
                    
                    (2,323,498
                    )Total
      uses
                    
                    $
                    8,628,392





As of
March 15, 2010, we have sold approximately 1.7 million shares at an aggregate of
price of approximately $17.3 million.  In addition, we have sold
approximately 7,718 shares at an aggregate price of approximately $73,325 under
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.





2009
                        
                        
                        2008(1)Operating
      Data:Revenues
                        
                        $
                        -
                        
                        
                        $
                        -Net
      loss
                        
                        
                        (248,368
                        )
                        
                        
                        -Less:
      net loss attributable to noncontrolling interest
                        
                        
                        42
                        
                        
                        
                        -Net
      loss applicable to Company's common shares
                        
                        
                        (248,326
                        )
                        
                        
                        -Basic
      and diluted loss per Company's common shares
                        
                        
                        (0.98
                        )
                        
                        
                        -Dividends
      declared per Company's common share
                        
                        
                        157,177
                        
                        
                        
                        -Weighted
      average common shares outstanding-basic and diluted
                        
                        
                        254,632
                        
                        
                        
                        -Balance
      Sheet Data:Total
      assets
                        
                        $
                        10,395,455
                        
                        
                        $
                        202,000Long-term
      obligations
                        
                        
                        -
                        
                        
                        
                        -Company's  Stockholder's
      Equity
                        
                        
                        7,557,007
                        
                        
                        
                        200,000Other
      financial data:Funds
      from operations (FFO) attributable to Company's common shares
      (2)
                        
                        $
                        (248,326
                        )
                        
                        $
                        -





1)
            For
      the period April 28, 2008 (inception date) through December 31, 2008 for
      operating data and as of December 31, 2008 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 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.


35





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 II, Inc. (the “Lightstone REIT” or
“Company”) intends to acquire and operate commercial, residential and
hospitality properties, principally in North America. Principally through the
Lightstone Value Plus REIT II, 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, industrial and office properties and that our
residential properties located either in or near major metropolitan
areas.





Capital
required for the purchase of real estate and real estate related investments
will be obtained from the public offering of up to 51,000,000 common shares for
$10 per share, and from any indebtedness that we may incur in connection with
the acquisition of any real estate and real estate related investments
thereafter. A Registration Statement on Form S-11 covering our public offering
was declared effectiveunder the Securities Act
of 1933on February
17, 2009.  The offering commenced on April 24, 2009 and is ongoing. We
are dependent upon the net proceeds from the offering to conduct our proposed
activities.





We do not
have employees. We entered into an advisory agreement dated February 17, 2009
with Lightstone Value Plus REIT II 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.





Acquisitions
and Investment Strategy





We intend
to make direct or indirect real estate investments that will satisfy our primary
investment objectives of preserving capital, paying regular cash dividends and
achieving appreciation of our assets over the long term. The ability of our
Advisor to identify and execute investment opportunities at a pace consistent
with the capital raised through our offering will directly impact our financial
performance.





Through
December 31, 2009, the Operating Partnership acquired for approximately $1.7
million a 32.42% Class D Member Interest in HG CMBS Finance, LLC, a real estate
limited liability company that primarily invests in commercial mortgage-backed
securities (“CMBS”) in November 2009.  As of December 31, 2009, we
currently own no properties.




Current
Environment





Our
operating results as well as our investment opportunities are impacted by the
health of the North American economies.  Our business and financial
performance may be adversely affected by current and future economic conditions,
such as a reduction in the availability of credit, financial markets volatility,
and recession.





U.S.
and global credit and equity markets have recently undergone significant
disruption, making it difficult for many businesses to obtain financing on
acceptable terms or at all. As a result of this disruption, in general there has
been an increase in the costs associated with the borrowings and refinancing as
well as limited availability of funds for refinancing.  If these
conditions continue or worsen, our cost of borrowing may increase and it may be
more difficult to finance investment opportunities in the short
term.





We are
not aware of any other 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.


36


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.





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 requires
us to record as an asset, and include in revenue, unbilled rent that we only
receive if the tenant makes all rent payments required through the expiration of
the initial term of the lease. Accordingly, we will determine, in our judgment,
to what extent the unbilled rent receivable applicable to each specific tenant
is collectible. We 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 will record an increase in our allowance for doubtful accounts or will
record a direct write-off of the specific rent receivable, which will 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 decrease our total assets and
stockholders’ equity.





In
addition, we will defer the recognition of contingent rental income, such as
percentage rents, until the specific target which triggers the contingent rental
income is achieved.  Cost recoveries from tenants will be included in
tenant reimbursement income in the period the related costs are
incurred.





Investments in
Real Estate.   We will record
investments in real estate at cost and 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 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
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 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.





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 considers 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, we will record an
impairment loss to the extent that the carrying value exceeds the estimated fair
value of the property.





We will
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 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.


37





Real Estate
Purchase Price Allocation.  When we make an
investment in real estate, the fair value of the real estate acquired will be
allocated to the acquired tangible assets, consisting of land, building and
tenant improvements, 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, and certain liabilities such as assumed
debt and contingent liabilities, based in each case on their fair values.
Purchase accounting will be applied to assets and liabilities related to real
estate entities acquired based upon the percentage of interest acquired. Fees
incurred related to acquisitions will be expensed as incurred within general and
administrative costs within the consolidated statements of
operation.  Transaction costs incurred related to our investment in
unconsolidated real estate entities, accounted for under the equity method of
accounting, will be capitalized as part of the cost of the
investment.





Upon
acquisition of real estate operating properties, we will estimate the fair value
of acquired tangible assets and identified intangible assets and liabilities,
assumed debt and contingent liabilities at the date of acquisition, based upon
an evaluation of information and estimates available at that date. Based on
these estimates, we allocate the initial purchase price to the applicable
assets, liabilities and noncontrolling interest, if any. As final information
regarding fair value of the assets acquired and liabilities assumed and
noncontrolling interest is received and estimates are refined, appropriate
adjustments will be made to the purchase price allocation. The allocations will
be finalized within twelve months of the acquisition date. We will utilize
independent appraisals to determine fair values.





We will
allocate the purchase price of an acquired property to tangible assets 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 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.   The fair value of in-place leases will include direct
costs associated with obtaining a new tenant, opportunity costs associated with
lost rentals which will be avoided by acquiring an in-place lease, and tenant
relationships.  Direct costs associated with obtaining a new tenant
include commissions, tenant improvements, and other direct costs and will be
estimated based upon independent appraisals and management’s consideration of
current market costs to execute a similar leases.  These direct costs
will be included in intangible lease assets in the accompanying consolidated
balance sheet and will be amortized over the remaining terms of the respective
lease.   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 is charged to expense.   Through December 31, 2009,
we have not acquired any investments in real estate assets.




Investments in
Unconsolidated Real Estate Entities. We evaluate investments in
other real estate entities for consolidation.  We consider the
percentage interest in the joint venture, evaluation of control and whether a
variable interest entity (“VIE”) exists when determining if the investment
qualifies for consolidation.





Under the
equity method, the investment is recorded initially at
cost, and subsequently adjusted for equity in net income (loss) and cash
contributions and distributions.The net income or loss of
each investor is allocated in accordance with the provisions of the applicable
operating agreements of the real estate entities.  The allocation
provisions in these agreements may differ from the ownership interest held by
each investor.  Differences between the carrying amount of the
Company’s investment in the respective joint venture and the Company’s share of
the underlying equity of such unconsolidated entities are amortized over the
respective lives of the underlying assets as applicable.   These
items are reported as a single line item in the consolidated statements of
operations as income or loss from investments in unconsolidated affiliated real
estate entities.  Under the cost of accounting, the investment is
recorded initially
at cost, and subsequently adjusted for cash contributions and distributions
resulting from any capital events. Dividends earned from the
underlying entities are recorded as interest income.





On a
quarterly basis, we assess whether the value of our investments in
unconsolidated real estate entities has been impaired.  An investment
is impaired only if management’s estimate of the fair value of the investment is
less than the carrying value of the investment, and such decline in value is
deemed to be other than temporary.  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 record an impairment charge.





Accounting for
Derivative Financial Investments and Hedging Activities.  We
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.  We will account for derivative and hedging activities,
following Topic 815 - “Derivative and Hedging” in the Accounting Standards
Codification (“ASC”).  We will record all derivative instruments at
fair value on the consolidated balance sheet.


38


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 consolidated
balance sheet as either an asset or liability, with a corresponding amount
recorded in other comprehensive income (loss) within stockholders’ equity.
Amounts will be reclassified from other comprehensive income (loss) to the
consolidated statement of operations 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.  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.





Accounting for
Organizational and Offering Costs.  Selling
commissions and dealer manager fees paid to the Dealer manager, and other
third-party offering expenses such as registration fees, due diligence fees,
marketing costs, and professional fees, are accounted for as a reduction against
additional paid-in capital (“APIC”).  Any organizational costs are
expensed to general and administrative costs.





Inflation





We will
be exposed to inflation risk as income from long-term leases is expected to be
the primary source of our cash flows from operations.  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.





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 interests in real estate entities; asset management fees paid to our
Advisor and property management fees paid to our Property
Manager.  These fees are expensed or capitalized to the basis of
acquired assets, as appropriate.




Our
Property Manager may also perform fee-based construction management services for
both our re-development activities and tenant construction projects. These fees
will be considered incremental to the construction effort and will be
capitalized to the associated real estate project as incurred. 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.





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 II, LLC, which is wholly owned and controlled by our Sponsor, will purchase
subordinated profits interests in the Operating Partnership at a cost of
$100,000 per unit.  Lightstone SLP II, LLC may elect to purchase the
subordinated profits interests with either cash or an interest in real property
of equivalent value.  These subordinated profits interests, the
purchase price of which will be repaid only after stockholders receive a stated
preferred return and their net investment, will entitle LightstoneSLP II, LLCto a portion of any
regular distributions made by the Operating Partnership. Such distributions will
always be subordinated until stockholders receive a stated preferred return. The
proceeds received from the cash sale of the subordinated profits interests will
be used to offset payments made by Lightstone REIT from offering proceeds to pay
the dealer manager fees and selling commissions and other offering costs. 
As of December 31, 2009, Lightstone SLP II, LLC had not purchase any
subordinated profits interests.




39




Income Taxes


We will
elect 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”) in
conjunction with the filing of our 2009 federal tax return. To qualify as a
REIT, we 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, we will not be subject to federal income tax
on taxable income that it distributes to its stockholders. If we fail 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 us relief under certain statutory provisions. Such an
event could materially adversely affect our net income and net cash available
for distribution to stockholders.  As of December 31, 2009 and 2008,
we had no material uncertain income tax positions and our net operating loss
carryforward was zero. The tax years 2008 through 2009 remain open to
examination by the major taxing jurisdictions to which we are
subject.





Results of Operations





We
commenced operations on October 1, 2009 upon the release of our offering
proceeds from escrow.   In November 2009, we acquired an
investment of a 32.42% Class D Member Interest in HG CMBS Finance, LLC, a real
estate limited liability company that primarily invests in commercial
mortgage-backed securities.  Through December 31, 2009, we have not
acquired any other properties or investments.





The
Company’s primary financial measure for evaluating each of its properties will
be net operating income (“NOI”).  NOI represents rental income less
property operating expenses, real estate taxes and general and administrative
expenses.  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.





Comparison
of the year ended December 31, 2009 versus the period April 28, 2008 (date of
inception) through December 31, 2008





Consolidated





General
and administrative expenses





General
and administrative costs were $299,092 in 2009 compared to zero in
2008.  The costs incurred during the year end December 31, 2009
primarily relate to board of director fees, auditor and legal fees as well as
fees paid to our Advisor.  Fees paid to our Advisor during the year
end December 31, 2009 include an acquisition fee of $16,055 associated with the
investment in HG CMBS Finance, LLC and asset management fees of
$2,676.  No fees of any kind were paid to the Advisor for period April
28, 2008 (date of inception) through December 31, 2008.  We expect
general and administrative expenses to increase in the future as a result of
acquisitions in future periods.





Interest
income




Interest
income was $50,724 for the year ended December 31, 2009 compared to zero for the
period April 28, 2008 (date of inception) through December 31,
2008.   The interest income primarily relates to interest earned
on our investment in HG CMBS Finance LLC.  During the period April 28,
2008 (date of inception) through December 31, 2008, we did not own any
investments.





Noncontrolling
interests





The loss
allocated to Noncontrolling interests relates to the interest in the Operating
Partnership held by our Sponsor. (See Note 1 of the notes to the consolidated
financial statements).





Financial Condition, Liquidity and
Capital Resources





Overview:





As of
December 31, 2009, our primary source of funds was from net proceeds from our
public offering of $8.6 million.  We are dependent upon the net
proceeds to be received from our public offering to conduct our proposed
activities. The capital required to purchase real estate investments will be
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 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
sources 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.


40





We
currently have no outstanding debt under any financing facilities and have not
identified any sources of debt financing. 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.





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.




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 may provide for
variable interest rates.





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 include 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
II, LLC, an affiliate of the Advisor.





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, 2009 and 2008:





2009
                  
                  
                  2008Acquisition
      fees
                  
                  $
                  16,055
                  
                  
                  $
                  -Asset
      management fees
                  
                  
                  2,676
                  
                  
                  
                  -Property
      management fees
                  
                  
                  -
                  
                  
                  
                  -Acquisition
      expenses reimbursed to Advisor
                  
                  
                  -
                  
                  
                  
                  -Development
      fees
                  
                  
                  -
                  
                  
                  
                  -Leasing
      commissions
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  18,731
                  
                  
                  $
                  -





Our
charter states that our operating expenses, excluding offering costs, property
operating expenses and real estate taxes, as well as acquisition fees and non
cash related items (“Qualified Operating Expenses”) are to be less than the
greater of 2% of our average invested net assets or 25% of net
income.  For the year ended December 31, 2009, our Qualified Operating
Expenses were less than the greater of 2% of our average invested net assets or
25% of net income.





In
addition, our charter states that our acquisition fees and expenses shall not
exceed 6% of the contract price or in the case of a mortgage, 6% of funds
advanced unless approved by a majority of the independent
directors.  For the year ended December 31, 2009, the acquisition fees
and acquisition expenses were less than 6% of the contract
price.


41


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,
                      2009
                    
                    
                    For the Period
                      April 28, 2008
                      (date of
                      inception)
                      through
                      December 31,
                      2008Cash
      flows used in operating activities
                    
                    $
                    (178,410
                    )
                    
                    $
                    -Cash
      flows used in investing activities
                    
                    
                    (1,690,000
                    )
                    
                    
                    -Cash
      flows provided by financing activities
                    
                    
                    10,364,715
                    
                    
                    
                    99,703Net
      change in cash and cash equivalents
                    
                    
                    8,496,305
                    
                    
                    
                    99,703Cash
      and cash equivalents, beginning of the period
                    
                    
                    99,703
                    
                    
                    
                    -Cash
      and cash equivalents, end of the period
                    
                    $
                    8,596,008
                    
                    
                    $
                    99,703





Our
principal source of cash flow was derived from the net offering proceeds
received. In the future, we intend to acquire properties which will provide a
relatively consistent stream of cash flow that provides us with resources to
fund operating expenses, debt service and quarterly dividends.




Our
principal demands for liquidity currently are acquisition and development
activities as well as costs associated with our public offering.  The
principal sources of funding for our operations are currently the issuance of
equity securities.





Operating
activities





During
the year ended December 31, 2009, cash flows used in operating activities was
$0.2 million compared to zero for the period April 28, 2008 (date of inception)
through Decembers 31, 2008.  The cash used during 2009 related to net
loss of $0.2 million.





Investing
activities





Cash used
in investing activities for the year end December 31, 2009 of $1.7 million
resulted from the purchase of an investment in a 32.42% Class D Member Interest
in HG CMBS Finance, LLC, a real estate limited liability company that primarily
invests in commercial mortgage-backed securities.





Financing
activities





Cash
provided by financing activities during the year ended December 31, 2009 is
primarily the proceeds from the issuance of common stock of $11.5 million offset
by the payment of selling commissions, dealer manger fees and other offering
costs of $1.1 million.




Cash
provided by financing activities during the period ended April 28, 2008 (date of
inception) through December 31, 2008 is primarily the proceeds from the issuance
of common stock of $0.2 million to our Advisor offset by $0.1 million of amounts
due from our Sponsor for reimbursement of offering costs.





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.





Contractual Obligations




None


42


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.




Below is
a reconciliation of net income to FFO for the years ended December 31, 2009 and
2008:





For
      the Year
                              Ended
      December
                              31,
      2009
                            
                            
                            For
      the Period April
                              28,
      2008 (date of
                              inception)
      through
                              December
      31, 2008Net
      loss
                            
                            $
                            (248,368
                            )
                            
                            $
                            -Adjustments:NoneFFO
                            
                            $
                            (248,368
                            )
                            
                            $
                            -Less:
      FFO attributable to noncontrolling interests
                            
                            
                            42
                            
                            
                            
                            -FFO  attributable
      to Company's common share
                            
                            $
                            (248,326
                            )
                            
                            $
                            -FFO
      per common share, basic and diluted
                            
                            $
                            (0.98
                            )
                            
                            $
                            -Weighted
      average number of common shares outstanding, basic and
    diluted
                            
                            
                            254,632
                            
                            
                            
                            -





New
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, a revision of
SFAS No. 141, “Accounting for Business Combinations,” which was primarily
codified into Topic 805 – “Business Combinations” in the ASC.  This
standard 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 impact the Company’s recording of
acquisition fees associated with the purchase of wholly-owned entities on a
prospective basis.  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.  The Company adopted this standard on January 1, 2009 and the
adoption of this statement did not have a material effect on the consolidated
results of operations or financial position.


43


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements an amendment to ARB No. 51” which was
primarily codified into Topic 810 - “Consolidation” in the ASC.  This
standard 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. The Company will also be
required to present net income allocable to the noncontrolling interests and net
income attributable to the stockholders of the Company separately in its
consolidated statements of operations. Prior to the implementation
of  this standard, noncontrolling interests (minority interests) were
reported between liabilities and stockholders’ equity in the Company’s statement
of financial position and the related income attributable to minority interests
was reflected as an expense/income in arriving at net income/loss. This standard
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of this standard are to
be applied prospectively. The Company adopted this standard on January 1, 2009
and the presentation and disclosure requirements were applied retrospectively.
Other than the change in presentation of noncontrolling interests, the adoption
of this standard did not have a material effect on the consolidated results of
operations or financial position.





In
February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a
one-year deferral of the effective date of SFAS No. 157, “Fair Value
Measurements,”  which was primarily codified into Topic 820 - “Fair
Value Measurements and Disclosures” in the ASC.  This guidance is for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis.  The Company adopted this guidance and it did not have a
material impact to the Company’s financial position or consolidated results of
operations.





In
November 2008, the FASB ratified EITF Issue No.  08-6, “Equity Method
Investment Accounting Considerations”, which was primarily codified into Topic
323 – “Investments-Equity Method” in the ASC.  This guidance clarifies
the accounting for certain transactions and impairment considerations involving
equity method investments and is effective for fiscal years beginning on or
after December 15, 2008 to be applied on a prospective basis. The Company
adopted the provisions of this standard on January 1, 2009.  The
adoption of this guidance changed the Company’s accounting for transaction costs
related to equity investments.  Prior to the adoption of this
guidance, the Company expensed these transaction costs to general and
administrative expense as incurred.  Beginning January 1,
2009,  transaction costs incurred related to the Company’s investment
in unconsolidated affiliated real estate entities accounted for under the equity
method of accounting  are capitalized as part of the cost
of  the investment.





In April
2009, FASB, issued FASB Staff Position, or FSP, No. FAS 115-2 and FAS
124-2,Recognition and
Presentation of Other-Than-Temporary Impairments, which was primarily
codified into Topic 320 – “Investments-Debt and Equity Securities” in the
ASC.  This guidance is intended to provide greater clarity to
investors about the credit and noncredit component of an other-than-temporary
impairment event and to more effectively communicate when an
other-than-temporary impairment event has occurred.  The guidance
applies to fixed maturity securities only and requires separate display of
losses related to credit deterioration and losses related to other market
factors.  When an entity does not intend to sell the security and it
is more likely than not that an entity will not have to sell the security before
recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income.  In addition, upon adoption of the guidance, an
entity will be required to record a cumulative-effect adjustment as of the
beginning of the period of adoption to reclassify the noncredit component of a
previously recognized other-than-temporary impairment from retained earnings to
accumulated other comprehensive income.  The guidance is effective for
the Company for the quarter ended June 30, 2009.  The Company adopted
the guidance during the quarter ended June 30, 2009 and the adoption did not
have a material effect on the consolidated results of operations or financial
position.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which was primarily codified into Topic 810 in the ASC.  This
standard requires ongoing assessments to determine whether an entity is a
variable entity and requires qualitative analysis to determine whether an
enterprise’s variable interest(s) give it a controlling financial interest in a
variable interest entity. In addition, it requires enhanced disclosures about an
enterprise’s involvement in a variable interest entity. This standard is
effective for the fiscal year that begins after November 15, 2009. The adoption
of this standard did not have a material impact on the Company's consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles", which was
primarily codified into Topic 105 - "Generally Accepted Accounting Standards" in
the ASC. This standard will become the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants, EITF, and other related accounting literature.
This standard condenses the thousands of GAAP pronouncements into approximately
90 accounting topics and displays them using a consistent structure. Also
included is relevant Securities and Exchange Commission guidance organized using
the same topical structure in separate sections. This guidance became effective
for financial statements issued for reporting periods that ended after September
15, 2009. Beginning in the third quarter of 2009, this guidance impacts the
Company's financial statements and related disclosures as all references to
authoritative accounting literature reflect the newly adopted
codification.





In
January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No.
2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements”.  ASU No. 2010-06 amends
ASC 820 and clarifies and provides additional disclosure requirements related to
recurring and non-recurring fair value measurements. This ASU becomes effective
for the Company on January 1, 2010. The adoption of this ASU did not have a
material impact on our consolidated financial statements.


44





The
Company has determined that all other recently issued accounting pronouncements
will not have a material impact on its consolidated financial position, results
of operations and cash flows, or do not apply to its operations.





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, 2009, we did not have any other swap or derivative
agreements outstanding.





In
addition to changes in interest rates, the value of our real estate will be
subject to fluctuations based on changes in the real estate capital markets,
market rental rates for office space, local, regional and national economic
conditions and changes in the creditworthiness of tenants. All of these factors
may also affect our ability to refinance our debt if necessary.


45





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries


(a
Maryland corporation)





Index





PageReport
      of Independent Registered Public Accounting Firm
                            
                            47Financial
      Statements:Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                            
                            48Consolidated
      Statements of Operations for the year ended December 31, 2009 and the
      period from April 28, 2008 (date of inception) through December 31,
      2008
                            
                            49Consolidated
      Statements of Stockholders' Equity for the year ended December 31, 2009
      and the period from April 28, 2008 (date of inception) through December
      31, 2008
                            
                            50Consolidated
      Statements of Cash Flows for the year ended December 31, 2009 and the
      period from April 28, 2008 (date of inception) through December 31,
      2008
                            
                            51Notes
      to Consolidated Financial Statements
                            
                            52





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.


46


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and its
Subsidiaries




We have
audited the accompanying consolidated balance sheets of Lightstone Value Plus
Real Estate Investment Trust II, Inc. and Subsidiaries (the “Company’) as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year ended December 31,
2009 and the period from April 28, 2008 (date of inception) through 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 II, Inc. and Subsidiaries as of December
31, 2009 and 2008, and the results of their operations and their cash flows
for  the year ended December 31, 2009 and the period from April 28,
2008 (date of inception) through December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.





/s/
Amper, Politziner & Mattia, LLP





March 31,
2010


Edison,
New Jersey


47


PART II. CONTINUED:


ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, CONTINUED:





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


CONSOLIDATED
BALANCE SHEETS


As
of December 31, 2009 and 2008





December 31, 2009
                                      
                                      
                                      December 31, 2008AssetsInvestments
      in unconsolidated real estate entity, at cost
                                      
                                      $
                                      1,690,000
                                      
                                      
                                      $
                                      -Cash
      and cash equivalents
                                      
                                      
                                      8,596,008
                                      
                                      
                                      
                                      99,703Due
      from Sponsor
                                      
                                      
                                      -
                                      
                                      
                                      
                                      102,297Prepaid
      expenses and other assets
                                      
                                      
                                      109,447
                                      
                                      
                                      
                                      -Total
      Assets
                                      
                                      $
                                      10,395,455
                                      
                                      
                                      $
                                      202,000Liabilities
      and Stockholders' EquityAccounts
      Payable and other Accrued expenses
                                      
                                      $
                                      1,110,312
                                      
                                      
                                      $
                                      -Due
      to Sponsor
                                      
                                      
                                      1,569,001Distributions
      payable
                                      
                                      
                                      157,177
                                      
                                      
                                      
                                      -Total
      liabilities
                                      
                                      
                                      2,836,490
                                      
                                      
                                      
                                      -Commitments
      and contingencies (Note 7)Equity:Company's
      stockholders' equity:Preferred
      shares, $0.01 par value, 10,000,000 shares authorized,  none
      outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, $0.01 par value; 100,000,000 shares authorized, 1,236,037 and
      20,000 shares issued and outstanding in 2009 and 2008,
      respectively
                                      
                                      
                                      12,360
                                      
                                      
                                      
                                      200Additional
      paid-in-capital
                                      
                                      
                                      8,616,032
                                      
                                      
                                      
                                      199,800Subscription
      receivable
                                      
                                      
                                      (665,882
                                      )
                                      
                                      
                                      -Accumulated
      distributions in addition to net loss
                                      
                                      
                                      (405,503
                                      )
                                      
                                      
                                      -Total
      Company stockholder’s equity
                                      
                                      
                                      7,557,007
                                      
                                      
                                      
                                      200,000Noncontrolling
      interest
                                      
                                      
                                      1,958
                                      
                                      
                                      
                                      2,000Total
      Equity
                                      
                                      
                                      7,558,965
                                      
                                      
                                      
                                      202,000Total
      Liabilities and Stockholders' Equity
                                      
                                      $
                                      10,395,455
                                      
                                      
                                      $
                                      202,000





The
accompanying notes are an integral part of these consolidated financial
statements.


48


PART II.
CONTINUED:


ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, CONTINUED:





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


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
Year Ended December 31, 2009 and for the period from April 28, 2008 (date of
inception) through December 31, 2008





For the Year Ended
                                  December 31, 2009
                                
                                
                                For the Period April
                                  28, 2008 (date of
                                  inception) through
                                  December 31, 2008Expenses:General
      and administrative costs
                                
                                $
                                299,092
                                
                                
                                $
                                -Total
      operating expenses
                                
                                
                                299,092
                                
                                
                                
                                -Operating
      loss
                                
                                
                                (299,092
                                )
                                
                                
                                -Interest
      income
                                
                                
                                50,724
                                
                                
                                
                                -Net
      loss
                                
                                
                                (248,368
                                )
                                
                                
                                -Less:
      net loss attributable to noncontrolling interest
                                
                                
                                42
                                
                                
                                
                                -Net
      loss applicable to Company's common shares
                                
                                $
                                (248,326
                                )
                                
                                $
                                -Net
      loss per Company's common share, basic and diluted
                                
                                $
                                (0.98
                                )
                                
                                $
                                -Weighted
      average number of common shares outstanding, basic and
    diluted
                                
                                
                                254,632
                                
                                
                                
                                -





The
accompanying notes are an integral part of these consolidated financial
statements.


49


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


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


For
the Year ended December 31, 2009 and for the period from April 28, 2008 (date of
inception) through December 31, 2008





Preferred Shares
              
              
              Common Shares
              
              
              
              
              
              
              
              
              
              
              
              TotalAdditional
              
              
              
              
              
              Accumulated
              
              
              Company
              
              
              TotalPreferred
              
              
              
              
              
              Common
              
              
              
              
              
              Paid-In
              
              
              Subscription
              
              
              Distributions in
              
              
              Stockholders'
              
              
              Noncontrolling
              
              
              TotalShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Receivable
              
              
              Excess of Net Loss
              
              
              Equity
              
              
              Interests
              
              
              EquityBALANCE,
      April 28, 2008 (Date of Inception)
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Proceeds
      from issuance of common shares
              
              
              -
              
              
              
              -
              
              
              
              20,000
              
              
              
              200
              
              
              
              199,800
              
              
              
              -
              
              
              
              -
              
              
              
              200,000
              
              
              
              -
              
              
              
              200,000Proceeds
      from noncontrolling interests
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,000
              
              
              
              2,000BALANCE,
      December 31, 2008
              
              
              -
              
              
              
              -
              
              
              
              20,000
              
              
              
              200
              
              
              
              199,800
              
              
              
              -
              
              
              
              -
              
              
              
              200,000
              
              
              
              2,000
              
              
              
              202,000Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (248,326
              )
              
              
              (248,326
              )
              
              
              (42
              )
              
              
              (248,368
              )Total
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (248,326
              )
              
              
              (248,326
              )
              
              
              (42
              )
              
              
              (248,368
              )Dividends
      declared
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (157,177
              )
              
              
              (157,177
              )
              
              
              -
              
              
              
              (157,177
              )Proceeds
      from offering
              
              
              
              
              
              
              
              
              
              
              1,216,037
              
              
              
              12,160
              
              
              
              12,127,997
              
              
              
              (665,882
              )
              
              
              
              
              
              
              11,474,275
              
              
              
              -
              
              
              
              11,474,275Selling
      commissions and dealer manager fees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,041,470
              )
              
              
              
              
              
              
              
              
              
              
              (1,041,470
              )
              
              
              
              
              
              
              (1,041,470
              )Other
      offering costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,670,295
              )
              
              
              
              
              
              
              
              
              
              
              (2,670,295
              )
              
              
              
              
              
              
              (2,670,295
              )BALANCE,
      December 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              1,236,037
              
              
              $
              12,360
              
              
              $
              8,616,032
              
              
              $
              (665,882
              )
              
              $
              (405,503
              )
              
              $
              7,557,007
              
              
              $
              1,958
              
              
              $
              7,558,965





The
accompanying notes are an integral part of these consolidated financial
statements.


50




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


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Year ended December 31, 2009 and the period from April 28, 2008 (date of
inception) through December 31, 2008





Year Ended
                                  December 31,
                                  2009
                                
                                
                                Period fromApril28,
                                  2008(date ofInception)
                                  throughDecember 31,
                                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                
                                $
                                (248,368
                                )
                                
                                $
                                -Changes
      in assets and liabilities:Increase
      in prepaid expenses and other assets
                                
                                
                                (109,447
                                )
                                
                                
                                -Increase
      in accounts payable and other accrued expenses
                                
                                
                                160,674
                                
                                
                                
                                -Increase
      in due to sponsor
                                
                                
                                18,731
                                
                                
                                
                                -Net
      cash used in operating activities
                                
                                
                                (178,410
                                )
                                
                                
                                -CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in unconsolidated real estate entity
                                
                                
                                (1,690,000
                                )
                                
                                
                                -Net
      cash used in investing activities
                                
                                
                                (1,690,000
                                )
                                
                                
                                -CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      due from sponsor
                                
                                
                                -
                                
                                
                                
                                (102,297
                                )Proceeds
      from issuance of common stock
                                
                                
                                11,474,275
                                
                                
                                
                                200,000Proceeds
      from issuance of limited partnership units
                                
                                
                                -
                                
                                
                                
                                2,000Payment
      of offering costs
                                
                                
                                (1,109,560
                                )
                                
                                
                                -Net
      cash provided by financing activities
                                
                                
                                10,364,715
                                
                                
                                
                                99,703Net
      change in cash
                                
                                
                                8,496,305
                                
                                
                                
                                99,703Cash
      and cash equivalents, beginning of year
                                
                                
                                99,703
                                
                                
                                
                                -Cash
      and cash equivalents, end of year
                                
                                $
                                8,596,008
                                
                                
                                $
                                99,703Supplemental
      disclosure of cash flow information:Dividend
      declared
                                
                                $
                                157,177
                                
                                
                                $
                                -Non
      cash commissions and other offering costs in accounts payable and other
      accrued expenses
                                
                                $
                                2,602,205
                                
                                
                                $
                                -Subscription
      receivable
                                
                                $
                                665,882
                                
                                
                                $
                                -





The
accompanying notes are an integral part of these consolidated financial
statements.


51


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008




1. Organization




Lightstone
Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation (the
“Lightstone REIT” and, together with the Operating Partnership (as defined
below), the “Company”) was formed on April 28, 2008. 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 North
America, as well as real estate-related securities, such as collateralized debt
obligations, commercial mortgage-backed securities and mortgage and mezzanine
loans secured, directly or indirectly, by the same types of properties which it
may acquire directly.





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 II
LP, a Delaware limited partnership formed on April 30, 2008 (the “Operating
Partnership”).





The
Company commenced an initial public offering to sell a maximum of 51,000,000
shares of common shares on April 24, 2009, at a price of $10 per share
(exclusive of 6.5 million shares available pursuant to the Company’s dividend
reinvestment plan, 75,000 shares that are reserved for issuance under the
Company’s stock option plan and 255,000 shares reserved for issuance under the
Company’s Employee and Director Incentive Restricted Share Plan). The Company’s
Registration Statement on Form S-11 (the “Registration Statement”) was declared
effective under the Securities Act of 1933 on February 17, 2009, and on April
24, 2009, 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 issued 20,000 shares to the Advisor on May 20, 2008, for $10 per
share.  In addition, as of September 30, 2009, the Company had reached
its minimum offering by receiving subscriptions of its common shares,
representing gross offering proceeds of approximately $6.5 million. Through
December 31, 2009, cumulative gross offering proceeds of $11.5 million were
released to the Lightstone REIT.  The Lightstone REIT invested the
proceeds from this sale and proceeds from the Advisor in the Operating
Partnership, and as a result, held a 99.98% general partnership interest at
December 31, 2009 and 99.01% general partnership interest at December 31, 2008
in the Operating Partnership’s common units.  The Operating
Partnership commenced operations as of October 1, 2009.




Noncontrolling
Interest – Partners of Operating Partnership





On May
20, 2008, the Advisor 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.





Lightstone
SLP II, LLC, which is wholly owned and controlled by our Sponsor, will purchase
subordinated general partner participation units (“subordinated profits
interests”) in the Operating Partnership at a cost of $100,000 per
unit.  Lightstone SLP II, LLC may elect to purchase the subordinated
profits interests with either cash or an interest in real property of equivalent
value.  The proceeds received from the cash sale of the subordinated
profits interests will be used to offset payments made by Lightstone REIT from
offering proceeds to pay the dealer manager fees and selling commissions and
other offering costs.    As of December 31, 2009, Lightstone
SLP II, LLC had not purchase any subordinated profits interests.





Operating
Partnership Activity





Through
its Operating Partnership, the Company will seek to acquire and operate
commercial, residential, and hospitality properties, principally in North
America. The Company’s commercial holdings will consist of retail (primarily
multi-tenanted shopping centers), lodging, industrial and office
properties.   All such properties may be acquired and operated by
the Company alone or jointly with another party.  In addition, the
Company may invest up to 20% of its net assets in collateralized debt
obligations, commercial mortgage-backed securities (“CMBS”) and mortgage and
mezzanine loans secured, directly or indirectly, by the same types of properties
which it may acquire directly.  Since inception, the Company has
completed the following acquisitions and investments:





2008


During
2008, the Company did not have any acquisitions or investments.


52


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008





2009


During
November 2009, the Operating Partnership acquired a 32.42% Class D Member
Interest in HG CMBS Finance, LLC, a real estate limited liability company that
primarily invests in commercial mortgage-backed securities
(“CMBS”).





All the
acquired properties and development activities will be 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.
These related parties 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 6).





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, 2009, the Company had a
99.98% 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 and investment
in other real estate entities, depreciable lives of long-lived assets, 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 other real estate entities where the Company has the ability to exercise
significant influence, but does not exercise financial and operating control,
and is not
considered to be the primary beneficiary will be accounted for using the
equity method.  Investments in other real estate entities where the
Company has virtually no influence will be accounted for using the cost
method.





Operating
Segments





The
Company currently operates in one business segment through its investment in an
unconsolidated real estate entity as of December 31, 2009.




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





The
Company may invest in marketable securities in the future.  Marketable
securities consist of equity securities and corporate bonds that are designated
as available-for-sale and are recorded at fair value. Unrealized holding gains
or losses will be reported as a component of accumulated other comprehensive
income (loss). Realized gains or losses resulting from the sale of these
securities will be determined based on the specific identification of the
securities sold. An impairment charge will be recognized when the decline in the
fair value of a security below the amortized cost basis is determined to be
other-than-temporary. We will 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 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.  The Company did not
invest in marketable securities during the year ended December 31, 2009 and the
period from April 28, 2008 (date of inception) through December 31,
2008.




53


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


Revenue
Recognition




The
Company may investment in real estate assets that generate rental
income.  Minimum rents will be recognized on a straight-line accrual
basis, over the terms of the related leases. The capitalized above-market lease
values and the capitalized below-market lease values will be amortized as an
adjustment to rental income over the initial lease term. Percentage rents, which
are based on commercial tenants’ sales, will be recognized once the sales
reported by such tenants exceed any applicable breakpoints as specified in the
tenants’ leases. Recoveries from commercial tenants for real estate taxes,
insurance and other operating expenses, and from residential tenants for utility
costs, will be recognized as revenues in the period that the applicable costs
are incurred.





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 or loss is directly
affected by management’s estimate of the collectability of accounts receivable.
As of December 31, 2009 and 2008, the Company did not have any account
receivable balances outstanding.




Investment in Real
Estate




Accounting
for Acquisitions




When the
Company makes an investment in real estate, the fair value of the real estate
acquired will be 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 will be applied to assets and
liabilities related to real estate entities acquired based upon the percentage
of interest acquired. Fees incurred related to acquisitions will be expensed as
incurred and recorded in general and administrative costs in the consolidated
statements of operation. Transaction costs incurred related to the Company’s
investment in unconsolidated real estate entities, accounted for under the
equity method of accounting, and will be capitalized as part of the cost of the
investment.





Upon the
acquisition of real estate operating properties, the Company will estimate the
fair value of acquired tangible assets and identified intangible assets and
liabilities and certain liabilities such as assumed debt and contingent
liabilities, at the date of acquisition, based on evaluation of information and
estimates available at that date. Based on these estimates, the Company will
allocate the initial purchase price to the applicable assets, liabilities and
noncontrolling interests, if any. As final information regarding fair value of
the assets acquired, liabilities assumed and noncontrolling interests is
received and estimates are refined, appropriate adjustments will be made to the
purchase price allocation. The allocations will be finalized as soon as all the
information necessary is available and in no case later than within twelve
months from the acquisition date. We will estimate the value of below market
rental renewal options for acquired below market leases when the exercise of
such renewal options is reasonably assured. The estimated value of any such
below market rental renewal options will be deferred and amortized over the
corresponding reasonably assured renewal period.





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
will be 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 will be amortized as an adjustment to rental income
over the initial non-cancelable lease term and any fixed-rate renewal periods,
which are reasonably assured, in the respective leases.




54


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


The
aggregate value of in-place leases will be 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 will include 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. Optional renewal periods will not be considered.




The
aggregate value of other acquired intangible assets includes tenant
relationships. Factors considered by management in assigning a value to these
relationships will 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 will be amortized over the remaining lease terms.





The
Company did not acquire any real estate during the year ended December 31, 2009
or during the period from April 28, 2008 (date of inception) through December
31, 2008.




Carrying
Value of Assets




The
amounts to be capitalized as a result of periodic improvements and additions to
real estate property, when applicable, and the periods over which the assets are
depreciated or amortized, will be 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
will evaluate the recoverability of its investments in real estate assets at the
lowest identifiable level. Long-lived assets will be tested for recoverability
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. An impairment loss will be recognized only if the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value.





The
Company will evaluate the long-lived assets for potential impairment 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 will be 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.





Depreciation and
Amortization




Depreciation
expense for real estate assets will be computed based on the 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 will be capitalized and amortized over the initial term of
each lease. Maintenance and repairs will be charged to expense as
incurred.




Deferred
Costs




The
Company will capitalize initial direct costs associated with financing and
leasing activities.  The costs will be 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 is originated. Deferred leasing costs will not be amortized to
expense until the earlier of the store opening date or the date the tenant’s
lease obligation begins.




Investments in
Unconsolidated Real Estate Entities





The
Company evaluates its investment in other real estate entities for
consolidation.  The percentage interest in the joint venture,
evaluation of control and whether a variable interest entity (“VIE”) exists are
all considered in determining if the investment qualifies for
consolidation.




55


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


The
Company accounts for its investments in unconsolidated real estate entities
using the equity or cost method of accounting, as appropriate.  Under
the equity method, the investment is recorded initially at
cost, and subsequently adjusted for equity in net income (loss) and cash
contributions and distributions.The net income or loss of
each investor is allocated in accordance with the provisions of the applicable
operating agreements of the real estate entities.  The allocation
provisions in these agreements may differ from the ownership interest held by
each investor.  Differences between the carrying amount of the
Company’s investment in the respective joint venture and the Company’s share of
the underlying equity of such unconsolidated entities are amortized over the
respective lives of the underlying assets as applicable.   These
items are reported as a single line item in the consolidated statements of
operations as income or loss from investments in unconsolidated affiliated real
estate entities.  Under the cost method of accounting, the investment
is recorded
initially at cost, and subsequently adjusted for cash contributions and
distributions resulting from any capital events. Dividends
earned from the underlying entities are recorded as interest income in the
consolidated statements of operations.





On a
quarterly basis, the Company assesses whether the value of the investments in
unconsolidated real estate entities has been impaired.  An investment
is impaired only if management’s estimate of the fair value of the investment is
less than the carrying value of the investment, and such decline in value is
deemed to be other than temporary.  To the extent impairment has
occurred, the loss shall be measured as the excess of the carrying amount of the
investment over the fair value of the investment.  Management’s
estimate of value for each investment is based on a number of assumptions that
are subject to economic and market uncertainties.  As these factors
are difficult to predict and are subject to future events that may alter our
assumptions, the values estimated by management in the impairment analysis may
not be realized. Any decline that is not considered temporary will result in the
recording of an impairment charge.  Management believes no impairment
of the investment in unconsolidated real estate entity existed as of December
31, 2009. The Company did not have investments in unconsolidated real estate
entities as of December 31, 2008.  See Note 3 for additional
information.





Income
Taxes





The
Company will elect 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”), in conjunction with the filing of the Company’s 2009
federal tax return.  To qualify and 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.





As
of January 1, 2009, the Company adopted new accounting guidance concerning
provisions for uncertain income tax positions as contained in ASC 740-10. As of
December 31, 2009 and 2008, the Company had no material uncertain income tax
provisions.





The
Company has not been examined by the Internal Revenue Service nor state taxing
authorities. The tax filings are open to examine by taxing
authorities.





Selling Commission, Dealer
Manager Fees and Organization and Offering Costs




Selling
commissions and dealer manager fees paid to the Dealer manager, and other
third-party offering expenses such as registration fees, due diligence fees,
marketing costs, and professional fees are accounted for as a reduction against
additional paid-in capital (“APIC”) as costs are incurred.  Any
organizational costs are accounted for as general and administrative costs.
Through December 31, 2009, the Company has incurred approximately $1.0 million
in selling commissions and dealer manager fees and $2.8 million of
organizational and offering costs. From the commencement of its initial public
offering through December 31, 2009, the Company has recorded approximately $3.7
million of these expenses against APIC.


56


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008




Financial
Instruments





The
carrying amounts of cash and cash equivalents, receivables and payables
approximate their fair values because of the short maturity of these
instruments.





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 derivative and hedging activities, following Topic 815
- “Derivative and Hedging” in the Accounting Standards Codification
(“ASC”).  The Company will record all derivative instruments at fair
value on the consolidated 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 consolidated balance sheet as either an asset or liability,
with a corresponding amount recorded in other comprehensive income (loss) within
stockholders’ equity. Amounts will be reclassified from other comprehensive
income (loss) to the consolidated statement of operations 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.  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-Based
Compensation





The
Company has a stock-based incentive award plan for our directors, and an
Employee and Director Incentive Restricted Share Plan.  The Company
will account for the incentive award plan in accordance with Topic 718 –
“Compensation-Stock Compensation” in the ASC.  Awards will be 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.  As stock-based compensation expense
recognized in the consolidated statements of operations will be based on awards
ultimately expected to vest, the amount of expense will be reduced for
forfeitures estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures will be estimated based on historical experience. The tax benefits
associated with these share-based payments will be classified as financing
activities in the consolidated statement of cash flows as required under
previous regulations.  For the year ended December 31, 2009 and for
the period from April 28, 2008 (date of inception) through December 31, 2008,
the Company has not granted any stock-based incentive awards.





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 by dividing the net loss by the weighted average number of
shares of common stock outstanding. 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.




57


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008
  New Accounting
Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, a revision of
SFAS No. 141, “Accounting for Business Combinations,” which was primarily
codified into Topic 805 – “Business Combinations” in the ASC.  This
standard 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 impact the Company’s recording of
acquisition fees associated with the purchase of wholly-owned entities on a
prospective basis.  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.  The Company adopted this standard on January 1, 2009 and the
adoption of this statement did not have a material effect on the consolidated
results of operations or financial position.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements an amendment to ARB No. 51” which was
primarily codified into Topic 810 - “Consolidation” in the ASC.  This
standard 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. The Company will also be
required to present net income allocable to the noncontrolling interests and net
income attributable to the stockholders of the Company separately in its
consolidated statements of operations. Prior to the implementation
of  this standard, noncontrolling interests (minority interests) were
reported between liabilities and stockholders’ equity in the Company’s statement
of financial position and the related income attributable to minority interests
was reflected as an expense/income in arriving at net income/loss. This standard
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of this standard are to
be applied prospectively. The Company adopted this standard on January 1, 2009
and the presentation and disclosure requirements were applied retrospectively.
Other than the change in presentation of noncontrolling interests, the adoption
of this standard did not have a material effect on the consolidated results of
operations or financial position.





In
February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a
one-year deferral of the effective date of SFAS No. 157, “Fair Value
Measurements,”  which was primarily codified into Topic 820 - “Fair
Value Measurements and Disclosures” in the ASC.  This guidance is for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis.  The Company adopted this guidance and it did not have a
material impact to the Company’s financial position or consolidated results of
operations.





In
November 2008, the FASB ratified EITF Issue No.  08-6, “Equity Method
Investment Accounting Considerations”, which was primarily codified into Topic
323 – “Investments-Equity Method” in the ASC.  This guidance clarifies
the accounting for certain transactions and impairment considerations involving
equity method investments and is effective for fiscal years beginning on or
after December 15, 2008 to be applied on a prospective basis. The Company
adopted the provisions of this standard on January 1, 2009.  The
adoption of this guidance changed the Company’s accounting for transaction costs
related to equity investments.  Prior to the adoption of this
guidance, the Company expensed these transaction costs to general and
administrative expense as incurred.  Beginning January 1,
2009,  transaction costs incurred related to the Company’s investment
in unconsolidated affiliated real estate entities accounted for under the equity
method of accounting  are capitalized as part of the cost
of  the investment.





In April
2009, FASB, issued FASB Staff Position, or FSP, No. FAS 115-2 and FAS
124-2,Recognition and
Presentation of Other-Than-Temporary Impairments, which was primarily
codified into Topic 320 – “Investments-Debt and Equity Securities” in the
ASC.  This guidance is intended to provide greater clarity to
investors about the credit and noncredit component of an other-than-temporary
impairment event and to more effectively communicate when an
other-than-temporary impairment event has occurred.  The guidance
applies to fixed maturity securities only and requires separate display of
losses related to credit deterioration and losses related to other market
factors.  When an entity does not intend to sell the security and it
is more likely than not that an entity will not have to sell the security before
recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income.  In addition, upon adoption of the guidance, an
entity will be required to record a cumulative-effect adjustment as of the
beginning of the period of adoption to reclassify the noncredit component of a
previously recognized other-than-temporary impairment from retained earnings to
accumulated other comprehensive income.  The guidance is effective for
the Company for the quarter ended June 30, 2009.  The Company adopted
the guidance during the quarter ended June 30, 2009 and the adoption did not
have a material effect on the consolidated results of operations or financial
position.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which was primarily codified into Topic 810 in the ASC.  This
standard requires ongoing assessments to determine whether an entity is a
variable entity and requires qualitative analysis to determine whether an
enterprise’s variable interest(s) give it a controlling financial interest in a
variable interest entity. In addition, it requires enhanced disclosures about an
enterprise’s involvement in a variable interest entity. This standard is
effective for the fiscal year that begins after November 15, 2009. The adoption
of this standard did not have a material impact on the Company's consolidated
financial statements.




58


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles", which was
primarily codified into Topic 105 - "Generally Accepted Accounting Standards" in
the ASC. This standard will become the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants, EITF, and other related accounting literature.
This standard condenses the thousands of GAAP pronouncements into approximately
90 accounting topics and displays them using a consistent structure. Also
included is relevant Securities and Exchange Commission guidance organized using
the same topical structure in separate sections. This guidance became effective
for financial statements issued for reporting periods that ended after September
15, 2009. Beginning in the third quarter of 2009, this guidance impacts the
Company's financial statements and related disclosures as all references to
authoritative accounting literature reflect the newly adopted
codification.





In
January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No.
2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements”.  ASU No. 2010-06 amends
ASC 820 and clarifies and provides additional disclosure requirements related to
recurring and non-recurring fair value measurements. This ASU becomes effective
for the Company on January 1, 2010. The adoption of this ASU did not have a
material impact on our consolidated financial statements.





The
Company has determined that all other recently issued accounting pronouncements
will not have a material impact on its consolidated financial position, results
of operations and cash flows, or do not apply to its operations.





3. Investment in
Unconsolidated Real Estate Entity





In
November 2009, the Company, through its Operating Partnership, acquired for
approximately $1.7 million a 32.42% Class D Member Interest in HG CMBS Finance,
LLC (“HGF”), a real estate limited liability company that primarily invests in
commercial mortgage-backed securities. In accordance with HGF’s operating
agreement and subscription agreement, (1). HGI Debt Opportunity Fund, LLC, the
manager of HGF (the “Manager”), has complete power and authority for the
management and operation of HGF's assets and business; (2). The Company’s Class
D Member Interest is non-redeemable and cannot be assigned, sold, encumbered,
transferred or otherwise disposed of in whole or in part without the prior
written consent of the Manager; (3). As a Class D Member, the Company has no
rights in or with respect to any other Class of membership interest in HGF
(including any rights to any investments acquired by HGF for the benefit of any
other Class; and (4). All income, losses and distributable process of each Class
are shared by the Members of such Class on a pro rata basis according to their
respective member interest.  The Company accounts for its Class D
Member Interest in HGF using the cost method as the Company is a passive
investor and does not have any influence or control. As of December 31, 2009,
such investment was approximately $1.7 million and was included in Investment in
Unconsolidated Real Estate Entity on the consolidated balance
sheet.





The Class
D Members in HGF as of November 2009 own collectively two CMBS bonds with face
values of approximately $16.6 million and $13.6 million, respectively. The bonds
were acquired by HGF specifically for its Class D members and were financed with
$25.7 million of financing from Term Asset Back Securities Loan Facility (TALF)
issued by the Federal Reserve Bank with an interest rate of 2.72% per annum and
cash of $5.2 million. The Company’s share is $1.7 million. The face values of
the bonds are held as collateral against the TALF loans. The bonds accrue
interest at a coupon rate of 5.67% and 5.61% per annum, respectively, and have a
weighted average life of 2.5 years.  For the year ended December 31,
2009, the Company recorded interest income, net of fees related to its
investment in HGF of $49,616 within interest income on the consolidated
statements of operations.





4.
Stockholder’s Equity





Preferred
Shares





Shares of
preferred stock may be issued in the future in one or more series as authorized
by the Company’s board of directors. Prior to the issuance of shares of any
series, the board of directors is required by the Company’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 Company’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 Company, 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 Company’s common stock. To date, the Company
had no outstanding preferred shares.




59


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


Common
Shares





All of
the common stock being offered by the Company 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 Company’s
common stock will be entitled to receive distributions if authorized by the
board of directors and to share ratably in the Company’s assets available for
distribution to the stockholders in the event of a liquidation, dissolution or
winding-up.





Each
outstanding share of the Company’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 Company’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 Company’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
Company’s common stock have equal dividend, distribution, liquidation and other
rights.





Under its
charter, the Company cannot make any 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 which the Company is the acquirer,
however, do not require stockholder approval. The Company had 1,236,037 and
20,000 shares of common stock outstanding as of December 31, 2009 and 2008,
respectively.




Dividends





On
November 3, 2009, the Board of Directors of the Lightstone
REIT  declared a dividend for the quarter December 31, 2009. The
dividends have been calculated based on stockholders of record each day during
this three-month period at a rate of $0.00178082191 per day, which, if paid each
day for a 365-day period, would equal a 6.5% annualized rate based on a share
price of $10.00.  The dividend will be paid in cash on January 15,
2010 to shareholders of record during the three-month period ended December 31,
2009, and $157,177 was recorded as Distributions Payable in the consolidated
balance sheet.  The stockholders have an option to elect the receipt
of shares under our Distributions Reinvestment Program.





The
December 31, 2009 dividend was paid in full in January 15, 2010 using a
combination of cash ($83,852) and shares ($73,325) which represents 7,718 shares
of the Company’s common stock issued pursuant to the Company’s Distribution
Reinvestment Program, at a discounted price of $9.50 per share.




On March
23, 2010, the Company’s Board of Directors declared the quarterly dividend for
the three-month period ended March 31, 2010 in the amount of
$0.00178082191  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
2010.





The
amount of dividends to be distributed to our stockholders in the future will be
determined by our 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 Real Estate Investment Trust under the Internal Revenue
Code.


60


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008




Equity Compensation
Plans





The
Company’s Employee and Director Incentive Restricted Share Plan provides for
grants of awards to its directors, officers and full-time employees (in the
event we ever have employees), full-time employees of its advisor and its
affiliates, full-time employees of entities that provide services to it,
directors of its advisor or of entities that provide services to it, certain of
its consultants and certain consultants to the advisor and its affiliates or to
entities that provide services to it. Such awards shall consist of restricted
shares.





Restricted
share awards entitle the recipient to common shares from us under terms that
provide for vesting over a specified period of time or upon attainment of
pre-established performance objectives. Such awards would typically be forfeited
with respect to the unvested shares upon the termination of the recipient’s
employment or other relationship with the Company. Restricted shares may not, in
general, be sold or otherwise transferred until restrictions are removed
and the shares have vested. Holders of restricted shares may receive cash
dividends prior to the time that the restrictions on the restricted shares have
lapsed. Any dividends payable in common shares shall be subject to the same
restrictions as the underlying restricted shares.





The
Company has adopted a stock option plan under which its independent directors
may receive grants of options to purchase shares of the Company’s common stock.
The Company has authorized 75,000 shares of its common stock for issuance under
its plan. The plan indicates that the Company shall not grant options to its
independent directors unless and until such time as either the Company offers
options to the general public on the same terms or the rules of the North
American Securities Administrators Association permit real estate investment
trusts to grant compensatory stock options to independent directors without
offering such options to the general public. The exercise price for options
granted under the stock option plan will be at least 100% of the fair market
value of the common stock as of the date the option is granted. The term of each
such option will be 10 years.  For the year ended December 31, 2009
and for the period April 28, 2008 (date of inception) through December 31, 2008,
no stock options have been granted to the Company’s independent
directors.





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





Subscription
Receivable





As of
December 31, 2009, the Company recorded a subscription receivable of $665,882 as
a reduction in the Company’s equity on the consolidated balance
sheets.   The subscription receivable relates to shares issued to
the Company’s shareholders for which the proceeds have not yet been received by
the Company solely due to a fact of timing of transfers from the escrow agent
holding the funds.





5.
Noncontrolling Interests





The
noncontrolling interests parties of the Company hold units in the Operating
Partnership.  These units may include subordinated profits interests,
limited partner units, and Common Units.  As of December 31, 2009 and
2008, the noncontrolling interest in the Company’s consolidated balance sheets
represented the 2,000 limited partner units held by the Advisor.





Share Description


See Note
6 for discussion of rights related to subordinated profits
interests.  The limited partner and Common Units of the Operating
Partnership have similar rights as those of the Company’s stockholders including
distribution rights.





Distributions





No
distributions were paid to noncontrolling interests for the years ended December
31, 2009 and for the period from April 28, 2008 (date of inception) through
December 31, 2008.


61


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


6. Related Party Transactions




The
Company 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 Company’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 $35.7 million if the maximum
      offering of 51 million shares is sold. Through inception of the
      offering to December 31, 2009, approximately $858,360 of selling
      commission has been incurred.Dealer
      Management Fee
                          
                          The
      Dealer Manager will be paid up to 3% of gross offering proceeds before
      reallowance to participating broker-dealers. The estimated dealer
      management fee is expected to be approximately $15.3 million if the
      maximum offering of 51 million shares is sold. Through inception of
      the offering to December 31, 2009, approximately $183,110 of dealer
      management fee has been incurred.Reimbursement
      of Offering Expenses
                          
                          Reimbursement
      of all selling commissions and dealer management fees indicated above, are
      estimated at approximately $51 million if the maximum offering of 51
      million shares is sold. The Company will sell a subordinated profits
      interests in the Operating Partnership to Lightstone SLP II LLC (an
      affiliate of the Sponsor) for either cash or interests in real property of
      equivalent value, at the Sponsor’s option. The proceeds received from the
      cash sale of subordinated profits interests will be used to pay the dealer
      manager fees and selling commissions, except to the extent that the
      proceeds from the sale of the subordinated profits participation interests
      exceed the dealer manager fees and selling commissions, the Company will
      apply the remaining proceeds to pay for organizational and offering
      expenses.Acquisition
      Fee
                          
                          The
      Advisor will be paid an acquisition fee equal to 0.95% 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 Company
      anticipates that acquisition expenses will be 0.45% 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, $19,380,000
      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%. During the year ended December
      31, 2009, the Company paid the Advisor $16,055 in acquisition
      fees.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.
      Company 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.


62


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


Fees
                      
                      AmountProperty
      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 Company 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 0.95% of
      the Company’s average invested assets, as defined, payable quarterly in an
      amount equal to 0.2375 of 1% of average invested assets as of the last day
      of the immediately preceding quarter.  For the year ended
      December 31, 2009, the total asset management fee was
    $2,376.Reimbursement
      of Other expenses
                      
                      For
      any year in which the Company qualifies as a REIT, the Advisor must
      reimburse the Company 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 Company.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 Company by independent
      parties.





Lightstone
SLP II, LLC, a wholly-owned subsidiary of the Sponsor, will purchase
subordinated profits interests in the Operating Partnership. These subordinated
profits 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 II, LLC to a portion of any regular distributions
made by the Operating Partnership. There are no distributions to date. Any
future distributions will be paid at a 7% annualized rate of return to
Lightstone SLP II, LLC and will always be subordinated until stockholders
receive a stated preferred return, as described below.


63


Lightstone
Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 For
the Year Ended December 31, 2009 and For the Period From April 28, 2008 (date of
inception) Through December 31, 2008


The
subordinated profits interests will also entitle Lightstone SLP II, 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 Company and, therefore, cannot be determined at the present
time. Liquidating distributions to Lightstone SLP II, LLC will always be
subordinated until stockholders receive a distribution equal to their initial
investment plus a stated preferred return, as described below:


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 subordinated
      profits interests plus a cumulative non-compounded return of 7% per
      year.Returns
      in Excess of 7%
                    
                    Once
      stockholders have received liquidation distributions, and a cumulative
      non-compounded return of 7% per year on their initial net investment, 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 II, LLC, until a 12% return is
      reached.Returns
      in Excess of 12%
                    
                    After
      stockholders and Lightstone SLP II, 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 II,
  LLC.





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 II, 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 subordinated profits interests. “Net
      investment” refers to $10 per share, less a pro rata share of any proceeds
      received from the sale or refinancing of the Company’s
    assets.Returns
      in excess of 7%
                    
                    Once
      a cumulative non-compounded return of 7% per year is realized by
      stockholders on their net investment, 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
      II, LLC until a 12% return is reached.Returns
      in Excess of 12%
                    
                    After
      the 12% return threshold is realized by stockholders and Lightstone SLP
      II, 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 II,
LLC.




7. Commitments and
Contingencies





Legal
Proceedings





From time
to time in the ordinary course of business, the Company may become subject to
legal proceedings, claims or disputes. As of the date hereof, we are not a party
to any material pending legal proceedings.


64





PART II. CONTINUED:


ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:





There
were no disagreements on accounting or financial disclosure during
2009.





Item 9A(T).CONTROLS
      AND PROCEDURES




Disclosure
Controls and Procedures. As of December 31, 2009, 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, 2009 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 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, 2009. 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, 2009.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent 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.




Changes in
Internal Control over Financial Reporting. There were no changes in our
internal control over financial reporting during the quarter ended
December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





ITEM 9B. OTHER INFORMATION:


None.




65




PART
III.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT





Directors




The
following table presents certain information as of March 15, 2010 concerning
each of our directors serving in such capacity:





Principal Occupation and
                        
                        Year Term of
                        
                        Served as aName
                        
                        Age
                        
                        PositionsHeld
                        
                        OfficeWillExpire
                        
                        DirectorSinceDavid
      Lichtenstein
                        
                        49
                        
                        Chief
      Executive Officer, President
                          and
      Chairman of the Board ofDirectors
                        
                        2010
                        
                        2008Edwin
      J. Glickman
                        
                        77
                        
                        Director
                        
                        2010
                        
                        2008George
      R. Whittemore
                        
                        60
                        
                        Director
                        
                        2010
                        
                        2008Shawn
      R. Tominus
                        
                        50
                        
                        Director
                        
                        2010
                        
                        2008Bruno
      de Vinck
                        
                        64
                        
                        Secretary
      and Director
                        
                        2010
                        
                        2008





David
Lichtenstein is the Chairman of our board of directors and our Chief
Executive Officer.  Mr. Lichtenstein is also the Chairman of the Board
and Chief Executive Officer of Lightstone Value Plus Real Estate Investment
Trust, Inc.  Mr. Lichtenstein founded both American Shelter
Corporation and the Lightstone Group in 1988 and directs all aspects of the
acquisition, financing and management of a diverse portfolio of multi-family,
retail and industrial properties located in 27 states, the District of Columbia
and Puerto Rico.  Mr. Lichtenstein is a member of the International
Council of Shopping Centers and NAREIT.  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 Prime Retail, a private company.
Mr. Lichtenstein is the president and/or director of various subsidiaries of
Extended Stay Hotels, Inc. (“‘Extended Stay”) that filed for Chapter 11
protection with Extended Stay.





Edwin J. Glickmanis one of our independent directors and the Chairman of our audit
committee.  Mr. Glickman is also an independent director of Lightstone
Value Plus Real Estate Investment Trust, Inc. 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 is also an
independent director of Lightstone Value Plus Real Estate Investment Trust, Inc.
Mr. Whittemore also serves as Audit Committee Chairman of Prime Group Realty
Trust, as a Director of Village Bank Financial Corporation 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 also an
independent director of Lightstone Value Plus Real Estate Investment Trust, Inc.
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 was a Senior Vice President at
Kamson Corporation, where he managed a portfolio of over 5,000 residential units
as well as commercial and industrial properties.




66





Bruno de
Vinck is our Chief Operating Officer, Senior Vice President, Secretary
and a Director. Mr. de Vinck is also the Senior Vice President, Secretary and
director of Lightstone Value Plus Real Estate Investment Trust, Inc. Mr. de
Vinck is also a Director of the privately held Park Avenue Bank, and Prime Group
Realty Trust, a publicly registered REIT. Mr. de Vinck is a Senior Vice
President with the Lightstone Group, and has been employed by Lightstone since
April 1994.  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.  Mr. de Vinck
is also a director of certain subsidiaries of Extended Stay that filed for
Chapter 11 protection with Extended Stay.





Executive
Officers:




The
following table presents certain information as of March 15, 2010 concerning
each of our executive officers serving in such capacities:





Name
                
                Age
                
                Principal Occupation and Positions
      HeldDavid
      Lichtenstein
                
                49
                
                Chief
      Executive Officer, President and Chairman of the Board of
      DirectorsBruno
      de Vinck
                
                64
                
                SecretaryPeyton
      Owen
                
                52
                
                Chief
      Operating OfficerStephen
      Hamrick
                
                57
                
                PresidentJoseph
      Teichman
                
                36
                
                General
      CounselDonna
      Brandin
                
                53
                
                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.”





Peyton
Owen is our Chief Operating Officer and also serves as President and
Chief Operating Officer of The Lightstone Group. Prior to joining The Lightstone
Group in July 2007, Mr. Owen served as President and CEO of Equity Office
Properties LLC from February 2007 to June 2007, as Executive Vice President and
Chief Operating Officer of Equity Office Properties Trust from October 2003 to
February 2007, and as Chief Operating Officer of Jones Lang LaSalle Inc’s
Americas Region from April 1999 to October 2003. Prior to April 1999, Mr. Owen
held positions as Executive Vice President and Chief Operating Officer, Chief of
Staff, and Leasing Director with LaSalle Partners, Inc., and as Regional Sales
Director at Liebherr-America, Inc. Mr. Owen earned a Bachelor of Science in
Mechanical Engineering at the University of Virginia and a Masters of Business
Administration from the University of Virginia’s Darden School. Mr. Owen is
also a director of certain subsidiaries of Extended Stay that filed for Chapter
11 protection with Extended Stay.




Stephen H.
Hamrick is our President and the President and CEO of our affiliated
dealer-manager.  Mr. Hamrick is also President of Lightstone Value
Plus Real Estate Investment Trust, Inc.  Mr. Hamrick is also the Vice
President of our advisor.  Prior to joining Lightstone 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 Board of Trustees of The Saratoga Group of Funds. In the 1990’s Mr.
Hamrick developed for Cantor Fitzgerald an electronic trading business utilized
by institutional customers, 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
Inc 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
and the Committee on Securities of the NYSE AMEX LLC, 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.




67





Joseph E.
Teichman is our General Counsel and also serves as General Counsel of our
Advisor and Sponsor as well as Lightstone Value Plus Real Estate Investment
Trust, Inc.  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 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. Mr. Teichman is also a
director of certain subsidiaries of Extended Stay that filed for Chapter 11
protection with Extended Stay.





Donna Brandinis our Chief Financial Officer and Treasurer since August 2008 and also
serves as Chief Financial Officer of our advisor and our sponsor as well as
Lightstone Value Plus Real Estate Investment Trust, Inc, and its
advisor.  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, 2009, 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 2009.





Information
Regarding Audit Committee




Our Board
established an audit committee in December 2008. 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 Real
Estate Investment Trust II, Inc., 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





Our
officers will not receive any cash compensation from us for their services as
our officers. We may compensate our officers with restricted shares of our
common stock in accordance with our Employee and Director Incentive Restricted
Share Plan. Our board of directors (including a majority of our independent
directors) will determine if and when any of our officers will receive
restricted shares of our common stock. Additionally, our officers are officers
of one or more of our affiliates and are compensated by those entities
(including our sponsor), in part, for their services rendered to us. Through
December 31, 2009, the Company has not compensated the officers.





Compensation of Board of
Directors





We pay
our independent directors an annual fee of $30,000 and are responsible for
reimbursement of their out-of-pocket expenses, as incurred. 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.


68





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 15, 2010 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 Sharesof
                                  the Lightstone
                                  REIT IIDavid
      Lichtenstein
                                
                                
                                20,000
                                
                                
                                
                                1.62
                                %Edwin
      J. Glickman
                                
                                
                                -
                                
                                
                                
                                -George
      R. Whittemore
                                
                                
                                -
                                
                                
                                
                                -Shawn
      Tominus
                                
                                
                                -
                                
                                
                                
                                -Bruno
      de Vinck
                                
                                
                                -
                                
                                
                                
                                -Peyton
      Owen
                                
                                
                                -
                                
                                
                                
                                -Donna
      Brandin
                                
                                
                                -
                                
                                
                                
                                -Joseph
      Teichman
                                
                                
                                -
                                
                                
                                
                                -Stephen
      Hamrick
                                
                                
                                -
                                
                                
                                
                                -Our directors
      and executive officers as a group (9 persons)
                                
                                
                                20,000
                                
                                
                                
                                1.62
                                %





EQUITY COMPENSATION PLAN
INFORMATION




We have
adopted a stock option plan under which our independent directors may receive
annual awards of nonqualified stock options. The purpose of our stock option
plan is to promote the interests of our stockholders and to enhance our
profitability by attracting and retaining qualified independent directors and
giving such individuals an opportunity to acquire a proprietary interest in us,
thereby creating an increased personal interest in our success.




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, reverse stock split, recapitalization,
reorganization, merger, consolidation or sale of all or substantially all of our
assets. The stock options issuable to the independent directors will not exceed
an amount equal to 10% of the outstanding shares on the date of such grant. We
will not grant options to our independent directors until such time as either we
offer stock options to the general public on the same terms or the rules of
the North American Securities Administrators Association permit real estate
investment trusts to grant compensatory stock options to independent directors
without offering such options to the general public.





The
exercise price for options granted under our stock option plan will be at least
100% of the fair market value of our common stock as of the date the option is
granted.




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.





We have
not issued yet issued any options to purchase shares of our common stock to our
independent directors.





Employee
and Director Incentive Restricted Share Plan





Our
Employee and Director Incentive Restricted Share Plan:


•
            furnishes
      incentives to individuals chosen to receive restricted shares because they
      are considered capable of improving our operations and increasing
      profits;




•
            encourages
      selected persons to accept or continue employment with our advisor and its
      affiliates; and




•
            increases
      the interest of our employees, officers and directors in our welfare
      through their participation in the growth in the value of our common
      shares.




69





The
Employee and Director Incentive Restricted Share Plan provides us with the
ability to grant awards of restricted shares to our directors, officers and
full-time employees (in the event we ever have employees), full-time employees
of our advisor and its affiliates, full-time employees of entities that provide
services to us, directors of the advisor or of entities that provide services to
us, certain of our consultants and certain consultants to the advisor and its
affiliates or to entities that provide services to us. The total number of
common shares reserved for issuance under the Employee and Director Incentive
Restricted Share Plan is equal to 0.5% of our outstanding shares on a fully
diluted basis at any time, not to exceed 255,000 shares.





Restricted
share awards entitle the recipient to common shares from us under terms that
provide for vesting over a specified period of time or upon attainment of
pre-established performance objectives. Such awards would typically be forfeited
with respect to the unvested shares upon the termination of the recipient’s
employment or other relationship with us. Restricted shares may not, in general,
be sold or otherwise transferred until restrictions are removed and the shares
have vested. Holders of restricted shares may receive cash dividends prior to
the time that the restrictions on the restricted shares have lapsed. Any
dividends payable in common shares shall be subject to the same restrictions as
the underlying restricted shares.





The
guidance under Section 409A of the Internal Revenue Code provides that there is
no deferral of compensation merely because the value of property (received in
connection with the performance of services) is not includible in income by
reason of the property being substantially nonvested (as defined in Section
83 of the Internal Revenue Code). Accordingly, it is intended that the
restricted share grants will not be considered “nonqualified deferral
compensation.”





We have
not yet granted any awards of restricted shares.





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 February 17, 2009, 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.





Property
Manager


We have
agreed to pay our Property Manager a monthly management fee of up to 5% of the
gross revenues from our residential, lodging 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 managers a separate fee for the one-time initial rent-up or 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.





Notwithstanding
the foregoing, our property managers may be entitled to receive higher fees in
the event our property managers demonstrate to the satisfaction of a majority of
the directors (including a majority of the independent directors) that a higher
competitive fee is justified for the services rendered. 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
not incurred any fees to the Property Manager for the year ended December 31,
2009 and for the period from April 28, 2008 (date of inception) through December
31, 2008:





Dealer
Manager


We pay
the Dealer Manager selling commissions of up to 7% of gross offering proceeds,
or approximately $35,700,000 if the maximum offering of 51,000,000 shares are
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 3% of gross offering proceeds, or
approximately $15,300,000, 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 3% of the
gross offering proceeds to be paid to such participating
broker-dealers.  Total fees paid to the dealer manager in 2009 were
$1,041,470 and zero in 2008.




70




Advisor


We will
pay our Advisor an acquisition fee equal to 0.95% 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 0.45% 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, $19,380,000 may be
paid as an acquisition fee and for the reimbursement of acquisition expenses as
the maximum offering was sold, assuming aggregate long-term permanent leverage
of approximately 75%. The Advisor will also be paid an advisor asset management
fee of 0.95% of our average invested assets and we will reimburse some expenses
of the Advisor. We have recorded $18,731 and zero paid to the Advisor for the
year ended December 31, 2009 and for the period from April 28, 2008 (date of
inception) through December 31, 2008, respectively.





Sponsor


The
Sponsor has agreed to purchase subordinated profits interests in the Company’s
operating partnership semiannually at a price of $100,000 per $1,000,000 in
subscriptions until the maximum offering is achieved. The Sponsor may elect to
purchase subordinated profits interests with cash or contributions of interests
in real property. The proceeds received from the cash sale of subordinated
profits interests will be used to offset amounts paid by the Company for the
dealer manager fees, selling commissions and other offering costs.





As the
sole member of our Sponsor, which wholly owns Lightstone SLP II, LLC, Mr.
Lichtenstein is the indirect, beneficial owner of such subordinated
profits  interests and will thus receive an indirect benefit from any
distributions made in respect thereof.




These
subordinated profit interests will entitle Lightstone SLP II, 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 II, LLC, as
holder of the subordinated profits interests, could be
substantial.





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.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




Amper,
Politziner & Mattia LLP audited our financial statements for the year ended
December 31, 2009 and for the period from April 28, 2008 (date of
inception) through December 31, 2008. Amper, Politziner & Mattia LLP reports
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, 2009 and for the period from April 28, 2008
(date of inception) through December 31, 2008 by the Lightstone REIT’s principal
accounting firm of Amper, Politziner & Mattia LLP:





Year ended
                      December 31,2009
                    
                    
                    Period fromApril
                      28, 2008(date of
                      inception)through
                      December 31,
                      2008Audit
      Fees (a)
                    
                    $
                    52,500
                    
                    
                    $
                    47,775Audit-Related
      Fees (b)
                    
                    
                    7,350
                    
                    
                    
                    9,750Tax
      Fees (c)
                    
                    
                    -
                    
                    
                    
                    -All
      Other Fees
                    
                    
                    -
                    
                    
                    
                    -Total
      Fees
                    
                    $
                    59,850
                    
                    
                    $
                    57,525




a)
            Fees for audit services in the
      year ended December 31, 2009 and for the period from April 28, 2008 (date
      of inception) through December 31, 2008 consisted of the audit of the
      Lightstone REIT’s annual financial
  statements.





(b)
            Fees for audit-related services
      in the year ended December 31, 2009 and for the period from April 28, 2008
      (date of inception) through December 31, 2008 related to registration
      statements consents.




71





(c)
            There were no fees for tax
      services billed in the year ended December 31, 2009 and for the period
      from April 28, 2008 (date of inception) through December 31,
      2008.





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.





AUDIT
COMMITTEE REPORT




To the Directors of Lightstone Value
Plus Real Estate Investment Trust II, Inc.:




We have reviewed and discussed with
management Lightstone Value Plus Real Estate Investment Trust II, Inc.’s audited
financial statements as of and for the year ended December 31, 2009.




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 Public Company Accounting Oversight Board Rule
3526, Communication with Audit Committees Concerning Independence 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 II, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2009.




Audit
Committee


George R.
Whittemore


Edwin J.
Glickman


Shawn R.
Tominus


72


PART
IV.


ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:





LIGHTSTONE VALUE PLUS REAL
ESTATE INVESTMENT TRUST II, INC.


Annual
Report on Form 10-K


For the
fiscal year ended December 31, 2009





EXHIBIT
INDEX





The
following exhibits are filed as part of this Annual Report on Form 10-K or
incorporated by reference herein:




EXHIBIT NO.
              
              DESCRIPTION1.1#
              
              Dealer
      Manager Agreement by and between Lightstone Value Plus Real Estate
      Investment Trust II, Inc. and Lightstone Securities,
  LLC.1.2**
              
              Form
      of Soliciting Dealers Agreement by and between Lightstone Securities, LLC
      and the Soliciting Dealers.3.1**
              
              Form
      of Amended and Restated Charter of Lightstone Value Plus Real Estate
      Investment Trust II, Inc.3.2*
      *
              
              Bylaws
      of Lightstone Value Plus Real Estate Investment Trust II,
    Inc.4.1**
              
              Form
      of Amended and Restated Agreement of Limited Partnership of Lightstone
      Value Plus REIT II LP4.3*
              
              Agreement
      by and among Lightstone Value Plus REIT II LP, Lightstone SLP II LLC, and
      David Lichtenstein4.4#
              
              Amended
      and Restated Agreement dated as of November 10, 2008, by and among
      Lightstone Value Plus REIT II LP, Lightstone SLP II LLC, and David
      Lichtenstein.10.1**
              
              Escrow
      Agreement by and among Lightstone Value Plus Real Estate Investment Trust
      II, Inc., Wells Fargo Bank, National Association and Lightstone
      Securities, LLC.10.2+
              
              Advisory
      Agreement by and between Lightstone Value Plus Real Estate Investment
      Trust II, Inc. and Lightstone Value Plus REIT II LLC.10.3+
              
              Form
      of Management Agreement, by and among Lightstone Value Plus Real Estate
      Investment Trust II, Inc., Lightstone Value Plus REIT II LP and Prime
      Retail Property Management, LLC.10.4+
              
              Form
      of Management Agreement, by and among Lightstone Value Plus Real Estate
      Investment Trust II, Inc., Lightstone Value Plus REIT II LP and Beacon
      Property Management, LLC.Form of the Company’s Stock Option
      Plan.10.5+
              
              Form
      of Management Agreement, by and among Lightstone Value Plus Real Estate
      Investment Trust II, Inc., Lightstone Value Plus REIT II LP and HVM,
      LLC.10.6+
              
              Form
      of Management Agreement, by and among Lightstone Value Plus Real Estate
      Investment Trust II, Inc., Lightstone Value Plus REIT II LP and Prime
      Group Realty Trust.10.7**
              
              Form
      of the Employee and Director Incentive Restricted Share
    Plan.10.8
              
              Form
      of the Stock Option Plan.31.1
              
              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 200232.2
              
              Certification
      Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002





+
            Incorporated
      by reference from Lightstone Value Plus Real Estate Investment Trust II,
      Inc.’s Registration Statement on Form S-11 (333-151532) as amended on
      August 22, 2008.


*
            Incorporated
      by reference from Lightstone Value Plus Real Estate Investment Trust II,
      Inc.’s Registration Statement on Form S-11 (333-151532) as amended on
      October 6, 2008.


*
      *
            Incorporated
      by reference from Lightstone Value Plus Real Estate Investment Trust,
      Inc.’s Registration Statement on Form S-11 (File No. 333-151532) as
      amended on November 17, 2008.


#
            Incorporated
      by reference from Lightstone Value Plus Real Estate Investment Trust,
      Inc.’s Registration Statement on Form S-11 (File No. 333-151532) as
      amended on February 17, 2009.


73


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 II, INC.Date: March
      31, 2010
              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 Lichtenstein
              
              Chief
      Executive Officer and Chairman of the Board
              
              March
      31, 2010David
      Lichtenstein
              
              of
      Directors/s/ Donna Brandin
              
              Chief
      Financial Officer and Treasurer
              
              March
      31, 2010Donna
      Brandin/s/ Bruno de Vinck
              
              Director
              
              March
      31, 2010Bruno
      de Vinck/s/ Shawn R. Tominus
              
              Director
              
              March
      31, 2010Shawn
      R. Tominus/s/ Edwin J. Glickman
              
              Director
              
              March
      31, 2010Edwin
      J. Glickman/s/ George R. Whittemore
              
              Director
              
              March
      31, 2010George
      R. Whittemore




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