Document:

Unassociated Document

     

     

      www.forticellbioscience.com

    

    

    March
      28,
      2008            

    Dear
      Alan:

    

    We
      at
      Forticell deeply appreciate your hard work and skill in performing the essential
      tasks required of our Chief Financial Officer. In order to induce you to
      continue to serve as our CFO, our Board of Directors has authorized me to advise
      you that in the event your employment by Forticell is terminated by Forticell
      without cause:

    

    
      	 	
              (a)

            	
              Forticell
                will pay you upon termination a cash payment equal to nine (9) months
                of
                your then annual salary, paid to you in accordance with standard
                Company
                payroll practices. Your current annual salary is
                $225,000;

            

    

    

    
      	 	
              (b)

            	
              Forticell
                will pay the cost of the health insurance coverage, covering your
                same
                family members now covered by the health insurance policy now provided
                you
                by Forticell, you would be entitled to receive under COBRA, but which,
                under COBRA, you would otherwise have to pay for yourself, for a
                period
                equal to the lesser of (i) one (1) year or (ii) your becoming eligible
                to
                participate in the health benefit plan of a new
                employer;

            

    

    

    
      	 	
              (c)

            	
              any
                option heretofore granted you to purchase shares of Forticell’s common
                stock shall be modified as follows:

            

    

    

    
      	 	
              (i)

            	
              The
                next date following the date of termination of your employment without
                cause on which you could exercise any portion of any of your options
                shall
                be accelerated to the date of such termination of your employment,
                

            

    

    

    
      	 	
              (ii)

            	
              none
                of your vested stock options (that is, the portion of any option
                that you
                could exercise, including the portion where the exercise date is
                accelerated as provided in clause (c)(i) immediately above) shall
                expire
                before the end of their stated terms because of the termination of
                your
                employment with Forticell without cause, any provisions in any such
                stock
                options to the contrary nothwithstanding,
                and

            

    

    

    
      	 	
              (iii)

            	
              the
                portion of any option not exercisable upon the termination of your
                employment by us shall lapse and no longer be exercisable.
                

            

    

    

    The
      following illustrates the provision of this Section (c). 

    On
      October 26, 2007 the Board of Directors granted you an option to purchase
      250,000 shares of Forticell common stock with the option to purchase 62,500
      shares exercisable on the date of grant, and the option to purchase the other
      187,500 shares being exercisable as follows:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    

    
      	 	 	
              62,500
                shares on September 26, 2008

            

    

    
      	 	 	
              62,600
                shares on September 26, 2009; and

            

    

    
      	 	 	
              the
                remaining 62,500 shares on September 26,
                2010.

            

    

    

    Assume
      that your employment with Forticell is terminated without cause on June 1,
      2009.
      The option to purchase 125,000 of such 250,000 shares shall continue to be
      exercisable until the original expiration date of such option on September
      25,
      2014 because the portion of the option to purchase 62,500 shares was vested
      on
      the date of grant (September 26, 2007) and the portion of the option to purchase
      the next 62,500 shares originally exercisable on September 26, 2008 becomes
      exercisable on June 1, 2008, the date of termination of your employment. However
      the portion of the option to purchase an aggregate of 125,000 shares
      (exercisable for 62,500 shares on September 26, 2009 and for 62,500 shares
      on
      September 26, 2010) shall lapse and no longer be exercisable as to such 125,000
      shares, effective June 1, 2009, the date of termination of your employment
      with
      Forticell; and.

    

    
      	 	
              (d)

            	
              any
                grant of restricted stock received by you from Forticell shall not
                be
                required to be reconveyed by you to Forticell, any agreement between
                you
                and Forticell providing to the contrary
                notwithstanding.

            

    

    

    Without
      Cause.
      Forticell may terminate your employment at any time without case.

    

    With
      Cause.
      Forticell may terminate your employment at any time and without further
      obligation for cause. For purposes of this Agreement, “cause” shall mean the
      occurrence of any of the following events:

    

    
      	 	
              a)

            	
              a
                material breach by you of any fiduciary duty owed by you to Forticell,
                or

            

    

    
      	 	
              b)

            	
              criminal
                proceedings instituted against you by any governmental authority
                charging
                you with having committed a felony crime,
                or

            

    

    
      	 	
              c)

            	
              criminal
                proceedings instituted against others by any governmental authority
                in
                which you are designated as a participant in the commission of a
                felony
                crime even if you are not personally charged in such criminal proceedings,
                or

            

    

    
      	 	
              d)

            	
              any
                continuing refusal to obey the directives and/or instructions of
                the Board
                of Forticell if you have received 30 days written notice of your
                alleged
                refusal and the actions required to be taken by you to cure it, and
                such
                identified refusal remains uncured after such 30 day period. Provided
                that
                no such notice shall be required for any repetitive refusal to obey
                the
                directives and/or instructions of the Board of Forticell or if such
                violation is not susceptible to
                cure.

            

    

    

    Disability
      or Death.
      Your
      employment with Forticell shall terminate upon your death or your “disability”.
      For purposes of this agreement the term “Disability” shall mean your inability
      to perform your duties due to your mental or physical incapacity for a period
      of
      45 consecutive days or for a period of 90 days during any consecutive 6 month
      period. Within 15 days following the termination of your employment on account
      of disability or death, you or your estate (as the case may be) shall be
      entitled to receive a lump sum payment equal to one-twelfth (l/12th)
      of your
      then annual salary. You or your estate (as the case may be) shall have no
      further rights to any compensation or any other benefits as a result of your
      death or disability provided that, the foregoing is not in any way intended
      to
      limit the right of you or your estate (as the case may be) to exercise the
      vested portion of your options in accordance with the terms of the applicable
      stock option agreements. All other benefits, if any, due you following
      termination of your employment because of your death or disability shall be
      determined in accordance with the then plans, policies and practices of
      Forticell; provided, however, that you (or your estate, as the case may be)
      shall not participate in any of Forticell’s severance plan, policy or
      program.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    

    Release
      as a Condition Precedent to Certain Payments.
      You
      agree as a condition to receipt of the termination payments and benefits
      provided in this agreement, that you will execute a release agreement, in a
      form
      reasonably satisfactory to Forticell, releasing Forticell from any and all
      claims arising out of your employment other than the enforcement of this
      agreement and your rights under any of Forticell’s employee benefit plans and
      programs to which you are entitled pursuant to this agreement.

    

    Please
      confirm your acknowledgment of the receipt of this agreement by
      Forticell.

    

    
      	 	
              Yours
                very truly,

            
	 	 
	 	 
	 	
              /s/
                Costa Papastephanou

            
	 	
              Costa
                Papastephanou

            
	 	
              Chief
                Executive Officer

            

    

    

    

    

    

    I
      hereby
      acknowledge, appreciate and accept receipt of the foregoing agreement and agree
      to be bound by the terms thereof.

    

    

    
      	 	
              /s/
                Alan W. Schoenbart

            
	 	
              Alan
                W. Schoenbart

            
	 	
              Dated,
                March 28, 20081407
      BROADWAY MEZZ II LLC and SUBSIDIARIES 

    

    For
      The
      Period January 4, 2007 (date of inception) through December 31,
      2007

    

      
        	 	 	
                Page

              	 
	
                Report
                  of Independent Registered Public Accounting Firm

              	 	 	
                1

              	 
	 	 	 	 	 
	
                Consolidated
                  Balance Sheet

              	 	 	
                2

              	 
	 	 	 	 	 
	
                Consolidated
                  Statement of Operations

              	 	 	
                3

              	 
	 	 	 	 	 
	
                Consolidated
                  Statement of Members’ Capital

              	 	 	
                4

              	 
	 	 	 	 	 
	
                Consolidated
                  Statement of Cash Flows

              	 	 	
                5

              	 
	 	 	 	 	 
	
                Notes
                  to Consolidated Financial Statements

              	 	 	
                6
                  - 20

              	 

      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Report
      of
      Independent Registered Public Accounting Firm

     

    Members

    1407
      Broadway Mezz II LLC

    

    We
      have
      audited the accompanying consolidated balance sheet of 1407 Broadway Mezz II
      LLC
      and Subsidiaries (the “Company”) as of December 31, 2007, and the related
      consolidated statement of operations, members’ capital and cash flows for the
      period January 4, 2007 (date of inception) through December 31, 2007. 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 audit.

    

    We
      conducted our audit 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 also 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 audit provides a
      reasonable basis for our opinion.

    

    In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of 1407 Broadway Mezz II LLC
      and Subsidiaries as of December 31, 2007, and the results of their operations
      and their cash flows for period January 4, 2007 (date of inception)
      through December 31 2007, in conformity with accounting principles generally
      accepted in the United States of America.

    

     

     

    /s/
      Amper, Politziner & Mattia, P.C.

     

    March
      28,
      2008

    Edison,
      New Jersey

     

    
      
        
        

      

      
        -1-

        
          

        

      

      
        
        

      

    

     

    
      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Consolidated
        Balance Sheet

      December
        31, 2007

      

        
          	
                  Assets

                	 	 	 	 
	 	 	 	 	 
	
                  Real
                    estate, at cost

                	 	 	 	 
	
                  Building
                    and improvements

                	 	
                  $

                	
                  106,394,693

                	 
	
                  Tenant
                    improvements

                	 	 	
                  12,461,728
                    

                	 
	 	 	 	
                  118,856,421
                    

                	 
	 	 	 	 	 
	
                  Less
                    accumulated depreciation

                	 	 	
                  (7,495,184

                	
                  )

                
	
                   

                	 	 	
                  111,361,237
                    

                	 
	 	 	 	 	 
	
                  In-place
                    lease intangibles, net of accumulated amortization of
                    $7,159,460

                	 	 	
                  6,891,569
                    

                	 
	
                  Above-market
                    lease intangibles, net of accumulated amortization of
                    $1,335,085

                	 	 	
                  2,118,107
                    

                	 
	 	 	 	 	 
	
                  Total
                    real estate

                	 	 	
                  120,370,913
                    

                	 
	 	 	 	 	 
	
                  Cash

                	 	 	
                  1,986,588
                    

                	 
	
                  Restricted
                    cash escrows

                	 	 	
                  9,471,509
                    

                	 
	
                  Accounts
                    receivable, net of allowance of $393,382

                	 	 	
                  1,344,327
                    

                	 
	
                  Accrued
                    straight lined rent

                	 	 	
                  950,788
                    

                	 
	
                  Deferred
                    costs, net of accumulated amortization of $2,029,572

                	 	 	
                  3,319,757
                    

                	 
	
                  Prepaid
                    real estate taxes

                	 	 	
                  3,033,932
                    

                	 
	
                  Prepaid
                    and other assets

                	 	 	
                  827,053
                    

                	 
	 	 	 	 	 
	
                  Total
                    assets

                	 	
                  $

                	
                  141,304,867

                	 
	 	 	 	 	 
	
                  Liabilities
                    and Members' Capital

                	 	 	 	 
	 	 	 	 	 
	
                  Mortgage
                    note payable

                	 	
                  $

                	
                  110,847,201

                	 
	
                  Accrued
                    interest payable

                	 	 	
                  431,418
                    

                	 
	
                  Accounts
                    payable and accrued liabilities

                	 	 	
                  2,725,770
                    

                	 
	
                  Accrued
                    tenant improvement allowances

                	 	 	
                  987,680
                    

                	 
	
                  Deferred
                    rental income

                	 	 	
                  456,262
                    

                	 
	
                  Below-market
                    lease intangibles, net of accumulated amortization of
                    $1,526,150

                	 	 	
                  4,876,419
                    

                	 
	
                  Tenant
                    security deposits

                	 	 	
                  8,162,813
                    

                	 
	 	 	 	 	 
	
                  Total
                    liabilities

                	 	 	
                  128,487,563
                    

                	 
	 	 	 	 	 
	
                  Commitments
                    and Contingencies

                	 	 	 	 
	 	 	 	 	 
	
                  Members'
                    Capital

                	 	 	
                  12,817,304
                    

                	 
	 	 	 	 	 
	
                  Total
                    liabilities and members' capital 

                	 	
                  $

                	
                  141,304,867

                	 

        

      

       

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

         

        
          
            
            

          

          
            -2-

            
              

            

          

          
            
            

          

        

      

      

        1407
          BROADWAY MEZZ II LLC and SUBSIDIARIES

        Consolidated
          Statement of Operations

        For
          the
          Period January 4, 2007 (date of inception) through December 31,
          2007

        

          
            	
                    Revenue

                  	 	 	 	 
	
                    Rental

                  	 	
                    $

                  	
                    36,119,292

                  	 
	
                    Tenant
                      reimbursements

                  	 	 	
                    1,328,150
                      

                  	 
	 	 	 	 	 
	
                    Total
                      revenue

                  	 	 	
                    37,447,442
                      

                  	 
	 	 	 	 	 
	
                    Expenses

                  	 	 	 	 
	
                    Property
                      operations

                  	 	 	
                    20,290,118
                      

                  	 
	
                    Real
                      estate taxes

                  	 	 	
                    6,411,362
                      

                  	 
	
                    Depreciation

                  	 	 	
                    7,495,184
                      

                  	 
	
                    Amortization

                  	 	 	
                    8,719,735
                      

                  	 
	
                    
                      
                        Interest,
                          including amortization of  deferred financing costs of
                          $469,297

                      

                    

                  	 	 	
                    9,490,576
                      

                  	 
	 	 	 	 	 
	
                    Total
                      expenses

                  	 	 	
                    52,406,975
                      

                  	 
	 	 	 	 	 
	
                    Operating
                      loss

                  	 	 	
                    (14,959,533

                  	
                    )

                  
	 	 	 	 	 
	
                    Other
                      income

                  	 	 	
                    126,985
                      

                  	 
	 	 	 	 	 
	
                    Net
                      loss

                  	 	
                    $

                  	
                    (14,832,548

                  	
                    )

                  

          

        

         

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

        

         

        
          
            
            

          

          
            -3-

            
              

            

          

          
            
            

          

        

      

      

        1407
          BROADWAY MEZZ II LLC and SUBSIDIARIES

        Consolidated
          Statement of Members' Capital

        For
          the
          Period January 4, 2007 (date of inception) through December 31,
          2007.

        

          
            	 	 	
                     

                  	
                     

                  	
                     

                  	
                     

                  	
                    Total

                  	
                     

                  
	
                     

                  	
                     

                  	
                    Lightstone
                      1407

                  	
                     

                  	
                    LVP
                      1407

                  	
                     

                  	
                    Members'
                      

                  	
                     

                  
	
                     

                  	
                     

                  	
                    Manager,
                      LLC

                  	
                     

                  	
                    Broadway
                      LLC

                  	
                     

                  	
                    Capital

                  	 
	
                    Initial
                      contributions at date of inception on January 4, 2007

                  	 	
                    $

                  	
                    13,511,866

                  	 	
                    $

                  	
                    12,981,989

                  	 	
                    $

                  	
                    26,493,855

                  	 
	
                     

                  	 	 	 	 	 	 	 	 	 	 
	
                    Contributions

                  	 	 	
                    589,558
                      

                  	 	 	
                    566,439
                      

                  	 	 	
                    1,155,997
                      

                  	 
	 	 	 	 	 	 	 	 	 	 	 
	
                    Net
                      loss

                  	 	 	
                    (7,564,599

                  	
                    )

                  	 	
                    (7,267,949

                  	
                    )

                  	 	
                    (14,832,548

                  	
                    )

                  
	 	 	 	 	 	 	 	 	 	 	 
	
                    Balance,
                      December 31, 2007

                  	 	
                    $

                  	
                    6,536,825

                  	 	
                    $

                  	
                    6,280,479

                  	 	
                    $

                  	
                    12,817,304

                  	 

          

        

         

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

        

         

        
          
            
            

          

          
            -4-

            
              

            

          

          
            
            

          

        

      

      

        1407
          BROADWAY MEZZ II LLC and SUBSIDIARIES

        Consolidated
          Statement of Cash Flows

        For
          the
          Period from January 4, 2007 (date of inception) through December 31,
          2007

        

          
            	
                    Cash
                      flows from operating activities

                  	 	 	 	 
	
                    Net
                      loss

                  	 	
                    $

                  	
                    (14,832,548

                  	
                    )

                  
	
                    
                      
                        Adjustments
                          to reconcile net loss to net cash  provided by operating
                          activities

                      

                    

                  	 	 	 	 
	
                    
                      
                        Amortization
                          of above/below-market lease intangibles (included in rental
                          revenue)

                      

                    

                  	 	 	
                    (191,065

                  	
                    )

                  
	
                    Depreciation
                      and amortization

                  	 	 	
                    16,214,919
                      

                  	 
	
                    Amortization
                      of deferred financing costs

                  	 	 	
                    469,297
                      

                  	 
	
                    Changes
                      in other operating assets and liabilities

                  	 	 	 	 
	
                    Accounts
                      receivable

                  	 	 	
                    (1,344,327

                  	
                    )

                  
	
                    Accrued
                      straight lined rent

                  	 	 	
                    (950,788

                  	
                    )

                  
	
                    Prepaid
                      real estate tax

                  	 	 	
                    (3,033,932

                  	
                    )

                  
	
                    Prepaid
                      and other assets

                  	 	 	
                    (827,053

                  	
                    )

                  
	
                    Accrued
                      interest payable

                  	 	 	
                    431,418
                      

                  	 
	
                    Accounts
                      payable and accrued liabilities

                  	 	 	
                    2,725,770
                      

                  	 
	
                    Deferred
                      rental income

                  	 	 	
                    456,262
                      

                  	 
	 	 	 	 	 
	
                    Net
                      cash provided by operating activities

                  	 	 	
                    (882,047

                  	
                    )

                  
	 	 	 	 	 
	
                    Cash
                      flows from investing activities

                  	 	 	 	 
	
                    Expenditures
                      for real estate 

                  	 	 	
                    (132,489,505

                  	
                    )

                  
	
                    Increase
                      in restricted cash escrows, primarily security deposits

                  	 	 	
                    (9,471,509

                  	
                    )

                  
	
                    Security
                      deposits

                  	 	 	
                    8,162,813
                      

                  	 
	
                    Payment
                      of leasing costs

                  	 	 	
                    (251,803

                  	
                    )

                  
	 	 	 	 	 
	
                    Net
                      cash used in investing activities

                  	 	 	
                    (134,050,004

                  	
                    )

                  
	 	 	 	 	 
	
                    Cash
                      flows from financing activities

                  	 	 	 	 
	
                    Payment
                      of fnancing costs

                  	 	 	
                    (1,578,414

                  	
                    )

                  
	
                    Proceeds
                      from mortgage note payable

                  	 	 	
                    110,847,201
                      

                  	 
	
                    Contributions
                      from Members

                  	 	 	
                    27,649,852
                      

                  	 
	
                     

                  	 	 	 	 
	
                    Net
                      cash provided by financing activities

                  	 	 	
                    136,918,639
                      

                  	 
	 	 	 	 	 
	
                    Net
                      increase in cash

                  	 	 	
                    1,986,588
                      

                  	 
	 	 	 	 	 
	
                    Cash
                      at beginning of period

                  	 	 	
                    -
                      

                  	 
	 	 	 	 	 
	
                    Cash
                      at end of period

                  	 	
                    $

                  	
                    1,986,588

                  	 
	 	 	 	 	 
	 	 	 	 	 
	
                    Supplemental
                      disclosure of cash flow information

                  	 	 	 	 
	
                    Cash
                      paid for interest

                  	 	
                    $

                  	
                    8,589,861

                  	 
	 	 	 	 	 

          

        

      

       

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

       

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

       

    

    
      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007

       

      
        	
                Note
                  1 - 

              	
                Formation
                  and Organization of the
                  Company

              

      

    

     

    On
      January 4, 2007, 1407 Broadway Real Estate LLC (“NY Owner”), an indirect, wholly
      owned subsidiary of 1407 Broadway Mezz II LLC (“Mezz II”), consummated the
      acquisition of a sub-leasehold interest in an office building located at 1407
      Broadway, New York, New York (the “NY Property”). Mezz II is a joint venture
      between LVP 1407 Broadway LLC (“LVP LLC”), a wholly owned subsidiary of the
      operating partnership of Lightstone Value Plus Real Estate Investment Trust,
      Inc., and Lightstone 1407 Manager LLC (“Manager”), which is wholly-owned by
      David Lichtenstein, member, and Shifra Lichtenstein, his wife. 

     

    The
      Lightstone Value Plus Real Estate Investment Trust, Inc. is managed by
      Lightstone Value Plus REIT, LLC (the "Advisor"), an affiliate of the Lightstone
      Group (the "Sponsor"), under the terms and conditions of an advisory agreement.
      The Sponsor and Advisor are owned and controlled by David Lichtenstein, the
      Chairman of the Lightstone Value Plus Real Estate Investment Trust, Inc. board
      of directors and its Chief Executive Officer.

     

    Mezz
      II
      (the “Company”) is a Delaware limited liability company that through NY Owner
      owns, leases and operates a 42-story office building containing approximately
      914,762 square feet located in New York, New York (the “Property”). 

     

    Under
      the
      terms of the Contribution Agreement, 51.0% of the Company is owned by Lightstone
      1407 Manager LLC and 49.0% of the Company is owned by LVP 1407 Broadway LLC
      (collectively, the “Members”).

     

    The
      Operating Agreement provides that additional capital contributions, allocations
      of profit and loss, and distributions to members are generally made in
      accordance with each member’s percentage interest in the Company.

     

    In
      accordance with the Operating Agreement, the Company has perpetual existence
      unless sooner dissolved upon the occurrence of a defined termination event.
      No
      member can transfer its interest in any part of the Company without obtaining
      the prior written consent of the other member.

     

    
      	
              Note
                2 -

            	
              Summary
                of Significant Accounting
                Policies

            

    

    

    Basis
      of Presentation

     

    The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries over which the Company exercises financial and operating control.
      All
      inter-company balances and transactions have been eliminated in consolidation.
       

     

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    

    

    The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America (GAAP).
      GAAP requires the Company’s management to make estimates and assumptions that
      affect the reported amounts of assets and liabilities, the disclosure of
      contingent assets and liabilities and the reported amounts of revenues and
      expenses during a reporting period. The most significant assumptions and
      estimates relate to the valuation of real estate, depreciable lives, revenue
      recognition, the collectability of tenant 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.

    

    Investment
      in Real Estate

     

    Accounting
      for Acquisitions

     

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

     

    Upon
      the
      acquisition of real estate operating properties, the Company estimates the
      fair
      value of acquired tangible assets (consisting of land, building and
      improvements) and identified intangible assets and liabilities (consisting
      of
      above and below-market leases, in-place leases and tenant relationships), and
      assumed debt in accordance with SFAS No. 141, at the date of acquisition,
      based on evaluation of information and estimates available at that date. Based
      on these estimates, the Company allocates the initial purchase price to the
      applicable assets and liabilities. As final information regarding fair value
      of
      the assets acquired and liabilities assumed is received and estimates are
      refined, appropriate adjustments are made to the purchase price allocation.
      The
      allocations are finalized within twelve months of the acquisition
      date.

      

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

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    

     

    The
      aggregate value of in-place leases is determined by evaluating various factors,
      including an estimate of carrying costs during the expected lease-up periods,
      current market conditions and similar leases. In estimating carrying costs,
      management includes real estate taxes, insurance and other operating expenses,
      and estimates of lost rental revenue during the expected lease-up periods based
      on current market demand. Management also estimates costs to execute similar
      leases including leasing commissions, legal and other related costs. The value
      assigned to this intangible asset is amortized over the remaining lease terms
      ranging from one month to approximately 10 years. Optional renewal periods
      are
      not considered.

    

    The
      aggregate value of other acquired intangible assets includes tenant
      relationships. Factors considered by management in assigning a value to these
      relationships include: assumptions of probability of lease renewals, investment
      in tenant improvements, leasing commissions and an approximate time lapse in
      rental income while a new tenant is located. The value assigned to this
      intangible asset is amortized over the remaining lease terms ranging from one
      month to approximately 10 years.

     

    Carrying
      Value of Assets

     

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

     

    Impairment
      Evaluation  

     

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

     

    The
      Company evaluates the long-lived assets, in accordance with SFAS No. 144 on
      a
      quarterly basis and will record an impairment charge when there is an indicator
      of 

    impairment
      and the undiscounted projected cash flows are less than the carrying amount
      for
      a particular property. Management concluded no impairment adjustment was
      required through December 31, 2007. The estimated cash flows used for the
      impairment analysis and the determination of estimated fair value are based
      on
      the Company’s plans for the respective assets and the Company’s views of market
      and economic conditions. The estimates consider matters such as current and
      historical rental rates, occupancies for the respective Properties and
      comparable properties, and recent sales data for comparable properties. Changes
      in estimated future cash flows due to changes in the Company’s plans or views of
      market and economic conditions could result in recognition of impairment losses,
      which, under the applicable accounting guidance, could be
      substantial.

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    Real
      Estate

     

    Real
      estate is carried at depreciated cost. Expenditures for ordinary maintenance
      and
      repairs are expensed to operations as incurred. Significant renovations and
      improvements, which improve and/or extend the useful life of the asset are
      capitalized and depreciated over their estimated useful life.

    

    Depreciation
      and amortization are calculated on the straight-line method over the estimated
      useful lives of assets, which are as follows:

    

    
      	
              Asset
                Description

            	 	
              Life

            
	
              Building
                

            	 	
              39
                years

            
	
              Building
                improvements

            	 	
              10
                to 30 years

            
	
              Tenants
                improvements

            	 	
              Term
                of related lease

            
	
              In-place
                lease intangibles

            	 	
              Term
                of related lease

            
	
              Above/below-market
                lease intangibles

            	 	
              Term
                of related lease

            

    

    

    
      	 	
              Restricted
                Cash Escrows

            

    

    

    Restricted
      cash consists primarily of tenant security deposits, as well as cash held for
      real estate taxes and building improvements as required by the loan
      agreement.

    

    
      	 	
              Accounts
                Receivable and Allowance for Doubtful
                Accounts

            

    

     

    The
      liquidity and creditworthiness of the tenants are monitored on an ongoing basis.
      Allowances for doubtful accounts are maintained using the specific
      identification method for estimated losses resulting from the inability of
      certain tenants to make payments required by the terms of their respective
      leases. No general reserve is recorded. If the financial condition of the
      tenants were to deteriorate, additional allowances may be required.

    

    Deferred
      Costs

     

    Costs
      incurred in connection with financings or debt modifications are capitalized
      as
      deferred financing costs and are amortized on the straight-line method over
      the
      terms of the related loans. Leasing commissions and other leasing costs directly
      attributable
      to tenant leases are capitalized as deferred leasing costs and are amortized
      on
      the straight-line method over the terms of the related lease
      agreements.

     

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    
      	 	
              Intangible
                Assets

            

    

     

    In
      determining the fair value of the identified intangible assets and liabilities
      of the Property, above-market and below-market in-place lease values are
      recorded based on the present value (using an interest rate which reflects
      the
      risks associated with the leases acquired) of the difference between (1) the
      contractual amounts to be paid pursuant to the in-place leases and (2) the
      estimate of fair market lease rates for the corresponding in-place leases,
      measured over a period equal to the remaining non-cancelable term of the lease.
      The capitalized above-market lease values and the capitalized below-market
      lease
      values are amortized as an adjustment to rental income over the remaining lease
      term.

    

    The
      aggregate value of in-place leases is determined by evaluating various factors,
      including an estimate of carrying costs during the expected lease-up periods,
      current market conditions and similar leases. In estimating carrying costs,
      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 are included. Costs to execute similar leases, including leasing
      commissions, legal and other related costs, are also estimated. The in-place
      lease value is amortized over the remaining lease term.

    

    The
      above-market lease and below-market lease values are amortized as an adjustment
      to rental income over the remaining lease term while in-place lease values
      are
      amortized to expense over the remaining lease term. 

    

    Interest
      Rate Protection Agreement

    

    In
      the
      normal course of business, the Company is exposed to the effect of interest
      rate
      changes. The Company limits these risks by following established risk management
      policies and procedures including the use of derivatives. The Company requires
      that hedging derivative instruments be effective in reducing the interest rate
      risk exposure that they are designated to hedge. This effectiveness is essential
      for qualifying for hedge accounting. Instruments that meet these hedging
      criteria are formally designated as hedges at the inception of the derivative
      contract.

    

    The
      Company has a policy of only entering into derivative contracts with major
      financial institutions based upon their credit ratings and other factors. When
      viewed in conjunction with the underlying and offsetting exposure that the
      derivatives are designed to hedge, the Company has not sustained a material
      loss
      from its derivative instrument nor does it anticipate any material adverse
      effect on its financial position or earnings in the future from the use of
      derivatives. The Company’s interest rate cap hedges the future cash flows on the
      Company’s mortgage note payable and represents a cash flow hedge. If the term of
      the underlying transaction is modified or the underlying hedged item ceases
      to
      exist, all changes in the fair value of the instrument are marked-to-market
      with
      changes in value included in earnings each period until the instrument matures,
      unless the instrument is redesignated as a hedge of another transaction. If
      a
      derivative instrument is terminated or the hedging transaction is no longer
      determined to be effective, amounts held in accumulated other comprehensive
      loss
      are reclassified into earnings over the term of the future cash outflows on
      the
      related underlying transaction. In the future, if the hedging relationship
      is
      not highly effective, then all or a portion of the offsetting gains and losses
      would be reported in earnings. Over time, the unrealized gains and losses held
      in accumulated other comprehensive loss will be reclassified into earnings.
      This
      reclassification is consistent when the hedged items are also recognized into
      earnings.

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    Rental
      Revenue

     

    Rental
      revenue is recorded on the straight-line method over the terms of the related
      lease agreements. Differences between rental revenue earned and amounts due
      per
      the respective lease agreements are credited or charged, as applicable, to
      accrued straight-lined rent. Rental payments received prior to their recognition
      as income are classified as deferred rental income.

    

    Lease
      incentives, which may include cash payments to or on behalf of tenants, the
      buyout of a prospective tenant’s existing lease or the funding of an improvement
      that is owned by the tenant are amortized as a reduction to rental revenue
      on a
      straight-line basis over the lease term.

    

    
      	 	
              Tenant
                Reimbursements

            

    

    

    Estimates
      are used to record cost reimbursements from tenants for real estate taxes and
      operating expenses. Revenue is recognized based upon the amounts to be
      reimbursed from our tenants in the same period these reimbursable expenses
      are
      incurred. Differences between estimated recoveries and final amounts billed
      are
      recognized in the subsequent year. Leases are not uniform in dealing with such
      cost reimbursements and variations exist in computations between tenants.
      Adjustments are also made throughout the year to these receivables and the
      related cost recovery income based upon the best estimate of the final amounts
      to be billed and collected. The balance of the estimated accounts receivable
      for
      real estate taxes and operating expenses is also analyzed by comparing actual
      recoveries versus actual expenses. 

    

    
      	 	
              Income
                Taxes

            

    

     

    The
      Company is a limited liability company that has elected to be taxed as a
      partnership for Federal income tax purposes. Accordingly, Federal and state
      taxable income is reportable on the income tax return of the Members. As a
      result of the entity being taxed as a partnership, there is no federal or state
      income tax provision.

    

      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.

            

    

    

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    
      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    

     

    New
      Accounting Pronouncements

     

    In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities Including an Amendment of FASB
      Statement No. 115” (“SFAS No. 159”). This standard permits entities to choose to
      measure many financial instruments and certain other items at fair value and
      is
      effective for the first fiscal year beginning after November 15, 2007. The
      Company does not expect SFAS No. 159 to have a material impact on its financial
      statements.

     

    
      	 	
              In
                September 2006, the FASB issued SFAS No. 157, Fair
                Value Measurements.
                This Statement applies under other accounting pronouncements that
                require
                or permit fair value measurements. Accordingly, this Statement does
                not
                require any new fair value measurements. However, for some entities,
                the
                application of this Statement will change current practice. This
                Statement
                clarifies that market participant assumptions include assumptions
                about
                risk, for example, the risk inherent in a particular valuation technique
                used to measure fair value (such as a pricing model) and/or risk
                inherent
                in the inputs to the valuation technique. This Statement clarifies
                that
                market participant assumptions also include assumptions about the
                effect
                of a restriction on the sale or use of an asset. This Statement also
                clarifies that a fair value measurement for a liability reflects
                its
                nonperformance risk. The statement is effective in the fiscal first
                quarter of 2008 except for non-financial assets and liabilities recognized
                or disclosed at fair value on a recurring basis, for which the effective
                date is fiscal years beginning after November 15, 2008. The Company
                is currently evaluating the impact that the adoption of SFAS No.
                157, but
                does not expect the adoption of SFAS No. 157 will have a material
                effect
                on the Company’s consolidated financial
                statements.

            

    

      

    In
      June
      2007, the AICPA issued Statement of Position (“SOP”) 07-1, “Clarification of the
      Scope of the Audit and Accounting Guide, Investment Companies and Accounting
      by
      Parent Companies and Equity Method Investors for Investments in Investment
      Companies.” SOP 07-1 provides guidance for determining whether an entity is
      within the scope of the AICPA Audit and Accounting Guide, “Investment Companies”
(the “Guide”) and when companies that own or have significant stakes in
      investment companies should and should not retain, in their financial
      statements, the specialized industry accounting under the Guide. Management
      does
      not anticipate, the application of SOP 07-1 will have a material impact on
      our
      consolidated financial statements. This statement is effective for financial
      statements issued for fiscal years beginning after December 15, 2007, and
      interim periods within those fiscal years.

    

    In
      December 2007, the FASB issued FASB No. 141(R) which establishes principles
      and requirements for how the acquirer shall recognize and measure in its
      financial statements the identifiable assets acquired, liabilities assumed,
      any
      noncontrolling interest in the acquiree and goodwill acquired in a business
      combination. This statement is effective for business combinations for which
      the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008.  

    

    In
      December 2007, the FASB issued No. 160, which establishes and expands accounting
      and reporting standards for minority interests, which will be recharacterized
      as
      noncontrolling interests, in a subsidiary and the deconsolidation of a
      subsidiary. FASB 160 is effective for business combinations for which the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. This statement is effective
      for fiscal years beginning on or after December 15, 2008.  The Company
      is currently assessing the potential impact that the adoption of FASB No. 160
      will have on its financial position and results of operations.

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

       

    

    
      	
              Note
                3 - 

            	
              Acquisition

            

    

    

    On
      January 4, 2007, the Company, through NY Owner, acquired a sub-leasehold
      interest in a ground lease to an office building located at 1407 Broadway,
      New
      York, New York (the “Sublease Interest”). The seller of the Sublease Interest,
      Gettinger Associates, L.P., is not an affiliate of the Company, its Members
      or
      its subsidiaries. The property, a 42 story office building built in 1952, fronts
      on Broadway, 7th Avenue and 39th Street in midtown Manhattan. The property
      has
      approximately 915,000 leasable square feet, and as of the acquisition date,
      was 87.6% occupied (approximately 300 tenants) and leased by tenants
      generally engaged in the female apparel business. The ground lease, dated as
      of
      January 14, 1954, provides for multiple renewal rights, with the last renewal
      period expiring on December 31, 2048. The Sublease Interest runs concurrently
      with this ground lease.

     
       

    The
      acquisition price for the Sublease Interest was $122 million, exclusive of
      acquisition-related costs incurred by the Joint Venture ($3.5 million), pro
      rated operating expenses paid at closing ($4.1 million), financing-related
      costs
      ($1.9 million) and construction, insurance and tax reserves ($1.0 million).
      The
      acquisition was funded through a combination of $26.5 million of capital and
      a
      $106.0 million advance on a $127.3 million variable rate mortgage loan funded
      by
      Lehman Brothers Holding, Inc. As an inducement to Lender to make the loan,
      Owner
      has agreed to provide Lender with a 35% net profit interest in the project,
      which is contingent upon a capital transaction, as defined as any transaction
      involving the sale, assignment, transfer, liquidation, condemnation or
      settlement in lieu thereof, disposition, financing, refinancing or any other
      conversion to cash of all or any portion of the property or equity or membership
      interests in Borrower, directly, other
      than the leasing of space for occupancy and/or any other transaction with
      respect to the Property or the direct or indirect ownership interests in
      Borrower outside the ordinary course of business.   To date, the lender did
      not share in any net profits of the project. The lender also has a conversion
      option, which if upon exercised, would grant the lender a special membership
      interest in the Joint Venture whereby the lender will receive 35% of all
      distributions resulting from a capital transaction after the return of the
      member’s equity investment plus the member’s allowed return’s as specified in
      the “Net Profits Agreement”. 

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

    1407
      BROADWAY MEZZ II LLC and SUBSIDIARIES

    Notes
      to
      the consolidated financial statements

    For
      the
      period January 4, 2007 (date of inception) through December 31, 2007
      (continued)

     

    The
      Company plans to continue an ongoing renovation project at the property
      that consists of lobby, elevator and window redevelopment projects. Additional
      loan proceeds of up to $16.4 million are available to fund these improvements.
       

    

    
      	Note
              4 - 	
              Intangible
                Assets

            

    

    

    Intangible
      assets consist of the following at December 31, 2007:

    

      
        	
                 

              	 	
                Carrying 

              	
                 

              	
                Accumulated 

              	
                 

              	
                Carrying

              	
                 

              
	
                Intangible
                  asset category

              	
                 

              	
                amount
                  gross

              	
                 

              	
                amortization

              	
                 

              	
                Amount
                  -net

              	 
	
                In-place
                  lease intangibles

              	 	
                $

              	
                14,051,029
                  

              	 	
                $

              	
                (7,159,460

              	
                )

              	
                $

              	
                6,891,569

              	 
	
                Above-market
                  lease intangibles

              	 	 	
                3,453,192
                  

              	 	 	
                (1,335,085

              	
                )

              	 	
                2,118,107

              	 
	
                Below-market
                  lease intangibles

              	 	 	
                (6,402,569

              	
                )

              	 	
                1,526,150
                  

              	 	 	
                (4,876,419

              	
                )

              
	
                 

              	 	
                $

              	
                11,101,652
                  

              	 	
                $

              	
                (6,968,395

              	
                )

              	
                $

              	
                4,133,257

              	 

      

    

     

    Actual
      amortization for period January 4, 2007 (date of inception) through December
      31,
      2007 was:

    

    
      	
              In-place
                lease intangibles

            	 	
              $

            	
              7,159,460

            	
               

            
	
              Above-market
                lease intangibles

            	 	 	
              1,335,085

            	
               

            
	
              Below-market
                lease intangibles

            	 	 	
              (1,526,150
                

            	)
	 	 	
              $

            	
              6,968,395

            	
               

            

    

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

       

    

    
      	 	
              Estimated
                amortization for each of the next five fiscal years is as
                follows:

            

    

    

    
      	 	 	
              In-place

            	 	
              Above-market

            	 	
              Below-market

            	 
	
              Year
                ending December 31,

            	 	
              lease
                

              intangibles

            	 	
              lease
                

              intangibles

            	 	
              lease
                

              intangibles

            	 
	
              2008

            	 	
              $

            	
              3,673,004
                

            	 	
              $

            	
              871,399
                

            	 	
              $

            	
              (1,173,213

            	
              )

            
	
              2009

            	 	 	
              1,728,313
                

            	 	 	
              581,428
                

            	 	 	
              (802,917

            	
              )

            
	
              2010

            	 	 	
              710,810
                

            	 	 	
              278,326
                

            	 	 	
              (782,827

            	
              )

            
	
              2011

            	 	 	
              320,309
                

            	 	 	
              144,355
                

            	 	 	
              (593,966

            	
              )

            
	
              2012

            	 	 	
              152,823
                

            	 	 	
              77,661
                

            	 	 	
              (481,110

            	
              )

            

    

    

    
      	
              Note
                5 - 

            	
              Deferred
                Costs

            

    

     

    Deferred
      costs consist of the following at December 31, 2007:

    

    
      	
              Leasing
                costs

            	 	
              $

            	
              3,770,915
                

            	 
	
              Financing
                fees

            	 	 	
              1,578,414
                

            	 
	
              Less
                accumulated amortization

            	 	 	
              (2,029,572

            	
              )

            
	 	 	
              $

            	
              3,319,757
                

            	 

    

    

      
        	
                Estimated
                  amortization for each of the next five fiscal years is as
                  follows:

              	 
	
                 

              	 	
                 

              	 	
                 

              	 
	
                Year
                  ending December 31,

              	 	 	
                Leasing
                  

                costs

              	
                 

              	
                 

              	
                Financing
                  

                fees

              	 
	
                2008

              	 	
                $

              	
                1,053,947

              	 	
                $

              	
                554,558

              	 
	
                2009

              	 	 	
                612,385
                  

              	 	 	
                554,558
                  

              	 
	
                2010

              	 	 	
                295,881
                  

              	 	 	
                -
                  

              	 
	
                2011

              	 	 	
                138,244
                  

              	 	 	
                -
                  

              	 
	
                2012

              	 	 	
                41,266
                  

              	 	 	
                -
                  

              	 
	
                Thereafter

              	 	 	
                68,918
                  

              	 	 	
                -
                  

              	 
	
                 

              	 	
                $

              	
                2,210,641

              	 	
                $

              	
                1,109,116

              	 

      

    

    

    Amortization
      expense for the period January 4, 2007 through December 31, 2007 was $2,029,572,
      of which $469,297 related to the financing fees and is included in interest
      expense on the consolidated statement of operations, and $1,560,275 related
      to
      leasing costs which is included in depreciation and amortization on the
      consolidated statement of operations for the period January 4, 2007 (date of
      inception) through December 31, 2007. 

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

       

    

    
      	
              Note
                6 - 

            	
              Mortgage
                Note Payable

            

      	 	 

    

    
      	 	
              On
                January 4, 2007, the Company obtained a loan in the maximum aggregate
                principal amount of $127,250,000 secured by a first mortgage encumbering
                the Property; provided, however, that at closing, the lender shall
                only
                disburse to the Company an amount equal to $106,000,000. The loan
                is
                collateralized by the Property and is subject to various covenants,
                including maintaining a cash escrow account for the payment of real
                estate
                taxes. The loan bears interest at various LIBOR rates, as defined
                (5.03%
                at December 31, 2007), plus 3.00% (the “Applicable Interest Rate”)
                totaling 8.03% at December 31, 2007, with monthly payments of interest
                only through maturity on January 9, 2010. The agreement also required
                the Company to obtain an interest rate cap of LIBOR at 6.5% for the
                term
                of the loan. At closing, the Company paid the lender a financing
                fee of
                1.2% of the principal amount of the loan. The loan has two one-year
                extension options exercisable for a fee of 0.125% of the amount of
                the
                respective loan for each extension. In conjunction with the extension
                options, the Company must also secure an interest rate cap of LIBOR
                at
                6.5%. Due to the fact that interest rates during 2007 were below
                the 6.5%
                interest rate cap, the interest rate cap had a zero
                value.

            

    

    

    Upon
      the
      Company’s request and upon submission of a capital improvements budget (the
“Budget”) to the lender, lender shall advance funds equal to 85% of the line
      item cost set forth in the Budget and in the aggregate not to exceed $21,250,000
      (the “Future Fundings”) for (i) tenant improvements and leasing commissions
      associated with new leases and (ii) capital improvements at the property
      approved by the lender. Any disbursements from the Future Fundings shall be
      added to the outstanding principal balance of the loan and shall bear interest
      at the Applicable Interest Rate. Interest at the Applicable Interest Rate will
      be charged on any disbursed portion of the Future Fundings as and when advanced,
      but interest will not be charged on the undisbursed portion of the Future
      Fundings. The Future Fundings for the twelve months ended December 31, 2007,
      totaled $4,847,201, bringing the December 31, 2007 balance of the loan to
      $110,847,201.

    

    The
      Company shall pay an administrative fee to the lender in the amount of $20,000
      per annum, which is payable quarterly in equal installments on the first day
      of
      January, April, July and October of each year. This $20,000 expense for the
      period January 4, 2007 (date of inception) through December 31, 2007 is included
      in interest expense in the statement of operations. 

    

    Lightstone
      Holdings, LLC, an affiliate of Lightstone Group LLC (“Lightstone”), has
      guaranteed the principal amount of the loan.

    

    The
      above
      loan agreements include various covenants. As of December 31, 2007, the Company
      is in compliance with the requirements of all financial covenants.

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    For
      the
      period January 4, 2007 (date of inception) through December 31, 2007, the
      Company incurred interest expense totaling $9,021,279, including the
      adminstrative fee discussed above.

    

    
      	
              Note
                7 - 

            	
              Related-Party
                Transactions

            

      	 	 

    

    Effective
      January 4, 2007, the Company engaged PGRS 1407 BWAY LLC (the “Advisor”) to
      provide asset management, development and related advisory services in
      connection with the management, marketing, leasing, operating and redevelopment
      of the Property. The Advisor is entitled to receive fees (the “Advisor Fees”) in
      an amount equal to $500,000 per year for services performed on behalf of the
      Company. The Advisor Fees shall increase by 3.5% of the prior year’s fees on
      each anniversary of the date of the agreement. 

    

    In
      addition, in connection with any capital improvements to the Property relating
      to any redevelopment of the Property, Advisor shall be entitled to a fee (the
      “Redevelopment Fees”) of 2.5% of all hard and soft costs for capital
      improvements to the Property. 

    

    The
      Advisor is a subsidiary of Prime Group Realty, L.P. (“PGRLP”), which was
      acquired by Lightstone on July 1, 2005. As a result, Prime Office Company,
      LLC,
      a subsidiary of Lightstone, owned 100.0% of the common shares and 99.1% of
      the
      common units in PGRLP.

    

    Amounts
      incurred for period January 4, 2007 (date of inception) through December 31,
      2007, are summarized as follows:

    

    
      	
              Advisor
                Fees (1)

            	 	
              $

            	
              500,000
                

            	 
	
              Redevelopment
                Fees (2)

            	 	
              $

            	
              119,225
                

            	 

    

    

    (1) Included
      in property operations on the statement of operations.

    

    (2) Included
      in building and improvements on the balance sheet.

    

    Included
      in Accounts payable and accrued liabilities on the consolidated balance sheet
      is
      a due to affiliate balance in the amount of $922,138. This amount was advanced
      from Lightstone to reimburse operating expenses, which were paid by Lightstone
      Group LLC, on behalf of the Company, in December 2007 and subsequently repaid
      in
      January 2008.

    

    
      	
              Note
                8 - 

            	
              Leases

            

      	 	 

    

    The
      Company has entered into lease agreements with tenants with lease terms ranging
      from 1 to 15 years at lease inception. The leases generally provide for tenants
      to share in increases in operating expenses and real estate taxes in excess
      of
      specified base amounts.

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    

     

    
      	 	
              The
                total future minimum rental to be received under such non-cancelable
                operating leases executed at December 31, 2007, exclusive of tenant
                reimbursements and contingent rentals, are as
                follows:

            

    

    

    
      	
              Year
                ending December 31,

            	 	 	 
	
              2008

            	 	
              $

            	
              32,873,887
                

            	 
	
              2009

            	 	 	
              23,200,550
                

            	 
	
              2010

            	 	 	
              14,341,492
                

            	 
	
              2011

            	 	 	
              7,951,001
                

            	 
	
              2012

            	 	 	
              4,315,454
                

            	 
	
              Thereafter

            	 	 	
              2,694,521
                

            	 
	
              Total

            	 	
              $

            	
              85,376,905
                

            	 

    

    

    
      	
              Note
                9 - 

            	
              Fair
                Values of Financial Instruments 

            

      	 	 

    

    
      	 	
              SFAS
                No. 107, “Disclosures
                About Fair Value of Financial Instruments,”
                and SFAS No. 119, “Disclosure
                About Derivative Financial Instruments and Fair Value of Financial
                Instruments,”
                require disclosure of the fair value of certain on- and off-balance-sheet
                financial instruments for which it is practicable to estimate. Fair
                value
                is defined by SFAS No. 107 as the amount at which the instrument
                could be
                exchanged in a current transaction between willing parties other
                than in a
                forced or liquidation sale.

            

    

    

    The
      carrying amounts of cash and cash equivalents, restricted cash escrows, accounts
      receivable and accounts payable approximate their fair values because of the
      short maturity of these instruments. The carrying amount of the Company’s
      variable rate debt (including accrued interest) approximates fair value. The
      fair value of the mortgage note payable was determined by discounting the future
      contractual interest and principal payments by a market rate.

    

    
      	Note
              10 - 	
              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.

    

    On
      January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect,
      wholly owned subsidiary of the Company, consummated the acquisition of a
      sub-leasehold interest (the "Sublease Interest") in an office building located
      at 1407 Broadway, New York, New York (the "Office Property"). The Company is
      a
      joint venture between LVP 1407 Broadway LLC ("LVP LLC"), and Lightstone 1407
      Manager LLC ("Manager"), which is wholly owned by David Lichtenstein, member,
      and Shifra Lichtenstein, his wife.

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

    

     

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

    

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

     

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

    

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

     

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    

      1407
        BROADWAY MEZZ II LLC and SUBSIDIARIES

      Notes
        to
        the consolidated financial statements

      For
        the
        period January 4, 2007 (date of inception) through December 31, 2007
        (continued)

       

    

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

     

    Operating
      Leases

    

      The
        Company, through NY Owner, acquired a sub-leasehold interest in a ground
        lease
        on January 4, 2007, (as discussed in Note 3) for annual rent of $7,500,000
        through 2030, which provides for multiple renewal rights, with the last renewal
        period expiring on December 31, 2048. The rent expense under this lease for
        period January 4, 2007 through December 31, 2007 was approximately $7,500,000,
        included in property operating expenses on the consolidated statement of
        operations.

      

      Future
        minimum rental commitments under noncancelable operating leases, excluding
        the
        renewal period, are as follows:

    

    
      	
              Year
                ending December 31,

            	 	 	 
	
              2008

            	 	
              $

            	
              7,500,000
                

            	 
	
              2009

            	 	 	
              7,500,000
                

            	 
	
              2010

            	 	 	
              7,500,000
                

            	 
	
              2011

            	 	 	
              7,500,000
                

            	 
	
              2012

            	 	 	
              7,500,000
                

            	 
	
              Thereafter

            	 	 	
              134,375,000
                

            	 

    

     

    
      
        
        

      

      
        -20-

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