e10vk
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
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Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2010
or
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
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for the transition period from to |
Commission file number: 000-51868
CORNERSTONE REALTY FUND, LLC
(Exact name of the registrant as specified in its charter)
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California
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33-0827161 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
1920 Main Street, Suite 400, Irvine, California 92614
(Address of Principal Executive Offices)
949-852-1007
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class:
Units of limited liability company interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filed, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act): Yes o No þ
The aggregate market value of the units of membership interest held by non-affiliates of the
registrant was $34,337,000 as of the last business day of the registrants most recently completed
second fiscal quarter (June 30, 2010) based upon the estimated liquidation value of the
Registrants assets, as determined by the managing member.
Documents incorporated by reference. None.
TABLE OF CONTENTS
PART I
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words believes, project, expects, anticipates,
estimates, intends, strategy, plan, may, will, would, will be, will continue,
will likely result, and similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. Accordingly, there can be no
assurance that our expectations will be realized.
Factors which may cause actual results to differ materially from current expectations include, but
are not limited to:
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National and local economic and business conditions; |
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General and local real estate conditions; |
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Changes in federal, state and local governmental laws and regulations and |
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The availability of and costs associated with sources of liquidity. |
A detailed discussion of these and other risks and uncertainties that could cause actual results
and events to differ materially from such forward-looking statements is included in the section
entitled Risk Factors in Item 1A of this report. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information, future events or
otherwise.
As used in this report, we, us and our refer to Cornerstone Realty Fund, LLC except where the
context otherwise requires.
ITEM 1. BUSINESS
Overview
Cornerstone Realty Fund, LLC is a California limited liability company (the Fund) that was formed
in October of 1998 to invest in multi-tenant business parks catering to small business tenants. Our
properties are located in major metropolitan areas in the United States and are owned on an all
cash basis without debt financing.
Our managing member is Cornerstone Industrial Properties, LLC (CIP), a California limited
liability company. CIP is managed by Cornerstone Ventures, Inc. Cornerstone Ventures, Inc. is an
experienced real estate operating company specializing in the acquisition, operation and
repositioning of multi-tenant industrial business parks.
On August 7, 2001, we commenced a public offering of units of our membership interest pursuant to a
registration statement on Form S-11 filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933. On August 18, 2005, we completed our public offering of these units. As
of that date, we had issued 100,000 units to unit holders for gross offering proceeds of
$50,000,000, before discounts of $39,780.
Description of Business
We are a real estate fund that seeks return on our investments through the acquisition, management
and sale of multi-tenant industrial business parks. We have purchased and operate a diversified
portfolio of six existing leased multi-tenant industrial business parks catering to the small
business tenant.
Our properties are located in major metropolitan areas in the United States. These are geographic
areas nationwide that have historically demonstrated strong levels of demand for rental space by
tenants requiring small industrial buildings. We have properties located in the Los Angeles,
Chicago and Phoenix areas.
We have acquired only completed properties that generate current income from rental operations. Our
strategy has been to acquire such properties at prices below what our managing member estimates to
be the new development cost of a similar property located within the same competitive geographic
area. In stabilized market areas with high tenant demand, a tenant with an expiring lease
may not be able to find a competitive space to rent, causing rental rates and property values to
rise to the levels necessary to justify the construction of competitive properties. If this occurs,
we could experience financial gain as a result of having purchased properties at prices below their
new development cost.
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Multi-Tenant Business Parks
Multi-tenant business parks comprise one of the major segments of the commercial real estate market
on a nationwide basis. These properties contain a large number of diversified tenants and differ
from large warehouse and manufacturing buildings that rely on a single tenant. Multi-tenant
business parks are ideal for small businesses that require both office and warehouse space. This
combination of office and warehouse space cannot generally be met in other commercial property
types. Multi-tenant business park tenants come from a broad spectrum of industries including light
manufacturing, assembly, distribution, import/export, general contractors, telecommunications,
computer technology, general office/warehouse, wholesale, service, high-tech and other fields.
Leasing activity is typically diversified, with smaller-sized tenants. These properties diversify
revenue by generating rental income from multiple businesses instead of relying on one or two large
tenants.
The properties we have acquired cater to the small business tenant and have lease terms generally
ranging from one to five years. During economic conditions when rental rates are rising rapidly,
the short-term leases should allow us to increase rental income at a faster rate than properties
with longer-term leases.
One of the most attractive features of multi-tenant business parks is the ability to adapt to
changing market conditions and to meet the diversification needs of small business tenants. A
multi-tenant business park is the first home for many small businesses. In good economic times, new
businesses are forming and existing businesses are growing. Multi-tenant business parks can
accommodate this growth with a tenants expansion into multiple units. In difficult economic times
such as those currently being experienced, a tenants space requirements often contracts, and
tenants who previously outgrew their space in a multi-tenant business park may move back.
Accordingly multi-tenant industrial park space is in demand in both growing and declining
economies.
Investment Strategy
Cornerstone Ventures, Inc. specializes in and has substantial operating experience investing in and
operating multi-tenant business parks, offering in-depth real estate expertise through an
experienced team of industry professionals with extensive understanding of industrial real estate.
Our investment strategy has been to purchase properties in major industrial markets with
considerable tenant demand. We acquired properties in areas with strong tenant demand and a large
base of existing industrial properties, a high population of small business tenants and substantial
competitive barriers to entry.
Our strategy has involved purchasing multi-tenant business parks at prices below replacement cost.
Such opportunities may exist where rental rates at properties configured for the small business
tenant are below the levels necessary to justify the development of new projects.
We regularly conduct portfolio property reviews and, if appropriate, we make determinations to
dispose of properties that we do not believe meet our strategic criteria based on economic, market
and other circumstances.
Compared to single-user industrial properties that typically have longer lease terms, the
shorter-term multi-tenant business park leases allow for greater opportunities to increase rents
and maximize revenue growth in upward trending markets. Our investment strategy has been to
purchase and reposition properties and capitalize on shorter lease terms, rising rents, increasing
cash flow and capital appreciation.
Our portfolio is comprised of multi-tenant properties serving the small business tenant in three
major metropolitan markets. The highest dollar amount we have invested in any single property is
$9.9 million. As of December 31, 2010, we had purchased a total of seven properties for an
aggregate investment of approximately $37.5 million. On April 16, 2007, we sold one of our
properties to an unaffiliated third party for gross proceeds of $3.2 million. We do not expect to
acquire additional properties.
Potential Liquidation Transaction
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our managing member
has begun the process of evaluating strategic alternatives for winding up the Fund in order to
maximize overall returns for our unit holders. Our managing member initiated the examination at
this time, rather than waiting until 2012 because of the inherent uncertainty of the future and our
managing members view of (i) the current market conditions, (ii) the current increasing costs of
corporate compliance (including,
without limitation, all federal, state and local regulatory requirements applicable to us,
including the Sarbanes-Oxley Act of 2002, as amended), and (iii) the other factors discussed in
more detail below.
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Table
of Contents
After a
thorough analysis and consultation with a real estate broker specializing in multitenant
industrial real estate in the geographical regions where our properties are located, our managing
member has concluded that a liquidation of the Fund at this time will more likely produce superior
returns within a reasonable period of time to our unit holders than other potential exit strategies
reasonably available to us, including waiting until 2012 to complete a liquidation. As a result,
our managing member currently expects to distribute a proxy statement to our unit holders to
solicit consents from our unit holders to authorize a plan of liquidation of the Fund involving the
sale of all of the Funds properties to an unaffiliated third party.
In reaching its determination, our managing member has considered the following factors, among
others:
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the significant costs of compliance with federal, state and local tax
filings and reports under the applicable provisions of the Internal Revenue Code; |
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our managing members review of possible alternatives to a liquidation,
including: issuing additional equity; raising additional debt financing; seeking to
dispose of our assets through a merger; following which based on a variety of factors,
our managing member concluded that none of the alternatives considered were reasonably
likely to provide greater value to our unit holders than a liquidation of the Funds
asset through an asset sale; |
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the aggregate cash liquidating distributions that our managing member
estimates that such a liquidation transaction would generate for our unit holders; |
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the results of a targeted bid process conducted through an unaffiliated
real-estate broker to market our properties to likely buyers; |
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our managing members evaluation is based on industry forecast, or expected
increases in rental rates in 2011 and 2012. |
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our managing members belief that the range of cash liquidating
distributions that we estimate we will make to our unit holders will be fair relative to
its assessment of our current and expected future financial condition, earnings,
business opportunities, strategies and competitive position and the nature of the market
environment in which we operate; |
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the current and expected future illiquidity of units resulting from
applicable transfer restrictions that will continue if we continue as a going concern;
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that the per unit price to be received by unit holders in the liquidation
would be payable in cash or interests in a liquidating trust (which would distribute any
remaining net proceeds of the liquidation in cash), thereby eliminating uncertainties in
valuing the consideration to be received by unit holders. |
Our managing member believes that each of these factors generally support its determination.
However, the above discussion concerning the information and factors considered is not intended to
be exhaustive, but includes material factors considered by our managing member. In view of the
variety of factors considered in connection with their evaluation of the plan of liquidation and
the proposed liquidation, our managing member did not quantify or otherwise attempt to assign
relative weights to the factors it considered. Unit holders should
read in full and carefully consider the proxy statement to be
distributed by the managing member relating to a potential liquidation
transaction.
Property Features
Land: Lot sizes for our properties range from approximately 1.6 to 5.0 acres depending upon the
number of buildings and building sizes. Individual buildings contained in any specific property may
be located on a single parcel of land or on multiple parcels of land depending upon the
configuration and layout of the entire project. Sites are zoned for industrial, commercial and/or
office uses depending on local governmental regulations. The location of each property is an
important factor in its future value. We have purchased properties in what we considered to be in
prime locations.
Buildings: The buildings comprising our properties are generally rectangular in shape and
constructed utilizing concrete tilt up construction methods and in some cases brick and mortar
methods. Building sizes range from 30,000 to 86,000 square feet divided into leasable unit sizes
ranging from approximately 100 square feet to 20,000 square feet. Generally our buildings include
the following features:
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Functional site plan offering ample tenant parking and good truck and car circulation; |
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Multiple truck doors with ground level and dock high loading; |
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Ceiling clear heights in each tenant space from 14 feet to 24 feet; |
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Attractive front entry and visibility with a location for tenants address and sign; |
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Quality office improvements including private offices, restrooms and reception area; |
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Minimum of 100 amps of electrical service; |
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Heating, ventilating and air conditioning systems for the office area; and |
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Fire sprinklers where required by local governmental agencies. |
Property Selection
The experienced staff of our managing member were responsible for the selection and evaluation of
properties that we acquired. The acquisition process was performed by our managing member with no
acquisition fees payable by us to our managing member. All property acquisitions were evaluated by
our managing member based upon its experience in the area of multi-tenant business parks and our
investment objectives and supported by appraisals prepared by a competent independent appraiser.
The Asset Management Function
Asset management includes preparation, implementation, supervision and monitoring of a business
plan specifically designed for each property. Our managing member performs the following asset
management services for us:
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Creates and implements an individualized plan for enhancing the profitability and value of each property; |
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Supervises the day-to-day operations of property managers assigned to each property; |
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Selects and supervises the on-going marketing efforts of leasing
agents responsible for marketing the property to prospective tenants; |
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Coordinates semi-annual rental surveys of competitive projects in the
local geographic area this function is designed to maintain the
property at the highest possible rental rates allowable in the market
where the property is located; |
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Approves lease terms negotiated by leasing agents with new tenants and
tenants renewing their leases this includes making sure that lease
rates being attained are in line with market conditions as well as in
line with the then current operating plan for the property; |
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Reviews and approves any capital improvements necessary at the
property, including tenant improvements necessary to lease space; |
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Reviews monthly financial reports prepared by property managers with a
focus on improving the cost efficiency of operating the property; |
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Prepares annual property operating budgets for review and approval by senior management; and |
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Prepares regular updates regarding operations of the property as compared to budget estimates. |
Although most real estate operating companies charge a separate fee for asset management services,
our managing member does not charge us a separate fee for such services. However, our managing
member is entitled to receive an incentive share of our net cash flows from operations, as
described under Item 13. Certain Relationships and Related Transactions.
Property Management Services
Our managing member is responsible for providing or obtaining property management services for our
properties and is responsible for overseeing all day-to-day operations for each property, including
the following:
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Invoice tenants for monthly rent; |
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Collect rents; |
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Pay property level operating expenses; |
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Solicit bids from vendors for monthly contract services; |
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Provide property level financial reports on a monthly basis; |
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Review and comment on annual property operating budgets; |
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On-going assessment of potential risks or hazards at the property; |
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Clean up and prepare vacant units to be leased; |
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Supervise tenant improvement construction; |
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Supervise tenant and owner compliance with lease terms; |
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Supervise tenant compliance with insurance requirements; |
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Periodically inspect tenant spaces for lease compliance; and |
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Respond to tenant inquiries. |
Due to the short-term nature of the tenant leases, as well as the large number of small business
tenants at each property, multi-tenant business parks are management intensive. For this reason,
property management fees for multi-tenant industrial properties are generally higher than property
management fees for other types of commercial real estate. Our managing member believes that a very
high level of property management service and strict property maintenance standards maximizes the
value of each property. Our managing member may subcontract property management services with
either an affiliate or third party property management organization. Currently, our properties are
managed under subcontracts with CB Richard Ellis, Inc., Essex Realty Management, Inc. and Corporate
Facility Services Inc. none of which are affiliated with us or with our managing member.
Government Regulations
The properties we own are subject to federal, state and local laws and regulations relating to
environmental protection and human health and safety. Federal laws such as the National
Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability
Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the
Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right
to Know Act and the Hazard Communication Act govern such matters as 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 impose
joint and several liabilities on tenants, owners or operators for the costs to investigate or
remediate contaminated properties, regardless of fault or whether the acts causing the
contamination were legal. Compliance with these laws and any new or more stringent laws or
regulations may require us to incur material expenditures. Future laws, ordinances or regulations
may impose material environmental liability. In addition, there are various federal, state and
local fire, health, life-safety and similar regulations with which we may be required to comply,
and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties. The presence of hazardous substances, or the
failure to properly remediate these substances, may make it difficult or impossible to sell or rent
such property.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous real property owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on, under or in such property. These costs could be substantial. 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. Environmental laws also may impose restrictions
on the manner in which property may be used or businesses may be operated, and these restrictions
may require substantial expenditures or prevent us from entering into leases with prospective
tenants that may be impacted by such laws. Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private
parties. Certain environmental laws and common law principles could be used to impose liability for
release of and exposure to hazardous substances, including asbestos-containing materials into the
air. Third parties may seek recovery from real property owners or operators for personal injury or
property damage associated with exposure to released hazardous substances. The cost of defending
against claims of liability, of complying with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could be substantial.
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We obtained satisfactory Phase I environmental assessments on each property we purchased. A Phase I
assessment is an inspection and review of the property, its existing and prior uses, aerial maps
and records of government agencies for the purpose of determining the likelihood of environmental
contamination. A Phase I assessment includes only non-invasive testing. It is possible that all
environmental liabilities were not identified in the Phase I assessments we obtained or that a
prior owner, operator or current occupant has created an environmental condition which we do not
know about. There can be no assurance that future law, ordinances or regulations will not impose
material environmental liability on us or that the current environmental condition of our
properties will not be affected by our tenants, or by the condition of land or operations in the
vicinity of our properties such as the presence of underground storage tanks or groundwater
contamination.
Competition
We experience competition for tenants from owners and managers of comparable projects which may
include our managing member and its affiliates. As a result, we may be required to provide free
rent, reduced charges for tenant improvements, and other inducements, all of which may have an
adverse impact on our results of operations. At the time we elect to dispose of our properties, we
will also be in competition with sellers of similar properties to locate suitable purchasers.
Employees and Resources
We have no direct employees. Employees of Cornerstone Ventures, Inc., an affiliate of our managing
member, perform a full range of real estate services including leasing, property management,
accounting, asset management and investor relations for us. Our managing member may also engage
consultants to provide these services when our managing member deems this to be in our best
interest. See Item 13 Certain Relationships and Related Transactions for a summary of the
types of fees to be paid to our managing member and its affiliates for its services.
Our managing member provides us with office space for our operations without charge.
Available Information
Information about us is available on our website (http://www.crefunds.com). We make available, free
of charge, on our Internet website, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such
material with the SEC. These materials are also available at no cost in print to any person who
requests it by contacting our Investor Services Department at 1920 Main Street, Suite 400, Irvine,
California 92614; telephone (877) 805-3333. Our filings with the SEC are available to the public
over the Internet at the SECs website at http://www.sec.gov. You may read and copy any filed
document at the SECs public reference room in Washington, D.C. at 100 F Street, N.E., Room 1580,
Washington D.C. Please call the SEC at (800) SEC-0330 for further information about the public
reference rooms.
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ITEM 1A. RISK FACTORS
The risks and uncertainties described below can adversely affect our business, operating results,
prospects and financial condition. These risks and uncertainties could cause our actual results to
differ materially from those presented in our forward-looking statements.
Recent disruptions in the financial markets and deteriorating economic conditions could adversely
affect the values of our investments and our ongoing operations. During 2010, significant and
widespread concerns about credit risk and access to capital experienced during 2009 began to
subside. Concerns of a double-dip recession have diminished as a number of economic indicators have
improved. Increased trade volume in 2010 spurred increased leasing activity in many west coast
industrial markets. However, if the current economic uncertainty persists, we may continue to
experience significant vacancies or be required to reduce rental rates on occupied space resulting
in lower occupancy and declining values in our current portfolio. While there have been signs of
stabilization in the economy and credit markets continued volatility may adversely affect our
liquidity and financial condition. The current downturn may impact our tenants business operations
directly, reducing their ability to pay base rent, percentage rent or other charges due to us.
The occurrence of these events could have the following negative effects on us:
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the values of our investments in commercial properties could decrease below the amounts we paid for the investments; |
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we may not be able to sell our properties at an attractive price and
the time to effect a sale at any price may be extended; and |
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revenues from our properties could decrease due to lower occupancy
rates, reduced rental rates and potential increases in uncollectible
receivables; |
These factors could impair our ability to make distributions to you and decrease the value of your
investment in us.
Financial markets are still recovering from a period of disruption and recession, and we are unable
to predict if and when the economy will stabilize or improve. The financial markets are still
recovering from a recession, which created volatile market conditions, resulted in a decrease in
availability of business credit and led to the insolvency, closure or acquisition of a number of
financial institutions. While the markets showed signs of stabilizing throughout 2010, it remains
unclear when the economy will fully recover to pre-recession levels. Continued economic weakness in
the U.S. economy generally or a new recession would likely adversely affect our financial condition
and that of our tenants and could impact the ability of our tenants to pay rent to us.
We may not generate sufficient cash for distributions. If the cash flow generated by operation of
the properties we own is not sufficient to fully fund distributions, we may fund distributions from
cash reserves, from the proceeds of a sale of a property or incur financing upon unit holders
approval. If the rental revenues from the properties we own do not exceed our operational expenses,
or our cash reserves are depleted or we cannot incur indebtedness, we will not be able to make cash
distributions until such time as we sell a property.
We may incur debt financing to meet operational expenses and to fund our distributions. Effective
April 27, 2010, our operating agreement was amended to allow the managing member to cause us to
incur debt financing, not to exceed ten percent of the capital contributions of all unit holders,
to meet our operational expenses or to fund cash distributions declared and paid to members. On
December 2, 2010, we entered into a $4.0 million fixed rate secured loan to provide liquidity for
these purposes. To the extent we borrow funds, we may raise additional equity capital or sell
properties to pay such debt. If we incur debt, we would be subject to various risks associated
with the use of debt financing. Interest we pay could reduce overall returns to unit holders.
Additionally, if we incur variable rate debt, increases in interest rates would increase our
interest costs, which would reduce our cash flows and overall returns to unit holders. In addition,
if we need to repay existing debt during periods of rising interest rates, we could be required to
liquidate one or more of our investments in properties at times which may not permit realization of
the maximum return on such investments and could result in a loss.
We are dependent upon our managing member and its affiliates to conduct our operations. Any adverse
changes in the financial health of our managing member or its affiliates or our relationship with
them could hinder our operating performance and the return on investments in us. We are dependent
on our managing member, Cornerstone Industrial Properties, LLC, to manage our operations and our
portfolio of real estate assets. Our managing member has limited operating history and it depends
upon the fees and other compensation that it receives from us in connection with the purchase,
management and sale of our properties to conduct its operations. To date, the fees we pay to our
managing member have been inadequate to cover its operating expenses. To cover its operational
shortfalls, our managing member has relied on cash raised in private offerings. A FINRA inquiry
concluded in December 2009, which relates to such private offerings, could adversely affect the
success of such private offerings or future private capital-raising efforts. If our managing member
is unable to secure additional capital, it may become unable to meet its obligations and we
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might be required to find alternative service providers, which could result in a significant
disruption of our business and may adversely affect the value of your investment in us.
Our managing member, its affiliates, and its officers also have management responsibilities to
other entities. Cornerstone Industrial Properties, LLC and Cornerstone Ventures, Inc. may have
conflicts of interests in allocating management time between us and other entities. These other
entities will purchase, operate and sell the same type of properties, which we purchase, own and
operate. Our managing member, which is operated by Cornerstone Ventures, Inc., may have conflicts
of interest in deciding whether or not to sell a property since the interest of our managing member
and the interests of our unit holders may differ as a result of their financial and tax position
and the compensation to which our managing member or affiliates may be entitled to receive upon the
sale of a property.
Our managing member and its affiliates receive fees and other compensation based upon the property
we own and the sale of our properties and therefore our managing member and its affiliates may make
recommendations to us that we hold or sell property in order to increase their compensation. Our
managing member will have considerable discretion with respect to the terms and timing of our
disposition and leasing transactions. Our managing member and its affiliates receive fees and other
compensation related to the management of our investments. In some instances our managing member
and its affiliates may benefit by us retaining ownership of our assets, while our unit holders may
be better served by sale or disposition. In other instances they may benefit by us selling the
properties which may entitle our managing member to disposition fees and possible success-based
sales fees. In addition, our managing members ability to receive asset management fees and
reimbursements depends on our continued investment in properties and in other assets which generate
fees to them. Therefore, the interest of our managing member and its affiliates in receiving fees
may conflict with our interests.
Multi-tenant industrial properties accommodating small business tenants have a substantial on-going
risk of tenant lease defaults. If a tenant defaults on a lease, we will generally lose rental
income and have to pay legal costs, repair costs and re-leasing commissions. We may be unable to
re-lease the property for as much rent as we previously received. We may incur additional
expenditures in re-leasing the property. We could experience delays in enforcing our rights and
collecting rents due from a defaulting tenant.
Risks we cannot control will affect the value of our properties. The values of the properties we
purchase will be affected by:
|
|
|
changes in the general economic climate; |
|
|
|
|
oversupply of space or reduced demand for real estate in local area; |
|
|
|
|
competition from other available space; |
|
|
|
|
governmental regulations; |
|
|
|
|
changes in zoning or tax laws; |
|
|
|
|
interest rate levels; |
|
|
|
|
availability of financing; and |
|
|
|
|
potential liability under environmental laws. |
These factors may cause our rental income and the value of our properties to decrease and may make
it difficult for us to sell properties.
Lease terminations could reduce our revenues from rents and our distributions to our unit holders
and cause the value of our unit holders investment in us to decline. The success of our
investments depends upon the occupancy levels, rental income and operating expenses of our
properties and our company. In the event of tenant default or bankruptcy, we may experience delays
in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing
our property. We may be unable to re-lease the property for the rent previously received. We may be
unable to sell a property with low occupancy without incurring a loss. These events and others
could cause us to reduce the amount of distributions we make to unit holders and the value of our
unit holders investment in us to decline.
Rising expenses at both the property and the company level could reduce our net income and our cash
available for distribution to unit holders. Our properties are subject to operating risks common to
real estate in general, any or all of which may reduce our net income. If any property is not
substantially occupied or if rents are being paid in an amount that is insufficient to cover
operating
9
expenses, we could be required to expend funds with respect to that property for
operating expenses. The properties are subject to increases in tax rates, utility costs, operating
expenses, insurance costs, repairs and maintenance and administrative expenses. If we are unable to
lease properties on a basis requiring the tenants to pay such expenses, we would be required to pay
some or all of those costs which would reduce our income and cash available for distribution to
unit holders.
We may experience uninsured losses on our properties. We intend to maintain commercial general
liability insurance and property damage insurance on our properties. We believe this insurance will
be adequate to cover most risks. We may not obtain earthquake insurance on our properties due to
the lack of available and affordable earthquake insurance. If one of our properties sustains damage
as a result of an earthquake, we may incur substantial losses and lose our investment in the
property. If we, as a property owner, incur any liability that is not fully covered by insurance,
we would be liable for such amounts.
We may be subject to environmental liabilities. Various federal and state environmental laws and
regulations to investigate and clean up hazardous or toxic substances, asbestos-containing
materials, or petroleum product releases at the property may require an owner or operator of real
estate. The presence of contamination or the failure to remedy contamination will adversely affect
the owners ability to sell or lease real estate. The owner or operator of a site may be liable to
third parties for damages and injuries resulting from environmental contamination.
We will not seek any rulings from the Internal Revenue Service regarding any tax issues. We are
relying on opinions of our legal counsel. The opinions are based upon representations and
assumptions and conditioned upon the existence of specified facts. The opinions are not binding on
the IRS or the courts.
If we lose our partnership status we would be taxed as a corporation. Our legal counsel has
advised us that we will be treated as a partnership for federal income tax purposes and that we
will not be treated as an association taxable as a corporation, subject to the publicly traded
partnership rules. The application of publicly traded partnership rules to us will be based upon
future facts. The IRS may determine that we will be treated as a publicly traded partnership if
our units of membership interests are publicly traded or frequently transferred. We have included
provisions in our operating agreement designed to avoid this result. If we were to be reclassified
as an association taxable as a corporation or classified as a publicly traded partnership, we would
be taxed on our net income at rates of up to 35% for federal income tax purposes. All items of our
income, gain, loss, deduction, and credit would be reflected only on our tax returns and would not
be passed through to our unit holders. If we were treated as a corporation, distributions to our
unit holders would be ordinary dividend income to the extent of our earnings and profits, and the
payment of such dividends would not be deductible by us.
The IRS may challenge our allocations of income, gain, loss, and deduction. The operating agreement
provides for the allocation of income, gain, loss and deduction among the unit holders. The rules
regarding partnership allocations are complex. It is possible that the IRS could successfully
challenge the allocations in the operating agreement and reallocate items of income, gain, loss or
deduction in a manner that reduces benefits or increases income allocable our investors.
The IRS may disallow deduction of fees and expenses or reallocate basis. The IRS may challenge or
disallow our deduction of some or all fees and expenses. The IRS could seek to reallocate our basis
in properties among land, improvements and personal property. This could result in reduced tax
losses or increased income without a corresponding increase in net cash flow to our unit holders.
Future events may result in federal income tax treatment of us and our unit holders that is
materially and adversely different from the current tax treatment. Changes in current law,
including the internal revenue code, the treasury regulations, administrative interpretations, and
court decisions, could affect taxable years arising before and after such events. There can be no
assurance that future legislation and administrative interpretations will not be applied
retroactively.
|
|
|
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
As of the date of this report, we own six properties: Normandie Business Center in Torrance,
California; Arrow Business Center in Irwindale, California; Zenith Business Centre in Glenview,
Illinois; Paramount Business Center in Paramount, California; Interstate Commerce Center in Tempe,
Arizona; and Shoemaker Industrial Park in Santa Fe Spring, California. We purchased these
properties for all cash, without debt financing.
Our properties were built between 1978 and 1989 and are currently in good physical condition. We
intend to make modest repairs and improvements to this property over the next two years.
10
Although a considerable number of leases expire within the next twelve months, most tenants
average tenure at the property exceeds 5 years and typically smaller mom-and-pops tenants renew
on a one year basis with our larger corporate tenants renewing for 3 to 5 years. Existing leases at
the property generally include annual rental increases ranging between 3% and 5%.
Following are descriptions of our properties:
Normandie Business Center, Torrance, CA
On September 27, 2002, we purchased an existing multi-tenant industrial park known as Normandie
Business Center. Normandie Business Center is located on approximately 2.45 acres and is comprised
of two single-story buildings built in 1989 consisting of approximately 49,416 leasable square
feet. Our total acquisition cost was approximately $3.9 million. As of December 31, 2010, this
property was 69.9% leased to 20 tenants whose spaces range in size from 1,200 to 3,358 square feet.
The property is located in Torrance, California, and is in the South Bay submarket of Los Angeles.
The South Bay is one of the largest and most active industrial submarkets in Los Angeles County
near the ports of Los Angeles and Long Beach.
The propertys historical occupancy rates are as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
December 31 |
|
Occupancy (%) |
2006 |
|
|
94 |
% |
2007 |
|
|
95 |
% |
2008 |
|
|
96 |
% |
2009 |
|
|
98 |
% |
2010 |
|
|
81 |
% |
The following table sets forth lease expiration information for the next five years for those
leases in place at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent of |
|
|
Total |
|
|
Percent of |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Leasable |
|
|
Total Annual |
|
|
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area |
|
|
Base Rent |
|
Year Ending December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
Expiring (%) |
|
|
Expiring (%) |
|
Month to month |
|
|
3 |
|
|
|
3,725 |
|
|
$ |
42,000 |
|
|
|
7.5 |
% |
|
|
10.8 |
% |
2011 |
|
|
11 |
|
|
|
19,000 |
|
|
|
216,000 |
|
|
|
38.5 |
% |
|
|
55.7 |
% |
2012 |
|
|
4 |
|
|
|
6,056 |
|
|
|
66,000 |
|
|
|
12.3 |
% |
|
|
17.0 |
% |
2013 |
|
|
2 |
|
|
|
4,558 |
|
|
|
64,000 |
|
|
|
9.2 |
% |
|
|
16.5 |
% |
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
33,339 |
|
|
$ |
388,000 |
|
|
|
67.5 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow Business Park, Irwindale, California
On December 10, 2003, we purchased an existing multi-tenant business park known as the Arrow
Business Center, a single-story three building property built in 1987 consisting of approximately
69,592 square feet of leasable space on approximately 5.04 acres of land. Our total acquisition
cost was approximately $6.0 million. As of December 31, 2010, the property was 80.22% leased to 29
tenants which includes two tenants with two leases each, whose spaces range in size from
approximately 800 square feet to 4,800 square feet. The propertys historical occupancy rates are
as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
December 31 |
|
Occupancy (%) |
2006 |
|
|
99 |
% |
2007 |
|
|
94 |
% |
2008 |
|
|
89 |
% |
2009 |
|
|
83 |
% |
2010 |
|
|
80 |
% |
11
The following table sets forth lease expiration information for the next five years for leases in
place as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent Of |
|
|
Total |
|
|
Percent of |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Leasable |
|
|
Total Annual |
|
Year Ending |
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area |
|
|
Base Rent |
|
December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
Expiring (%) |
|
|
Expiring (%) |
|
Month to month |
|
|
6 |
|
|
|
6,240 |
|
|
$ |
72,000 |
|
|
|
9.0 |
% |
|
|
12.7 |
% |
2011 |
|
|
12 |
|
|
|
21,210 |
|
|
|
207,000 |
|
|
|
30.4 |
% |
|
|
36.1 |
% |
2012 |
|
|
9 |
|
|
|
18,702 |
|
|
|
194,000 |
|
|
|
26.9 |
% |
|
|
34.0 |
% |
2013 |
|
|
4 |
|
|
|
9,680 |
|
|
|
98,000 |
|
|
|
13.9 |
% |
|
|
17.2 |
% |
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
55,832 |
|
|
$ |
571,000 |
|
|
|
80.2 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zenith Drive Centre, Glenview, Illinois
On January 25, 2005, we purchased an existing multi-tenant industrial park known as Zenith Drive
Centre. Zenith Drive Centre is a single-story, three building property built in 1978 consisting of
approximately 37,990 square feet of leasable space on approximately 2.54 acres of land. Our total
acquisition cost was approximately $5.3 million. As of December 31, 2010, the property was 94.5%
leased to 28 tenants which includes one tenant with two leases and another tenant with three
leases, whose spaces range in size from approximately 100 square feet to 6,000 square feet.
Included in the acquisition and purchase price of Zenith Drive Centre were a billboard sign and
cellular relay antenna located on the property leased to a large media company and communications
company, respectively. In the fourth quarter of 2008, we recorded an impairment charge of
approximately $1.8 million related to this building. In the third quarter of 2009, we recorded an
additional impairment charge of $1.2 million. During the first quarter of 2010, management
committed to a plan to sell Zenith Drive Centre to a third party and classified the property as
held for sale. The property has not been sold as of December 31, 2010 and accordingly is classified
as held for sale. See Note 8 for additional information.
The propertys historical occupancy rates are as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
December 31 |
|
Occupancy (%) |
2006 |
|
|
74 |
% |
2007 |
|
|
92 |
% |
2008 |
|
|
88 |
% |
2009 |
|
|
90 |
% |
2010 |
|
|
94 |
% |
The following table sets forth lease expiration information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent Of |
|
|
Total |
|
|
Percent of |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Leasable |
|
|
Total Annual |
|
Year Ending |
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area |
|
|
Base Rent |
|
December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
Expiring (%) |
|
|
Expiring (%) |
|
Month to month |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
16 |
|
|
|
19,904 |
|
|
|
158,000 |
|
|
|
52.4 |
% |
|
|
47.3 |
% |
2012 |
|
|
11 |
|
|
|
13,535 |
|
|
|
74,000 |
|
|
|
35.6 |
% |
|
|
22.1 |
% |
2013 |
|
|
3 |
|
|
|
2,450 |
|
|
|
69,000 |
|
|
|
6.5 |
% |
|
|
20.7 |
% |
2014 |
|
|
1 |
|
|
|
|
|
|
|
33,000 |
|
|
|
|
|
|
|
9.9 |
% |
2015 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
35,889 |
|
|
|
334,000 |
|
|
|
94.5 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clear Channel Communications leases a portion of the land parcel for the purpose of maintaining and
displaying a billboard sign. Annual rent is $41,000 paid annually in advance. This lease expires in
2013. Successive five-year extensions run until 2038.
Cingular Wireless leases a portion of the land parcel for the purpose of maintaining and operating
a cell-site. This lease expires in 2028. Monthly rent is currently approximately $2,000 per month.
12
Paramount Business Center, Paramount, California
On April 28, 2005, we purchased an existing multi-tenant industrial park known as Paramount
Business Center, a single-story, two building property built in 1985 consisting of approximately
30,157 square feet on approximately 1.66 acres of land. Our total acquisition cost was
approximately $3.2 million. As of December 31, 2010, the property was 87.92% leased to 10 tenants
whose spaces range in size from 2,025 square feet to 3,794 square feet. In the second and fourth
quarter of 2010, we recorded impairment charges of $560,000 and $546,000, respectively, related to
this property.
The propertys historical occupancy rates are as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
December 31 |
|
Occupancy (%) |
2006 |
|
|
100 |
% |
2007 |
|
|
96 |
% |
2008 |
|
|
86 |
% |
2009 |
|
|
66 |
% |
2010 |
|
|
72 |
% |
The following table sets forth lease expiration information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent Of |
|
|
Total |
|
|
Total Annual |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Leasable |
|
|
Base Rent |
|
Year Ending |
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area |
|
|
Expiring |
|
December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
Expiring (%) |
|
|
(%)(1) |
|
Month to month |
|
|
1 |
|
|
|
2,191 |
|
|
$ |
24,000 |
|
|
|
7.3 |
% |
|
|
10.6 |
% |
2011 |
|
|
5 |
|
|
|
12,094 |
|
|
|
128,000 |
|
|
|
40.1 |
% |
|
|
56.6 |
% |
2012 |
|
|
3 |
|
|
|
8,715 |
|
|
|
53,000 |
|
|
|
28.9 |
% |
|
|
23.5 |
% |
2013 |
|
|
1 |
|
|
|
3,584 |
|
|
|
21,000 |
|
|
|
11.9 |
% |
|
|
9.3 |
% |
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
26,584 |
|
|
$ |
226,000 |
|
|
|
88.2 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interstate Commerce Center, Tempe, Arizona
On September 30, 2005, we purchased a multi-tenant industrial park built in 1987 in Tempe, Arizona,
near the Phoenix airport. This property consists of four buildings totaling 83,385 square feet of
leasable space situated on approximately 5.02 acres of land. Our total acquisition cost was
approximately $7.5 million. As of December 31, 2010, the property was 100.0% leased to 5 tenants
whose spaces range in size from 8,372 square feet to 19,930 square feet. The propertys historical
occupancy rates are as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
December 31 |
|
Occupancy (%) |
2006 |
|
|
87 |
% |
2007 |
|
|
100 |
% |
2008 |
|
|
95 |
% |
2009 |
|
|
90 |
% |
2010 |
|
|
98 |
% |
We intend to make modest repairs and improvements to this property over the next two years.
The following table sets forth lease expiration information for the next five years:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent Of |
|
|
Total |
|
|
Percent of |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Leasable |
|
|
Total Annual |
|
Year Ending |
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area |
|
|
Base Rent |
|
December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
Expiring (%) |
|
|
Expiring (%) |
|
Month to month |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
1 |
|
|
|
14,883 |
|
|
|
122,000 |
|
|
|
17.9 |
% |
|
|
19.1 |
% |
2013 |
|
|
2 |
|
|
|
40,200 |
|
|
|
317,000 |
|
|
|
48.2 |
% |
|
|
49.7 |
% |
2014 |
|
|
1 |
|
|
|
8,372 |
|
|
|
46,000 |
|
|
|
10.0 |
% |
|
|
7.2 |
% |
2015 and thereafter |
|
|
1 |
|
|
|
19,930 |
|
|
|
153,000 |
|
|
|
23.9 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
83,385 |
|
|
$ |
638,000 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shoemaker Industrial Park, Santa Fe Spring, California
On June 28, 2006 we acquired Shoemaker Industrial Park. The acquisition price was $9.9 million.
This property consists of three buildings totaling 86,084 square feet of leasable space situated on
approximately 4.0 acres of land. As of December 31, 2010, the property was 83.7% leased to 15
tenants which includes one tenant with two leases, whose spaces range in size from 1,960 square
feet to 13,617 square feet. In the fourth quarter of 2009 and 2010, we recorded impairment charges
of approximately $1.9 million and $987,000, respectively, related to this property.
The propertys historical occupancy rates are as follows:
|
|
|
|
|
Year Ending |
|
Average Annual |
Dec 31 |
|
Occupancy (%) |
2006 |
|
|
79 |
% |
2007 |
|
|
95 |
% |
2008 |
|
|
91 |
% |
2009 |
|
|
78 |
% |
2010 |
|
|
79 |
% |
We intend to make modest repairs and improvements to this property over the next two years.
The following table sets forth lease expiration information for the next five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent Of |
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
|
Expiring |
|
|
Expiring |
|
|
Total Leasable |
|
|
Total Annual |
|
Year Ending |
|
No. of Leases |
|
|
Leases (Sq. |
|
|
Leases |
|
|
Area Expiring |
|
|
Base Rent |
|
December 31 |
|
Expiring |
|
|
Feet) |
|
|
(Annual $) |
|
|
(%) |
|
|
Expiring (%) |
|
Month to month |
|
|
1 |
|
|
|
1,960 |
|
|
$ |
20,000 |
|
|
|
2.3 |
% |
|
|
3.4 |
% |
2011 |
|
|
7 |
|
|
|
27,391 |
|
|
|
245,000 |
|
|
|
31.8 |
% |
|
|
41.6 |
% |
2012 |
|
|
5 |
|
|
|
26,457 |
|
|
|
231,000 |
|
|
|
30.7 |
% |
|
|
39.2 |
% |
2013 |
|
|
3 |
|
|
|
14,246 |
|
|
|
93,000 |
|
|
|
16.5 |
% |
|
|
15.8 |
% |
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
70,054 |
|
|
$ |
589,000 |
|
|
|
81.3 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we may become subject to legal proceeding,
claims, or disputes. As of the date hereof, we are not a party to any pending legal proceedings.
There are no pending material legal proceedings to which we or our assets are subject. In
addition, no such material proceedings are known to be contemplated against us.
ITEM 4. REMOVED AND RESERVED
14
PART II
|
|
|
ITEM 5. |
|
MARKET FOR MEMBERSHIP INTERESTS, RELATED MEMBER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Market Information
There is no established public trading market for our units of membership interests and it is not
anticipated that a public trading market for the units will develop. Under our operating agreement,
our managing member has the right to refuse to permit the transfer of units in its reasonable
discretion.
Holders
On August 18, 2005, we completed our public offering of units. We had sold a total of 100,000 units
of membership interest to 1,448 investors for a total investment of $50,000,000. The sale of the
units of membership interest was made pursuant to a registration statement on Form S-11 filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. As of
December 31, 2010, 98,670 units remained outstanding held of record by 1,312 holders.
Distributions
Holders of our units are generally entitled to receive 90% of cash from operations, as defined in
the operating agreement, each year until investors receive an 8% cumulative, non-compounded annual
return, then 50% of cash from operations. Notwithstanding the foregoing, a 12% cumulative
non-compounded annual return applies to specified early investors for the 12-month period
subsequent to the date of their capital contributions and is in lieu of the 8% return during that
period. Our managing member is entitled to receive the remaining cash from operations. Holders of
our units receive 100% of net proceeds from property sales until they have received the return of
their capital contributions, then 90% of net proceeds from property sales until they have received
an overall 8% non-compounded annual return, taking into account all prior distributions, and
thereafter 50% of net proceeds from property sales is paid to the holders of our units and 50% is
paid to our managing member.
As of December 31, 2010, we have distributed a total of approximately $16.5 million to our
investors since inception, of which approximately $15.7 million was paid to unit holders and
approximately $0.8 million was paid to our managing member. Of the amount paid to unit holders,
$0.8 million was paid directly from funds of our managing member. We contemplate making
distributions quarterly but distributions may be made more or less frequently.
On January 15, 2011, we distributed an additional $649,000 to our investors, of which $622,000 was
paid to unit holders and $27,000 was paid to our managing member.
Equity Compensation Plan Information
We do not have any equity compensation plans and no units of membership interests are issuable
under any individual compensation arrangement.
Unit Repurchases
On February 22, 2007, our unit holders approved an amendment to the Funds operating agreement to
eliminate the prohibition on repurchases of units by the Fund and add a provision to the operating
agreement specifically permitting the managing member to cause the Fund to repurchase units at any
time, and from time to time, on such terms and conditions as the managing member may determine in
its sole discretion; provided that such repurchases do not jeopardize the status of the Fund as a
partnership for federal income tax purposes or cause the Fund to be treated as a publicly-traded
partnership.
15
As of December 31, 2010, we have redeemed 1,330 units. During the years ended December 31, 2009 and
2010, we repurchased units at the purchase price noted below per unit less a $37.50 per investor
transaction fee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of |
|
|
|
|
|
|
|
|
|
|
|
Units that may yet be |
|
|
|
Total Number of Units |
|
|
Average Price Paid |
|
|
purchased under the |
|
Period |
|
Repurchased (1) |
|
|
per Unit |
|
|
Program (2) |
|
1st quarter of 2009 |
|
|
105 |
|
|
$ |
435 |
|
|
|
575 |
|
2nd quarter of 2009 |
|
|
84 |
|
|
$ |
348 |
|
|
|
491 |
|
3rd quarter of 2009 |
|
|
203 |
|
|
$ |
348 |
|
|
|
288 |
|
4th quarter of 2009 |
|
|
144 |
|
|
$ |
348 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter of 2010 |
|
|
144 |
|
|
$ |
348 |
|
|
|
|
(3) |
2nd quarter of 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
3rd quarter of 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
4th quarter of 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All units were repurchased pursuant to the Funds publicly announced unit repurchase program. |
|
(2) |
|
The number of units repurchased in the 2010 and 2009 calendar years may not exceed $200,000
for each of the years or approximately $50,000 per quarter. |
|
(3) |
|
We discontinued repurchasing units effective as of the first quarter of 2010 as we were
preserving resources to fund capital expenditures and operations. We can make no assurances
as to when and on what terms repurchases will resume. |
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The selected financial data set forth below should be read in conjunction with the financial
statements and notes thereto and the Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 (f) |
|
|
2009 (d) |
|
|
2008(e) |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,846,000 |
|
|
$ |
3,151,000 |
|
|
$ |
3,514,000 |
|
|
$ |
3,502,000 |
|
|
$ |
2,809,000 |
|
(Loss) income from continuing operations |
|
|
(1,693,000 |
) |
|
|
(965,000 |
) |
|
|
1,233,000 |
|
|
|
1,241,000 |
|
|
|
924,000 |
|
Income (loss) from discontinued
operations |
|
|
208,000 |
(c) |
|
|
(1,176,000 |
)(c) |
|
|
(1,741,000 |
)(c) |
|
|
395,000 |
(b) |
|
|
(50,000 |
)(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,485,000 |
) |
|
$ |
(2,141,000 |
) |
|
$ |
(508,000 |
) |
|
$ |
1,636,000 |
|
|
$ |
874,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocable to unit
holders |
|
$ |
(1,337,000 |
) |
|
$ |
(1,927,000 |
) |
|
$ |
(457,000 |
) |
|
$ |
1,472,000 |
|
|
$ |
787,000 |
|
Basic and diluted (loss) income
allocable to unit holders per weighted
average unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(15.44 |
) |
|
$ |
(8.76 |
) |
|
$ |
11.13 |
|
|
$ |
11.18 |
|
|
$ |
8.31 |
|
Income from discontinued operations |
|
$ |
1.89 |
|
|
$ |
(10.66 |
) |
|
$ |
(15.73 |
) |
|
$ |
3.55 |
|
|
$ |
(0.45 |
) |
Basic and diluted weighted average
units outstanding |
|
|
98,713 |
|
|
|
99,218 |
|
|
|
99,618 |
|
|
|
99,930 |
|
|
|
100,000 |
|
Cash distributions per weighted average
units outstanding (a) |
|
$ |
18.90 |
|
|
$ |
24.99 |
|
|
$ |
35.06 |
|
|
$ |
25.02 |
|
|
$ |
25.00 |
|
|
|
|
(a) |
|
Excludes distributions paid to the managing member. |
|
(b) |
|
Income from discontinued operations related to Sky Harbor Business Park, which was sold on April 16, 2007 and Zenith
Drive Centre, which was classified as held for sale during the first quarter of 2010. |
|
(c) |
|
Income from discontinued operations related to Zenith Drive Centre. In the first quarter of 2010, management
committed to a plan to sell Zenith Drive Centre and classified the property as held for sale. All prior periods had
been adjusted for comparability purposes. |
|
(d) |
|
2009 operating data have been adjusted to reflect the plan to sell Zenith Drive Centre where we had classified it as held for sale |
16
|
|
|
|
|
during the first quarter of 2010. In the third quarter of 2009, we recorded an additional impairment
charge of approximately $1.2 million on Zenith Drive Centre. In the fourth quarter of 2009, we recorded an
impairment charge of approximately $1.9 million on Shoemaker Industrial Park. |
|
(e) |
|
In the fourth quarter of 2008, we recorded an impairment charge of approximately $1.8 million on Zenith Drive Centre. |
|
(f) |
|
In the fourth quarter of 2010 we recorded an additional impairment charge of approximately $987,000 on Shoemaker
Industrial Park. In the second and fourth quarter of 2010, we recorded impairment charges of approximately $560,000
and $546,000, respectively, related to Paramount Business Center. |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,285,000 |
|
|
$ |
29,239,000 |
|
|
$ |
34,401,000 |
|
|
$ |
38,830,000 |
|
|
$ |
40,269,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
5,251,000 |
|
|
$ |
698,000 |
|
|
$ |
862,000 |
|
|
$ |
943,000 |
|
|
$ |
1,134,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members capital |
|
$ |
25,034,000 |
|
|
$ |
28,541,000 |
|
|
$ |
33,539,000 |
|
|
$ |
37,887,000 |
|
|
$ |
39,135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our audited financial statements and notes thereto
as well as the Section Properties contained elsewhere in this report. See also the Special Note
about Forward-looking Statements preceding Item 1 of this report.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and the reported amount of revenue and
expenses during the reporting period. Actual results could differ materially from the estimates.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements and the reported
amount of revenue and expenses during the reporting periods. Actual results could differ
materially from the estimates in the near term.
Revenue Recognition and Valuation of Receivables
Revenue is recorded in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codifcation (ASC) 840-10, Leases, and SEC Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements, as amended (SAB 104). Revenue is recognized when four
basic criteria are met: persuasive evidence of an arrangement, the rendering of service, fixed and
determinable income and reasonably assured collectability. Leases with fixed annual rental
escalators are generally recognized on a straight-line basis over the initial lease period, subject
to a collectability assessment. Rental income related to leases with contingent rental escalators
is generally recorded based on the contractual cash rental payments due for the period. Because the
Funds leases may provide for free rent, lease incentives, or other rental increases at specified
intervals, the Fund straight-line the recognition of revenue, which results in the recording of a receivable for rent
not yet due under the lease terms. The Funds revenues are comprised largely of rental income and
other income collected from tenants. Management is required to determine, in its judgment, to what
extent the unbilled rent receivable applicable to each specific tenant is collectible. Management
reviews unbilled rent receivable on a quarterly basis and takes into consideration the tenants
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 collectability of unbilled rent with respect to any given tenant is in doubt,
the Fund records an increase in its allowance for doubtful accounts or records a direct write-off
of the specific rent receivable.
17
Investments in Real Estate
Upon acquisition of a property, we allocate the purchase price of the property based upon the fair
value of the assets acquired, which generally consist of land, buildings, site improvements and
intangible lease assets or liabilities including in-place leases, above market and below market
leases. We allocated the purchase price to the fair value of the tangible assets of an acquired
property by valuing the property as if it were vacant. The value of the building is depreciated
over an estimated useful life of 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease. The value of in-place lease intangibles, which are included
as a component of investments in real estate, is amortized to expense over the average expected
lease term.
Acquired above and below market leases is valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our statements of operations.
We consider any bargain periods in our calculation of fair value of below-market leases and to
amortize our below-market leases over the remaining non-cancelable lease term plus any bargain
renewal periods in accordance with FASB ASC 840-20-20, as determined by us at the time we acquire
real property with an in-place lease. The renewal option rates for our acquired leases do not
include any fixed rate options and, instead, contain renewal options that are based on fair value
terms at the time of renewal. Accordingly, no fixed rate renewal options were included in the fair
value of below-market leases acquired and the amortization period is based on the acquired
non-cancelable lease term.
Impairment of Real Estate Assets
Rental properties and intangibles are individually evaluated for impairment when conditions exist
which may indicate that it is probable that the sum of expected future undiscounted cash flows is
less than the carrying amount. Impairment indicators for our rental properties are assessed by
project and include, but is not limited to, significant fluctuations in estimated net operating
income, occupancy changes, rental rates and other market factors. We assess the expected
undiscounted cash flows based upon numerous factors, including, but not limited to, appropriate
capitalization rates, available market information, historical operating results, known trends and
market/economic conditions that may affect the property and our assumptions about the use of the
asset, including, if necessary, a probability-weighted approach if multiple outcomes are under
consideration. Upon determination that impairment has occurred and that the future undiscounted
cash flows are less than the carrying amount, a write-down will be recorded to reduce the carrying
amount to its estimated fair value.
Investment in Real Estate Held-for-Sale
We evaluate the held-for-sale classification of our owned real estate each quarter. Assets that are
classified as held-for-sale are recorded at the lower of their carrying amount or fair value less
cost to sell. Assets are generally classified as held-for-sale once management commits to a plan to
sell the properties and has initiated an active program to market them for sale. The results of
operations of these real estate properties are reflected as discontinued operations in all periods
reported. At December 31, 2010, one real estate asset was classified as held for sale.
Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no
assurance that a material environmental liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a material effect on our
financial condition, results of operations and cash flows. Further, we are not aware of any
environmental liability or any unasserted claim or assessment with respect to an environmental
liability that we believe would require additional disclosure or the recording of a loss
contingency.
Our commitments and contingencies include the usual obligations of real estate owners and operators
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our financial position, cash flows and results of operations. We are not
presently subject to any material litigation nor, to our knowledge, any material litigation
threatened against the Fund which if determined unfavorably to us would have a material adverse
effect on our cash flows, financial condition or results of operations.
Recently Issued Accounting Pronouncements
Reference is made to Notes to our Financial Statements, which begin
on page F-1 to F-17 of this Form
10-K.
18
Results of Operations
Overview
We were formed in October of 1998 to invest in multi-tenant business parks catering to small
business tenants. Our properties are located in major metropolitan areas in the United States and
were purchased on an all cash basis without debt financing. Our revenues consist primarily of
rental income from our properties and additional rent in the form of expense reimbursements derived
from our income producing properties. Our properties are located in Los Angeles, California,
Chicago, Illinois and Phoenix, Arizona.
Market Outlook Real Estate and Real Estate Finance Markets
During 2010, significant and widespread concerns about credit risk and access to capital
experienced during 2009 began to subside. Concerns of a double-dip recession have diminished as a
number of economic indicators have improved. Increased trade volume in 2010 spurred increased
leasing activity in many west coast industrial markets. However, if the economic uncertainty
persists, we may experience significant vacancies or be required to reduce rental rates on occupied
space.
Despite recent positive economic indicators, both the national and most global economies have
experienced continued volatility throughout 2010. The aforementioned conditions, combined with
stagnant business activity and low consumer confidence, have resulted in a challenging operating
environment.
As a result of the decline in general economic conditions, the U.S. commercial real estate industry
has also been experiencing deteriorating fundamentals across all major property types and most
geographic markets. These market conditions have and will likely continue to have a significant
impact on our real estate investments. In addition, these market conditions have impacted our
tenants businesses, which makes it more difficult for them to meet current lease obligations and
places pressure on them to negotiate favorable lease terms upon renewal in order for their
businesses to remain viable. Increases in rental concessions given to retain tenants and maintain
our occupancy level, which is vital to the continued success of our portfolio, has resulted in
lower current cash flow. Projected future declines in rental rates, slower or potentially negative
net absorption of leased space and expectations of future rental concessions, including free rent
to retain tenants who are up for renewal or to sign new tenants, are expected to result in
additional decreases in cash flows.
Results of Operations
Results of continuing operations for the years ended December 31, 2010 and 2009 comprise five
multi-tenant industrial business park properties in two major metropolitan areas. On March 1, 2010,
we determined that the potential sale of Zenith Drive Centre to a third party was probable and
classified the property as held for sale. We have included all operating results of the Zenith
Drive Centre in a separate component of income on the Statements of Operations under the heading
income (loss) from discontinued operations for the years ended December 31, 2010 and 2009.
The results of continuing operations for the years ended December 31, 2010 and 2009 are discussed
below.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Rental revenues decreased to $2.4 million in 2010 from $2.7 million in 2009 primarily due to longer
lease up periods of vacant units, lower market lease rates and higher concessions to attract and
retain tenants as a result of the competitive market conditions partially offset by existing tenant
leases with rent escalations. Tenant reimbursements and other income were comparable for years
ended December 31, 2010 and 2009.
Property operating and maintenance expense increased to $0.8 million in 2010 from $0.7 million in
2009. The increase is primarily due to higher bad debt expense and unit refurbishment repairs.
Property tax expense is comparable for years ended December 31, 2010 and 2009.
General and administrative expenses increased to $0.4 million in 2010 from $0.3 million in 2009 due
primarily to increases in insurance expense and audit, tax and other professional service fees.
Depreciation and amortization decreased to under $0.8 million in 2010 from above $0.8 million in
2009. The decrease is due to real estate impairment losses recognized during the years ended
December 31, 2009 and in 2010 which reduces depreciable basis and full amortization of intangible
assets at three properties.
19
Impairment of real estate increased to approximately $2.1 million in 2010 from $1.9 million in 2009
due to impairment charges recorded to reflect a decline in the market value of our real estate
properties.
Interest and other income is comparable for the years ended December 31, 2010 and 2009.
Interest expense increased to $24,000 from $0 for the same period of 2009 due to borrowing under
the loan agreement entered into in the fourth quarter of 2010.
Discontinued Operations
During the first quarter of 2010, we determined that the potential sale of Zenith Drive Centre to a
third party was probable and classified the property as held for sale in accordance with ASC
360-10, Property, Plant and Equipment. For the years ended December 31, 2010 and 2009, net income
from discontinued operations increased to approximately $0.2 million from a net loss of $1.2
million for the comparable period of 2009. The increase is primarily due to an impairment charge of
$1.2 million recognized during the third quarter of 2009, reducing depreciable basis, and the full
amortization of intangible assets of the property.
Liquidity and Capital Resources
As of December 31, 2010, we had approximately $4.4 million in cash and cash equivalents. We intend
to use the existing cash balance for capital improvements to the properties and to provide for
operating reserves. Cash in excess of these needs, if any, will be available for distribution to
unit holders and to repurchase units from unit holders.
Effective April 27, 2010, our operating agreement was amended to allow the managing member to cause
us to incur debt financing, not to exceed ten percent of the capital contributions of all unit
holders, to meet our operating expenses or to fund cash distributions declared and paid to members.
On December 2, 2010, we entered into a $4.0 million secured loan to provide liquidity for these
purposes. To the extent that net cash generated by the properties is not sufficient to meet
operating costs and pay cash distributions to our unit holders, we will endeavor to sell selected
properties so that we can continue to operate the remaining properties and pay cash distributions.
We intend to hold the properties in which we have invested until we determine that selling or
otherwise disposing of properties would help us to achieve our investment objectives. General
economic conditions, availability of financing, interest rates and other factors, including supply
and demand, all of which are beyond our control, affect the real estate market.
Debt Service Requirements
On December 2, 2010, we entered into a $4.0 million loan agreement with Farmers & Merchants Bank of
Long Beach. The loan matures on November 19, 2013 with no option to extend and bears interest at a
fixed rate of 5.75% per annum. The terms of the loan require monthly payments of principal and
interest. The remaining loan balance is payable on the maturity date. We may repay the loan, in
whole or in part, on or before November 19, 2013 without any penalty.
Contractual Obligations
The following table reflects our contractual obligations as December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
1 year |
|
1-3 years |
|
3-5 years |
|
5 years |
Notes payable (1) |
|
$ |
3,987,000 |
|
|
$ |
52,000 |
|
|
$ |
3,935,000 |
|
|
$ |
|
|
|
$ |
|
|
Interest expense related to long term debt (2) |
|
$ |
666,000 |
|
|
$ |
231,000 |
|
|
$ |
435,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
This represents the loan agreement with Farmers & Merchants Bank of Long Beach. |
|
(2) |
|
Interest expense related to the loan agreement with Farmers & Merchants Bank of Long Beach
is calculated based on a fixed rate of 5.75% per annum. |
Off-balance Sheet Financings and Liabilities
Other than lease commitments and legal contingencies incurred in the normal course of business, we
do not have any off-balance sheet financing arrangements or liabilities. We do not have any
majority-owned subsidiaries or any interests in, or relationships with, any special-purpose
entities.
20
|
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|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We invest our cash and cash equivalents in government backed securities and FDIC
insured savings account which, by its nature, are subject to interest rate fluctuations. As of
December 31, 2010, a 1% increase or decrease in interest rates would not have a material effect on
our interest income.
In addition to changes in interest rates, the value of our real estate is 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 credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if necessary.
|
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ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements, related notes and supplemental schedules are contained on pages F-1 to
F-17 of this report. The index to such items is included in Item 15(a).
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ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
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ITEM 9A. |
|
CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports we file or submit under the Securities and Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to our senior
management, including our chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief
Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and
have concluded that the disclosure controls and procedures were effective as of the end of the
period covered by this report.
In designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on their evaluation as of the end
of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have
concluded that we maintained effective internal control over financial reporting as of December 31,
2010.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
This annual report does not include an attestation report of the Funds independent registered
public accounting firm regarding control over financial reporting. Managements report was not
subject to attestation by the Funds independent registered public accounting firm pursuant to the
Dodd-Frank Wall Street and Consumer Protection Act, which exempts smaller reporting companies from
the auditor attestation requirement of Section 404 (b) of the Sarbanes-Oxley Act.
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ITEM 9B. |
|
OTHER INFORMATION |
Not applicable.
21
PART III
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ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Cornerstone Industrial Properties, LLC is a California limited liability company, which was
initially organized for the purpose of being our managing member. Our managing member is owned by
Cornerstone Ventures, Inc. as well as various investors which do not have any voting rights or
control with respect to the operations of our managing member.
Our managing member also acts as the manager of another investment fund and is a preferred
shareholder of Pacific Cornerstone Capital, Inc., our Managing Broker/Dealer. The manager of our
managing member is Cornerstone Ventures, Inc. Cornerstone Ventures, Inc. oversees the activities of
our managing member and provides many of the services necessary for our managing member to fulfill
its responsibilities to us. The Cornerstone Ventures, Inc. team of professionals brings together a
unique blend of talent and experience. As of March 17, 2011, Cornerstone Ventures, Inc. was the
owner of 26.4% of the equity profits interest in our managing member and has sole voting control
with respect to our operations.
Board of Directors of Manager of Managing Member
Terry G. Roussel, age 57, is one of the founding shareholders of the Cornerstone-related entities
that commenced operations in 1989. Mr. Roussel is Chief Executive Officer, a Director and the
majority shareholder of Cornerstone Ventures, Inc., the manager of our managing member of the Fund.
Mr. Roussel is also the President, Chief Executive Officer and a Director of Cornerstone Core
Properties REIT and Cornerstone Healthcare PLUS REIT, Inc. and their advisors, Cornerstone Realty
Advisors, LLC and Cornerstone Leveraged Realty Advisors, LLC, respectively and the majority
shareholder of Pacific Cornerstone Capital, Inc. Under Mr. Roussels direction, Cornerstone
Ventures and its affiliates formed nine separate real estate investment funds and joint ventures.
In 1993, Cornerstone and its affiliates became managing joint venture partner with Koll Capital
Markets Group, Inc., a wholly owned subsidiary of Koll Management Services, Inc. (now owned by CB
Richard Ellis).
On December 11, 2009, Mr. Roussel and Pacific Cornerstone Capital, Inc. entered into a Letter of
Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA)
relating to alleged rule violations. The AWC set forth FINRAs findings that Pacific Cornerstone
Capital and Mr. Roussel had violated conduct rules in connection with private placements conducted
by Pacific Cornerstone Capital during the period from January 1, 2004 through May 30, 2009. Without
admitting or denying the allegations and findings against them, Pacific Cornerstone Capital and Mr.
Roussel consented in the AWC to various findings by FINRA, which allege that they violated NASD and
FINRA rules relating to communications with the public (NASD Rule 2210); supervision (NASD Rule
3010), and standards of commercial honor and principles of trade (FINRA Rule 2010, formerly NASD
Rule 2110). FINRAs allegations, in sum, focus on claimed material misstatements and omissions with
respect to certain performance targets used in connection with the private placements. Pacific
Cornerstone Capital consented to a censure and fine of $700,000. Mr. Roussel consented to a fine of
$50,000, suspension from association with a FINRA member in all capacities for 20 business days,
and suspension from association with a FINRA member firm in a principal capacity for an additional
three months.
As managing partner of the above-described funds and joint ventures, Cornerstone Ventures, Inc. and
its affiliates were responsible for the acquisition, operation, leasing, and disposition of all
jointly owned properties between Koll and Cornerstone. In connection with acquiring properties for
the account of these joint ventures, Mr. Roussel personally supervised the acquisition of each
property, initiated and directed the business plan for each property, and arranged debt and equity
financing the acquisition of each property.
In addition to his real estate experience, Mr. Roussel gained valuable financial services industry
experience earlier in his career. In 1985, Mr. Roussel started the Special Investments Group, a new
division within Bank of Americas Capital Markets Group, which provided real estate investment
opportunities to the banks wealthiest private banking clients. Between 1980 and 1985, Mr. Roussel
was employed by Bateman Eichler, Hill Richards, Inc., a regional securities firm headquartered in
Los Angeles, California. In this capacity, Mr. Roussel was promoted to First Vice President and
Manager of the partnership finance department where he was responsible for the due diligence and
marketing of all publicly registered and real estate funds offered by the firm.
Mr. Roussel graduated with honors from California State University at Fullerton in 1976 with a B.A.
in Business Administration with a concentration in Accounting. Subsequent to graduation, Mr.
Roussel joined the accounting firm of Arthur Andersen & Co. as an auditor and later transferred to
the tax department of Arthur Young & Co., a predecessor firm to Ernst & Young. Mr. Roussel became a
Certified Public Accountant in 1979 (now inactive).
Alfred J. Pizzurro, age 54, is a Director and shareholder of Cornerstone Ventures, Inc. as
well as a shareholder of Pacific Cornerstone Capital, Inc., the dealer manager for the
Cornerstone Realty Fund, LLC offering that closed in August of 2005. Mr. Pizzurro joined
Cornerstone Ventures, Inc. in April 1998 and has been the individual primarily responsible for
Cornerstones marketing and new business development activities since that time.
22
Between 1993 and 1998, Mr. Pizzurro was responsible for business development both domestically and
internationally for The Joseph Company, a research and development company. From 1986 to 1992, he
was the Director of Marketing for a regional real estate company. Mr. Pizzurro served as a pilot in
the United States Marine Corps between 1979 and 1986 where he attained the rank of Captain.
Mr. Pizzurro received his Bachelor of Science Degree in Communications from Clarion University in
1978.
Financial Oversight Committee
We do not have a board of directors or an audit committee. Accordingly, as the managing member of
our manager, Cornerstone Ventures, Inc. has established a Financial Oversight Committee consisting
of Terry G. Roussel, as the Principal Executive Officer and Sharon C. Kaiser, as the Principal
Financial Officer of Cornerstone Ventures, Inc. The Financial Oversight Committee will serve the
equivalent function of an audit committee for, among others, the following purposes: appointment,
compensation, review and oversight of the work of our independent registered public accounting
firm, and establishing and enforcing our Code of Business Conduct and Ethics. The Financial
Oversight Committee is not independent of us or the managing member.
Management of the Managing Member
Mr. Roussel is the Chief Executive Officer of
Cornerstone Ventures, Inc. The remaining executive officer of Cornerstone Ventures, Inc. is Sharon
C. Kaiser. The experience of Mr. Roussel is described above under Board of
Directors of Manager of Managing Member. Ms. Kaisers experience is described below.
Sharon C. Kaiser, age 66, has served as the Chief Financial Officer of Cornerstone Ventures, Inc.
since October 2005. Ms. Kaiser joined Cornerstone in July 2005 as Chief Financial Officer of
Cornerstone Core Properties REIT, Inc. and its advisor, Cornerstone Realty Advisors, LLC. Ms.
Kaiser is responsible for finance and accounting.
Prior to joining Cornerstone, Ms. Kaiser was Director of Financial Operations for Westfield
America, Inc.
From 1999 to 2002, Ms. Kaiser served as Chief Financial Officer of The StayWell Company, a
subsidiary of Vivendi Universal, and from 1995 to 1999, where she served as Chief Financial Officer
and Senior Vice President of HemaCare Corporation, a publicly traded biomedical company. Her
responsibilities included financial accounting and reporting, information technology, investor
relations and human resources, as well as strategic planning and acquisition due diligence and
integration.
Before joining HemaCare Corporation, Ms. Kaiser served as the Chief Financial Officer of a publicly
traded (AMEX) REIT sponsored by the Koll Company. Earlier she spent eight years with Arthur
Andersen and Co.
Ms. Kaiser holds a Bachelor of Science in Business Administration from the University of Southern
California and has been a Certified Public Accountant since 1981.
Compensation
We reimburse our managing member for its direct expenses in administering our business and pay our
managing member compensation for its services as provided in the operating agreement. Our managing
member is also entitled to receive a percentage of net cash flow from operations and net sales
proceeds, both as defined in our operating agreement. See Item 13 for a discussion of the fees we
pay to our managing member and its affiliates.
Services Performed by Others
Our managing member and its affiliates outsource certain functions and intend to continue hiring
independent persons and companies to provide services to us as called for by the operating
agreement or which, in the opinion of our managing member, would be in our best interests. We will
pay the cost of all such services unless those services are to be provided by our managing member.
Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our managers and persons
who beneficially own more than 10% of a registered class of our equity securities to file reports
of securities ownership and changes in such ownership with the Securities and Exchange Commission
(the SEC). Managers and greater than 10% beneficial owners are also required by rules promulgated
by the SEC to furnish the Fund with copies of all Section 16(a) forms they file.
During the period from January 1, 2010 through December 31, 2010, there were no Section 16(a)
filings required.
23
Code of Business Conduct and Ethics
Cornerstone Ventures, Inc. has adopted a Code of Business Conduct and Ethics that applies to all of
its officers and directors, including Principal Executive Officer and Principal Financial Officer.
The Code of Business Conduct and Ethics can be found on http://www.crefunds.com.
|
|
|
ITEM 11. |
|
COMPENSATION OF OUR MANAGING MEMBER AND AFFILIATES |
We do not have executive officers or directors. We did not pay compensation to the executive
officers of our managing members managing member for services rendered to us. See Item 13 for a
discussion of the fees paid to and services provided by our managing member and its affiliates
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED MEMBER MATTERS |
There are no units of membership interest owned by our managing member as of December 31, 2010.
There are five units of membership interest owned by Terry G. Roussel as of December 31, 2010 which
represents less than 1% of the units outstanding.
No arrangements exist which would, upon implementation, result in a change in control of the
Company.
We do not have any equity compensation plans and did not have any such plan as of December 31,
2010.
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ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Compensation and Fees to be paid to our Managing Member and its Affiliates
Following is a summary of the compensation and fees paid by us to our managing member and its
affiliates in connection with the operation of the company and the liquidation of our properties
for the year ended December 31, 2010.
|
|
|
|
|
|
|
Type of Compensation |
|
|
|
|
and Recipient |
|
Method of Compensation |
|
Amount |
|
|
|
|
|
|
|
|
|
OPERATIONAL STAGE |
|
|
|
|
|
|
|
|
|
|
|
Property management fees
payable to our managing
member and/or its affiliates
some or all of which may be
paid to unaffiliated third
parties
|
|
Property management fees equal
to 6% of the gross rental
income generated by each
property will be paid monthly
|
|
$ |
|
|
|
|
|
|
|
|
|
Property refurbishment
supervision fee payable to
our managing member and/or
its affiliates some or all
of which may be paid to
unaffiliated third parties
|
|
Property refurbishment
supervision fee equal to 10%
of the cost of tenant
improvements or capital
improvements made to our
properties
|
|
$ |
|
|
|
|
|
|
|
|
|
Leasing commissions payable
to our managing member
and/or its affiliates some
or all of which may be paid
to unaffiliated third
parties
|
|
Leasing commissions paid upon
execution of each lease equal
to 6% of rent scheduled to be
paid during the first and
second year of the lease, 5%
during the third and fourth
years and 4% during the fifth
and later years
|
|
$ |
|
|
|
|
|
|
|
|
|
Incentive share of net cash
flow from operations payable
to our managing member
|
|
10% of net cash flow from
operations each year until
unit holders have received
distributions equal to an 8%
per annum, simple return for
the year or the early
investors 12% incentive
return, then 50% of net cash
flow from operations
|
|
$ |
107,000 |
|
|
|
|
|
|
|
|
Reimbursement of actual cost
of goods, materials and
other services supplied to
us by our managing member
|
|
Reimbursement of actual
expenses and costs
|
|
$ |
|
|
24
|
|
|
|
|
|
|
Type of Compensation |
|
|
|
|
and Recipient |
|
Method of Compensation |
|
Amount |
|
|
LIQUIDATION STAGE |
|
|
|
|
|
|
|
|
|
|
|
Property disposition fees
payable to our managing
member and/or its affiliates
some or all of which may be
paid to unaffiliated third
parties. Our managing member
will not be given an
exclusive right to sell our
properties
|
|
Property disposition fees in
an amount equal to 6% of the
contract sales price of the
property
|
|
$ |
|
|
|
|
|
|
|
|
|
Incentive share of net sales
proceeds payable to our
managing member
|
|
After the unit holders have
received an amount equal to
their aggregate capital
contributions, 10% of proceeds
from property sales until the
unit holders have received an
amount equal to an aggregate
8% per annum, cumulative,
non-compounded return taking
into account all prior
distributions and thereafter
50% of proceeds from property
sales
|
|
$ |
|
|
Director Independence
We are a limited liability company, not a corporation, and are therefore managed by our managing
member, Cornerstone Industrial Properties LLC, rather than by a board of directors. Our managing
member is managed by Cornerstone Ventures, Inc., which has a board of directors comprised of two
directors, Terry G. Roussel and Alfred J. Pizzurro. Since our securities are not listed on a
national securities exchange or an inter-dealer quotation system, we are not subject to the
director independence standards that are applicable to listed entities. Neither Mr. Roussel nor Mr.
Pizzurro would be considered independent as defined in the rules applicable to listed entities.
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ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
BDO Seidman, LLP was our independent registered public accounting firm from January 1, 2006 to June
30, 2009. Commencing with the third quarter of 2009, Deloitte & Touche LLP became our independent
registered public accounting firm.
Audit and Non-Audit Fees
Aggregate fees for professional services rendered to us by BDO Seidman, LLP and Deloitte & Touche,
LLP for the years ending December 31, 2010 and 2009 were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deloitte & Touche |
|
|
BDO Seidman |
|
Services Provided |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Audit Fees |
|
$ |
152,000 |
|
|
$ |
74,000 |
|
|
$ |
25,000 |
|
|
$ |
38,000 |
|
All Other Fees |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,000 |
|
|
$ |
74,000 |
|
|
$ |
25,000 |
|
|
$ |
38,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees. The aggregate fees billed for the years ended December 31, 2010 and 2009 were for the
audits of our financial statements and reviews of our interim financial statements included in our
annual and quarterly reports.
All Other Fees. The aggregate fees billed for the years ended December 31, 2010 and 2009 were for
expense related to the audits of our financial statements and reviews of our interim financial
statements included in our annual and quarterly reports.
25
Pre-Approval Policies and Procedures
The Financial Oversight Committee has implemented pre-approval policies and procedures related to
the provision of audit and non-audit services. Under these procedures, the Financial Oversight
Committee pre-approves both the type of services to be provided by its auditor and the estimated
fees related to these services.
During the approval process, the Financial Oversight Committee considers the impact of the types of
services and the related fees on the independence of the auditor. The services and fees must be
deemed compatible with the maintenance of the auditors independence, including compliance with SEC
rules and regulations. Throughout the year, the Financial Oversight Committee will review any
revisions to the estimates of audit and non-audit fees initially approved.
PART IV
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ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)(1) |
|
Financial Statements |
The following financial statements are included in a separate section of this Annual Report on Form
10-K commencing on the page numbers specified below:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2010 and 2009
Statements of Operations for the Years Ended December 31, 2010 and 2009
Statements of Members Capital for the Years Ended December 31, 2010 and 2009
Statements of Cash Flows for the Years Ended December 31, 2010 and, 2009
Notes to Financial Statements
(a)(2) |
|
Financial Statement Schedules
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
Schedule III Real Estate and Accumulated Depreciation
|
|
3.1 |
|
Articles of Organization (incorporated by reference to
Registration Statement on Form S-11, File No. 333-76609, filed
April 20, 1999). |
|
|
3.2 |
|
Amended and Restated Operating Agreement dated as of June 30, 2003, as
amended by Amendment No. 1 dated as of February 22, 2007, Amendment
No. 2 dated as of June 2, 2009 and Amendment No. 3 dated as of April
27, 2010 (incorporated by reference to Exhibit 3.1 to the Registrants
Quarterly Report on Form 10-Q filed on May 14, 2010.) |
|
|
3.3 |
|
Amendment to Articles of Organization filed August 18, 1999
(incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-11, File No. 333-76609, filed
February 4, 2000). |
|
|
3.4 |
|
Amendment to Articles of Organization of the Fund filed January 26,
2000 (incorporated by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-11, File No. 333-76609, filed
February 4, 2000). |
|
|
10.1 |
|
Loan Agreement by and between Farmers & Merchants Bank of Long Beach,
a California corporation and Cornerstone Realty Fund, LLC, dated as
of November 19, 2010. |
|
|
14.1 |
|
Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 14.1 to the Registrants Form 10-K filed on March 29, 2006) |
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
32 |
|
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this annual report to be signed on its behalf by the undersigned,
thereunto duly authorized this 17th day of March 2011.
|
|
|
|
|
|
CORNERSTONE REALTY FUND, LLC
|
|
|
By |
CORNERSTONE INDUSTRIAL PROPERTIES, LLC:
|
|
|
|
its Managing Member |
|
|
|
|
|
By |
CORNERSTONE VENTURES, INC.:
|
|
|
|
its Manager |
|
|
|
By |
/s/ Terry G. Roussel
|
|
|
|
Terry G. Roussel, President |
|
|
|
(Principal Executive Officer) |
|
|
|
By |
/s/ Sharon C. Kaiser
|
|
|
|
Sharon C. Kaiser, Chief Financial Officer |
|
|
|
(Principal Financial Officer and
Principal Accounting Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the following person on behalf
of the registrant has signed this report below in the capacity as and on the date indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Terry G. Roussel
Terry G. Roussel
|
|
Director of Cornerstone Ventures,
Inc.
|
|
March 17, 2011 |
|
/s/ Alfred J. Pizzurro
Alfred J. Pizzurro
|
|
Director of Cornerstone Ventures,
Inc.
|
|
March 17, 2011 |
27
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORNERSTONE REALTY FUND, LLC
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Cornerstone Realty Fund, LLC
Irvine, California
We have audited the accompanying balance sheet of Cornerstone Realty Fund, LLC, (the Fund) a
California limited liability company, as of December 31, 2010 and 2009 and the related statements
of operations, members capital and cash flows for the year ended December 31, 2010 and 2009. Our
audit also included financial statement schedules for the year ended December 31, 2010 and 2009
listed in the Index at Item 15. These financial statements
and schedules are the responsibility of the Funds management. Our responsibility is to express an
opinion on these financial statements and schedules 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
Fund 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 Funds 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 financial statements referred to above present fairly, in all material
respects, the financial position of Cornerstone Realty Fund, LLC as of December 31, 2010 and 2009
and the results of its operations and its cash flows for the year ended December 31, 2010 and 2009,
in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects, the information
set forth therein.
As described in Note 9 to the financial statements, subsequent to the year ended December 31, 2010,
management of the Fund have taken steps, including holding the Funds full portfolio of real estate
assets for sale, that may result in liquidation of the Fund in advance of the Funds scheduled
dissolution date of December 31, 2012.
|
|
|
|
|
|
|
|
/s/ DELOITTE & TOUCHE, LLP
|
|
|
|
Costa Mesa, California |
|
|
March 17, 2011 |
|
|
|
F-2
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,356,000 |
|
|
$ |
761,000 |
|
|
|
|
|
|
|
|
|
|
Investments in real estate |
|
|
|
|
|
|
|
|
Land |
|
|
9,238,000 |
|
|
|
10,088,000 |
|
Buildings and improvements value, net |
|
|
14,387,000 |
|
|
|
16,110,000 |
|
Intangible asset in-place leases, net |
|
|
|
|
|
|
9,000 |
|
Property held for sale, net |
|
|
1,721,000 |
|
|
|
1,726,000 |
|
|
|
|
|
|
|
|
|
|
|
25,346,000 |
|
|
|
27,933,000 |
|
Other assets |
|
|
|
|
|
|
|
|
Non-real estate assets associated with property held for sale |
|
|
81,000 |
|
|
|
74,000 |
|
Tenant and other receivables, less allowance of $298,000 in 2010 and $190,000 in 2009 |
|
|
245,000 |
|
|
|
263,000 |
|
Prepaid expenses |
|
|
16,000 |
|
|
|
50,000 |
|
Deferred financing cost, net |
|
|
77,000 |
|
|
|
|
|
Leasing commissions, net |
|
|
164,000 |
|
|
|
158,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,285,000 |
|
|
$ |
29,239,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
122,000 |
|
|
$ |
161,000 |
|
Distributions payable |
|
|
622,000 |
|
|
|
|
|
Real estate taxes payable |
|
|
82,000 |
|
|
|
76,000 |
|
Tenant security deposits |
|
|
189,000 |
|
|
|
194,000 |
|
Note payable |
|
|
3,987,000 |
|
|
|
|
|
Intangible lease liability, net |
|
|
|
|
|
|
5,000 |
|
Liabilities associated with property held for sale |
|
|
249,000 |
|
|
|
262,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,251,000 |
|
|
|
698,000 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
|
Members capital (100,000 units authorized and issued at 2010 and 2009; 98,670 and
98,814 units outstanding at 2010 and 2009, respectively) |
|
|
25,034,000 |
|
|
|
28,541,000 |
|
|
|
|
|
|
|
|
Total liabilities and members capital |
|
$ |
30,285,000 |
|
|
$ |
29,239,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
2,356,000 |
|
|
$ |
2,657,000 |
|
Tenant reimbursements and other income |
|
|
490,000 |
|
|
|
494,000 |
|
|
|
|
|
|
|
|
|
|
|
2,846,000 |
|
|
|
3,151,000 |
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating and maintenance |
|
|
793,000 |
|
|
|
715,000 |
|
Property taxes |
|
|
459,000 |
|
|
|
440,000 |
|
General and administrative expenses |
|
|
390,000 |
|
|
|
251,000 |
|
Depreciation and amortization |
|
|
781,000 |
|
|
|
831,000 |
|
Impairment of real estate |
|
|
2,093,000 |
|
|
|
1,880,000 |
|
|
|
|
|
|
|
|
|
|
|
4,516,000 |
|
|
|
4,117,000 |
|
|
|
|
|
|
|
|
|
|
Interest (income and other) |
|
|
(1,000 |
) |
|
|
(1,000 |
) |
Interest expense |
|
|
24,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(1,693,000 |
) |
|
|
(965,000 |
) |
|
|
|
|
|
|
|
|
|
Discontinued operation: |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
208,000 |
|
|
|
(1,176,000 |
) |
|
|
|
|
|
|
|
|
|
|
208,000 |
|
|
|
(1,176,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,485,000 |
) |
|
$ |
(2,141,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to managing member |
|
$ |
(148,000 |
) |
|
$ |
(214,000 |
) |
|
|
|
|
|
|
|
|
|
Net (loss) income allocable to unit holders: |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(1,524,000 |
) |
|
$ |
(869,000 |
) |
From discontinued operations |
|
|
187,000 |
|
|
|
(1,058,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
(1,337,000 |
) |
|
$ |
(1,927,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per unit amounts: |
|
|
|
|
|
|
|
|
Basic and diluted loss from continuing operation allocable to unit holders |
|
$ |
(15.44 |
) |
|
$ |
(8.76 |
) |
Basic and diluted income (loss) from discontinued operations allocable to
unit holders |
|
$ |
1.89 |
|
|
$ |
(10.66 |
) |
Basic and diluted weighted average units outstanding |
|
|
98,713 |
|
|
|
99,218 |
|
The accompanying notes are an integral part of these financial statements.
F-4
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF MEMBERS CAPITAL
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
33,539,000 |
|
|
|
|
|
|
Cash distributions to unit holders |
|
|
(2,479,000 |
) |
Cash distributions to managing member |
|
|
(192,000 |
) |
Units repurchased and retired |
|
|
(186,000 |
) |
Net loss |
|
|
(2,141,000 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
28,541,000 |
|
|
|
|
|
|
Distributions to unit holders |
|
|
(1,866,000 |
) |
Distributions to managing member |
|
|
(107,000 |
) |
Units repurchased and retired |
|
|
(49,000 |
) |
Net loss |
|
|
(1,485,000 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
$ |
25,034,000 |
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,485,000 |
) |
|
$ |
(2,141,000 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
5,000 |
|
|
|
|
|
Depreciation and amortization |
|
|
797,000 |
|
|
|
947,000 |
|
Provision for bad debts |
|
|
148,000 |
|
|
|
107,000 |
|
Impairment of real estate |
|
|
2,093,000 |
|
|
|
3,096,000 |
|
Straight-line rent and amortization of acquired above/below market leases |
|
|
(28,000 |
) |
|
|
(30,000 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
(200,000 |
) |
|
|
(292,000 |
) |
Accounts payable and accrued liabilities |
|
|
(67,000 |
) |
|
|
(124,000 |
) |
Real estate taxes payable |
|
|
(2,000 |
) |
|
|
14,000 |
|
Tenant security deposits |
|
|
(3,000 |
) |
|
|
(39,000 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,258,000 |
|
|
|
1,538,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Additions to real estate |
|
|
(169,000 |
) |
|
|
(209,000 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(169,000 |
) |
|
|
(209,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds
from note payable |
|
|
4,000,000 |
|
|
|
|
|
Repayment of note payable |
|
|
(13,000 |
) |
|
|
|
|
Cash distributions to unit holders |
|
|
(1,244,000 |
) |
|
|
(2,479,000 |
) |
Cash distributions to managing member |
|
|
(107,000 |
) |
|
|
(192,000 |
) |
Units repurchased and retired |
|
|
(49,000 |
) |
|
|
(186,000 |
) |
Deferred financing costs |
|
|
(81,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,506,000 |
|
|
|
(2,857,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,595,000 |
|
|
|
(1,528,000 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of year |
|
|
761,000 |
|
|
|
2,289,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
4,356,000 |
|
|
$ |
761,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
11,000 |
|
|
|
|
|
Supplemental disclosure of non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
Distribution declared not paid |
|
$ |
622,000 |
|
|
|
|
|
Accrued real estate additions |
|
$ |
21,000 |
|
|
$ |
12,000 |
|
The accompanying notes are an integral part of these financial statements.
F-6
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business
Cornerstone Realty Fund, LLC, a California limited liability company (the Fund), was formed on
October 28, 1998. The members of the Fund are Cornerstone Industrial Properties, LLC, a California
limited liability company (CIP), as the Managing Member (Managing Member), Terry G. Roussel, an
individual, and other various unit holders as described below. The purpose of the Fund is to
acquire, operate and sell multi-tenant industrial properties.
The operating agreement, as amended and restated, provides, among other things, for the following:
|
|
|
CIP generally has complete and exclusive discretion in the management
and control of our operations; however, unit holders holding the
majority of all outstanding and issued units have certain specified
voting rights which include the removal and replacement of the
Managing Member. |
|
|
|
|
Net Cash Flow from Operations, as defined, will be distributed 90% to
the unit holders and 10% to the Managing Member until the unit holders
have received either an 8% or 12% cumulative, non-compounded annual
return on their invested capital contributions, as defined. The 12%
return applies to specified early investors for the twelve-month
period subsequent to the date of their invested capital contributions
and is in lieu of the 8% return during that period. |
|
|
|
|
Net Sales Proceeds, as defined, will be distributed first, 100% to the
unit holders in an amount equal to their Invested Capital
Contributions; then, 90% to the unit holders and 10% to the Managing
Member until the unit holders have received an amount equal to the
unpaid balance of their aggregate cumulative, non-compounded annual
return on their invested capital contributions; and thereafter, 50% to
the unit holders and 50% to the Managing Member. |
|
|
|
|
Net Income, as defined, is allocated first, 10% to the Managing Member
and 90% to the unit holders until net income allocated equals
cumulative net losses, as defined, previously allocated in such
proportions; second, in proportion to and to the extent of net cash
flow from operations and net sales proceeds previously distributed to
the members, exclusive of distributions representing a return of
invested capital contributions; and then 50% to the Managing Member
and 50% to the unit holders. |
|
|
|
|
Net Loss is allocated first, 50% to the Managing Member and 50% to the
unit holders, until net loss allocated equals cumulative net income
previously allocated in such proportions; then remaining net loss is
allocated 10% to the Managing Member and 90% to the unit holders. |
|
|
|
|
All allocations and distributions to the unit holders are to be pro rata in proportion to
their ownership shares. |
|
|
|
|
Effective February 22, 2007, the Funds operating agreement was
amended to permit repurchase of units on such terms and conditions as
the Managing Member may determine. |
|
|
|
|
Effective June 2, 2009, the Funds operating agreement was amended and
the dissolution date was extended from December 31, 2010 to December
31, 2012. |
|
|
|
|
Effective April 27, 2010, our operating agreement was amended and
allows the Managing Member to cause us to incur debt financing not to
exceed ten percent of the capital contributions of all unit holders to
meet the Funds operating expenses or to fund cash distributions
declared and paid to members. |
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding the financial statements. Such financial statements and accompanying notes are the
representations of management, who is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been consistently applied in preparing the
accompanying financial statements.
F-7
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements and the reported
amount of revenue and expenses during the reporting periods. Actual results could differ
materially from the estimates in the near term.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a
maturity of three months or less at the time of purchase to be cash equivalents.
Investments in Real Estate
Upon acquisition of a property, the Fund allocates the purchase price of the property based upon
the fair value of the assets acquired, which generally consist of land, buildings, site
improvements and intangible lease assets or liabilities including in-place leases and above market
and below market leases. The Fund allocated the purchase price to the fair value of the tangible
assets of an acquired property by valuing the property as if it were vacant. The value of the
building is depreciated over an estimated useful life of 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease. The value of in-place lease intangibles, which are
included as a component of investments in real estate, is amortized to expense over the average
expected lease term.
Acquired above and below market leases is valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms,
including bargain renewal periods, of the respective leases as an adjustment to rental revenue on
the Funds statements of operations.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification
(ASC) 360 Accounting for the Impairment or Disposal of Long-lived Assets, the Fund assesses
whether there has been impairment in the value of its investments in real estate whenever events or
changes in circumstances indicate the carrying amount of an asset may not be recoverable. Its
portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential
impairment include the following:
|
|
|
Change in strategy resulting in a decreased holding period; |
|
|
|
|
Decreased occupancy levels; |
|
|
|
|
Deterioration of the rental market as evidenced by rent decreases over numerous quarters; |
|
|
|
|
Properties adjacent to or located in the same submarket as those with recent impairment issues; |
|
|
|
|
Significant decrease in market price; and/or; |
|
|
|
|
Tenant financial problems. |
During 2010, we recorded impairment charges related to two of our investments in real estate
totaling approximately $2.1 million. During 2009, we recorded impairment charges related to two of
our investments in real estate totaling approximately $3.1 million, of which, $1.2 million was
recorded to Zenith Centre Drive. The impairments were primarily driven by reduced estimates of net
operating income, primarily due to the impact of declines in the industrial rental market and
credit conditions of certain tenants, which when combined with increases in the capitalization
rates assumptions, resulted in the decreases in values of such properties.
The assessment as to whether our investments in real estate are impaired is highly subjective. The
calculations, which are primarily based on discounted cash flow analyses, involve managements
best estimate of market participants holding period, market comparables, future occupancy levels, rental rates,
capitalization rates, lease-up periods and capital requirements for each property. A change in any
one or more of these factors could materially impact whether a property is impaired as of any given
valuation date.
F-8
Investments in Real Estate Assets Held-for-Sale
The Fund evaluates the held-for-sale classification of its owned real estate each quarter. Assets
that are classified as held-for-sale are recorded at the lower of their carrying amount or fair
value less cost to sell and depreciation of the asset ceases. Assets are generally classified as
held-for-sale once management commits to a plan to sell the Properties and has initiated an active
program to market them for sale. The results of operations of these real estate properties are
reflected as discontinued operations in all periods reported. As of December 31, 2010, one of the
Funds properties, Zenith Drive Centre, was classified as held for sale. The results of operations
of Zenith Drive Centre are reflected as discontinued operations in all periods reported. See Note 8
for additional information. As of December 31, 2009 none of the Funds properties were classified
as held for sale.
Leasing Commissions
Leasing commissions are stated at cost and amortized on a straight-line basis over the related
lease term. As of December 31, 2010 and 2009, the Fund had recorded approximately $342,000 and
$324,000 in leasing commissions, respectively. The unamortized portion of this asset was
approximately $195,000 at December 31, 2010 and $180,000 at December 31, 2009.
Deferred Financing Costs
Costs incurred in connection with debt financing are recorded as deferred financing costs. Deferred
financing costs are amortized using the straight-line basis which approximates the effective
interest rate method, over the contractual terms of the respective financings.
Revenue Recognition
Revenue is recorded in accordance with FASB ASC 840-10, Leases, and SEC Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements, as amended. Revenue is recognized when four
basic criteria are met: persuasive evidence of an arrangement, the rendering of service, fixed and
determinable income and reasonably assured collectability. Leases with fixed annual rental
escalators are generally recognized on a straight-line basis over the initial lease period, subject
to a collectability assessment. Rental income related to leases with contingent rental escalators
is generally recorded based on the contractual cash rental payments due for the period. Because the
Funds leases may provide for free rent, lease incentives, or other rental increases at specified
intervals, the Fund recognizes revenue on a straight-line basis, which results in the recording of
a receivable for rent not yet due under the lease terms. The Funds revenues are comprised largely
of rental income and other income collected from tenants. Management is required to determine, in
its judgment, to what extent the unbilled rent receivable applicable to each specific tenant is
collectible.
Tenants Receivable
Management reviews unbilled rent receivable on a quarterly basis and takes into consideration the
tenants 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 collectability of unbilled rent with respect to any given tenant is
in doubt, the Fund records an increase in its allowance for doubtful accounts or records a direct
write-off of the specific rent receivable.
Our allowance for doubtful accounts was $298,000 and $190,000 as of December 31, 2010 and December
31, 2009, respectively.
Fair Value Measurement
ASC
820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework
for measuring fair value in GAAP and provides for expanded disclosure about fair value
measurements. ASC 820-10 applies prospectively to all other accounting pronouncements that require
or permit fair value measurements. The adoption of ASC 820-10 did not have a material impact on
the Funds financial statements since it does not record its financial assets and liabilities in
its financial statements at fair value. The Fund adopted ASC 820-10 with respect to its
non-financial assets and non-financial liabilities on January 1, 2009. The adoption of ASC 820-10
with respect to its non-financial assets and liabilities did not have a material impact on its
financial statements.
Fair value represents the estimate of the proceeds to be received, or paid in the case of a
liability, in a current transaction between willing parties. ASC 820 establishes a fair value
hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are
either observable or unobservable in the marketplace. Observable inputs are based on market data
from independent sources and unobservable inputs reflect the reporting entitys assumptions about
market participant assumptions used to value an asset or liability. Level 1 includes quoted prices in active markets for identical instruments.
Level 2 includes quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in inactive markets; and model-derived valuations
F-9
using observable
market information for significant inputs. Level 3 includes valuation techniques where one or more
significant
inputs are unobservable. Assets and liabilities are classified according to the lowest level input
that is significant to their valuation. Assets and liabilities that have a significant unobservable
input along with significant observable inputs may still be classified Level 3.
Certain assets and liabilities were measured at fair value on a nonrecurring basis. This category
included the impairment of real estate. During 2010 and 2009, we recorded impairment charges to
reduce certain investments in real estate assets to estimated fair
value. The fair values of investment in real estate included inputs based on managements estimate
of net operating income, expected occupancy changes, expected rental rates, capitalization rates
and discount rates based on available market information using a discounted cash flow analysis.
Because one or more of significant inputs are unobservable, the fair values of investment in real
estate are classified as Level 3.
The following table summarizes the two properties that were measured at fair value on a
nonrecurring basis as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Total |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
Losses |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
for the Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December 31, |
|
December 31, |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
2010 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paramount Business Center |
|
$ |
1,749,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,749,000 |
|
|
$ |
(546,000 |
) |
|
$ |
(1,106,000 |
) |
Shoemaker Industrial Park |
|
$ |
6,395,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,395,000 |
|
|
$ |
(987,000 |
) |
|
$ |
(987,000 |
) |
The following table summarizes the two properties that were measured at fair value on a
nonrecurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Losses |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
for the |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December 31, |
|
December 31, |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
2009 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zenith Drive Centre |
|
$ |
1,727,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,727,000 |
|
|
$ |
|
|
|
$ |
(1,216,000 |
) |
Shoemaker Industrial Park |
|
$ |
7,495,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,495,000 |
|
|
$ |
(1,880,000 |
) |
|
$ |
(1,880,000 |
) |
ASC
825-10, Financial Instruments, requires the disclosure of fair value information about
financial instruments whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value.
The Fund generally determines or calculates the fair value of financial instruments using quoted
market prices in active markets when such information is available or using appropriate present
value or other valuation techniques, such as discounted cash flow analyses, incorporating available
market discount rate information for similar types of instruments and its estimates for
non-performance and liquidity risk. These techniques are significantly affected by the assumptions
used, including the discount rate, credit spreads, and estimates of future cash flow.
As of December 31, 2010 and 2009, management estimates that the carrying value of cash and cash
equivalents, tenant and other receivables, tenant security deposits, real estate taxes payable,
accounts payable and accrued liabilities are recorded at amounts that reasonably approximate the
fair value due to the short term nature of these items. Fair value of the note payable at December
31, 2010 and 2009, was $4.0 and $0 million, respectively, based on interest rates available for the
issuance of debt with similar terms and maturities, with carrying values of $4.0 million and $0
million, respectively.
F-10
Income Tax Matters
It is the intent of the Fund and its members that the Fund be treated as a partnership for income
tax purposes. As a limited liability company, the Fund is subject to certain minimal taxes and
fees, including California state income taxes on limited liability companies; however, income taxes
on the income or losses realized by the Fund are generally the obligation of the members.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk are
primarily cash investments; cash is generally invested in investment-grade short-term instruments.
On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act
entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act that implements
far-reaching changes to the regulation of the financial services industry, including provisions
that made permanent the $250,000 limit for federal deposit insurance and increase the cash limit of
Securities Investor Protection Corporation protection from $100,000 to $250,000, and provide
unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand
transaction accounts at all insured depository institutions. As of December 31, 2010 we had cash
accounts in excess of FDIC insured limits. We believe this risk is not significant.
As of December 31, 2010, we owned four properties in the state of California, one property in the
state of Arizona and one property in the state of Illinois. Accordingly, there is a geographic
concentration of risk subject to fluctuations in the states economy.
Segment Disclosure
ASC 280-10, Segment Reporting, establishes standards for reporting financial and descriptive
information about an enterprises reportable segments. Our current business consists of acquiring
and operating real estate assets. Management evaluates operating performance on an individual
property level. However, as each of our properties has similar economic characteristics, our
properties have been aggregated into one reportable segment.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820 to require additional
disclosure and clarify existing disclosure requirements about fair value measurements. ASU 2010-06
requires entities to provide fair value disclosures for each class of assets and liabilities, which
may be a subset of assets and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure regarding the amounts and reasons for
significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate
presentation of purchases, sales, issuances and settlements of items within Level 3 of the fair
value hierarchy. The guidance clarifies existing disclosure requirements regarding the inputs and
valuation techniques used to measure fair value for measurements that fall in either Level 2 or
Level 3 of the hierarchy. ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and
settlements which is effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. We adopted ASU 2010-06 on January 1, 2010, which only applies to
our disclosures on the fair value of financial instruments. The adoption of ASU 2010-06 did not
have a material impact on our footnote disclosures.
Reclassification
Certain amounts in our consolidated financial statements for prior periods have been reclassified
to conform to the current period presentation. Asset held for sale and associated liabilities have
been reclassified on the consolidated balance sheets and operating results reclassified from
continuing to discontinued operations.
F-11
3. Investments in Real Estate
As of December 31, 2010, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
Acquired |
|
|
Below- |
|
|
|
|
|
|
|
Buildings and |
|
|
Lease |
|
|
In-Place |
|
|
Market |
|
|
|
Land |
|
|
Improvements |
|
|
Value |
|
|
Lease |
|
|
Leases |
|
Investments in real estate |
|
$ |
9,238,000 |
|
|
$ |
16,924,000 |
|
|
$ |
|
|
|
$ |
770,000 |
|
|
$ |
(154,000 |
) |
Less: accumulated depreciation and amortization
from continuing operations |
|
|
|
|
|
|
(2,537,000 |
) |
|
|
|
|
|
|
(770,000 |
) |
|
|
154,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate and related lease
intangibles from continuing operations |
|
$ |
9,238,000 |
|
|
$ |
14,387,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net investments in real estate and related lease
intangibles held for sale |
|
|
355,000 |
|
|
|
1,262,000 |
|
|
|
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate |
|
$ |
9,593,000 |
|
|
$ |
15,649,000 |
|
|
$ |
104,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, accumulated depreciation and amortization related to investments in real
estate and related lease intangibles were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
Acquired |
|
|
Below- |
|
|
|
|
|
|
|
Buildings and |
|
|
Lease |
|
|
In-Place |
|
|
Market |
|
|
|
Land |
|
|
Improvements |
|
|
Value |
|
|
Lease |
|
|
Leases |
|
Investments in real estate |
|
$ |
10,088,000 |
|
|
$ |
18,411,000 |
|
|
$ |
|
|
|
$ |
770,000 |
|
|
$ |
(155,000 |
) |
Less: accumulated depreciation and amortization
from continuing operations |
|
|
|
|
|
|
(2,301,000 |
) |
|
|
|
|
|
|
(761,000 |
) |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate and related lease
intangibles from continuing operations |
|
$ |
10,088,000 |
|
|
$ |
16,110,000 |
|
|
$ |
|
|
|
$ |
9,000 |
|
|
$ |
(5,000 |
) |
Net investments in real estate and related lease
intangibles held for sale |
|
|
355,000 |
|
|
|
1,265,000 |
|
|
|
106,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate |
|
$ |
10,443,000 |
|
|
$ |
17,375,000 |
|
|
$ |
106,000 |
|
|
$ |
9,000 |
|
|
$ |
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense associated with held and used investments in real estate and
related lease intangibles were $0.7 million and $0.7 million, in 2010 and 2009, respectively.
Depreciation and amortization expense associated with held for sale investments in real estate and
related lease intangibles were $11,000 and $97,000, in 2010 and 2009, respectively.
All lease intangibles had been fully amortized as of December 31, 2010.
Future Minimum Lease
The future minimum lease payments to be received under existing operating leases for the six
properties owned as of December 31, 2010 are as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
2,143,000 |
|
2012 |
|
|
1,163,000 |
|
2013 |
|
|
439,000 |
|
2014 |
|
|
228,000 |
|
2015 |
|
|
112,000 |
|
2016 and thereafter |
|
|
375,000 |
|
|
|
|
|
|
|
$ |
4,460,000 |
|
|
|
|
|
Industrial space in the properties is generally leased to tenants under lease terms that provide
for the tenants to pay increases in operating expenses in excess of specified amounts. The above
future minimum lease payments do not include specified payments for tenant reimbursements of
operating expenses.
F-12
4. Related Party Transactions
During the years ended December 31, 2010 and 2009, the total incentive share of net cash flow from
operations paid to the Funds Managing Member was $107,000 and $192,000, respectively.
5. Note Payable
On December 2, 2010, we entered into a $4.0 million loan agreement with Farmers & Merchants Bank of
Long Beach. The loan matures on November 19, 2013 with no option to extend and bears interest at a
fixed rate of 5.75% per annum. The terms of the loan require monthly payments of principal and
interest. We may repay the loan, in whole or in part, on or before November 19, 2013 without any
penalty. The loan agreement contains various covenants including financial covenants with respect
to debt service coverage ratios and loan to value ratio. As of
December 31, 2010, we were in compliance with all of these covenants.
We anticipate repaying our existing debt obligation with cash on hand and the proceeds from the
sale of real estate assets. As of December 31, 2010 and 2009, we had incurred net financing costs
of $81,000 and $0, respectively. The financing costs have been capitalized and are being amortized
over the life of the loan. For the years ended December 31, 2010 and 2009, $5,000 and, $0,
respectively of deferred financing costs were amortized and included in interest expense in the
consolidated statement of operations.
The principal payments due on note payable as of December 31, 2010 for each of the next five years
are as follows:
|
|
|
|
|
|
|
Principal |
Year |
|
amount |
2011 |
|
$ |
52,000 |
|
2012 |
|
$ |
3,935,000 |
|
2013 |
|
$ |
|
|
2014 |
|
$ |
|
|
2015 |
|
$ |
|
|
6. Commitments and Contingencies
The Fund monitors its properties for the presence of hazardous or toxic substances. While there
can be no assurance that a material environmental liability does not exist, the Fund is not
currently aware of any environmental liability with respect to the properties that would have a
material effect on its financial condition, results of operations and cash flows. Further, the
Fund is not aware of any environmental liability or any unasserted claim or assessment with respect
to an environmental liability that the Fund believes would require additional disclosure or the
recording of a loss contingency.
The Funds commitments and contingencies include the usual obligations of real estate owners and
operators in the normal course of business. In the opinion of management, these matters are not
expected to have a material impact on its financial position, cash flows and results of operations.
The Fund is not presently subject to any material litigation nor, to its knowledge, any material
litigation threatened against the Fund which if determined unfavorably to the Fund would have a
material adverse effect on its cash flows, financial condition or results of operations.
7. Quarterly Financial Data
Set forth below is certain unaudited quarterly financial information. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included in the amounts
stated below to present fairly, and in accordance with generally accepted accounting principles,
the selected quarterly information when read in conjunction with the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
2010 |
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
Revenues |
|
$ |
722,000 |
|
|
$ |
720,000 |
|
|
$ |
707,000 |
|
|
$ |
697,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations allocable to
unit holders: |
|
$ |
80,000 |
|
|
$ |
(389,000 |
)(a) |
|
$ |
109,000 |
|
|
$ |
(1,325,000 |
)(a) |
Net income from discontinued operations allocable to
unit holders: |
|
|
63,000 |
|
|
|
13,000 |
|
|
|
50,000 |
|
|
|
61,000 |
|
Per unit amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) from continuing operations |
|
$ |
0.81 |
|
|
$ |
(3.94 |
) |
|
$ |
1.10 |
|
|
$ |
(13.43 |
) |
Basic and diluted income from discontinued operations |
|
$ |
0.64 |
|
|
|
0.13 |
|
|
$ |
0.51 |
|
|
$ |
0.61 |
|
Basic and diluted weighted average units outstanding |
|
|
98,790 |
|
|
|
98,670 |
|
|
|
98,670 |
|
|
|
98,670 |
|
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
2009 |
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
Revenues |
|
$ |
809,000 |
|
|
$ |
806,000 |
|
|
$ |
800,000 |
|
|
$ |
736,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations allocable to
unit holders: |
|
$ |
235,000 |
|
|
$ |
235,000 |
|
|
$ |
247,000 |
(b) |
|
$ |
(1,586,000 |
)(b) |
Net income (loss) from discontinued operations allocable to
unit holders: |
|
|
1,000 |
|
|
|
12,000 |
|
|
|
(1,102,000 |
)(b) |
|
|
34,000 |
(b) |
Per unit amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) from continuing operations |
|
$ |
2.37 |
|
|
$ |
2.37 |
|
|
$ |
2.49 |
|
|
$ |
(15.70 |
) |
Basic and diluted income (loss) from discontinued operations |
|
$ |
0.01 |
|
|
|
0.12 |
|
|
$ |
(11.11 |
) |
|
$ |
0.35 |
|
Basic and diluted weighted average units outstanding |
|
|
99,333 |
|
|
|
99,231 |
|
|
|
99,127 |
|
|
|
98,934 |
|
|
|
|
(a) |
|
Includes impairment charge of $1.5 million recorded in the fourth quarter
of 2010 and $0.6 million in the second quarter of 2010. |
|
(b) |
|
Includes impairment charge of $1.9 million recorded in the fourth quarter
of 2009 and $1.2 million in the third quarter of 2009. |
8. Discontinued Operations
We report results of operations from real estate assets that meet the definition of a component of
an entity that have been sold, or meet the criteria to be classified as held for sale, as
discontinued operations. As of March 1, 2010, we determined that the potential sale of Zenith Drive
Centre to a third party was probable, and accordingly, classified the property as held for sale. No
depreciation and amortization of Zenith Drive Centre was recorded for the period from March 1, 2010
to December 31, 2010 in accordance with ASC 360-10. No properties were sold during the year ended
December 31, 2010 and 2009. We included all results of the discontinued operations in a separate
component of income or loss on the Statements of Operations under the heading Net income (loss)
from discontinued operations.
The following is a summary of the components of income (loss) from discontinued operations for the
year ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
2010 |
Total revenues |
|
$ |
548,000 |
|
Operating expenses and real estate taxes |
|
|
340,000 |
|
|
|
|
|
Income from discontinued operations |
|
$ |
208,000 |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
Total revenues |
|
$ |
482,000 |
|
Operating expenses and real estate taxes |
|
|
442,000 |
|
Impairment of real estate |
|
|
1,216,000 |
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(1,176,000 |
) |
|
|
|
|
F-14
A summary of the property held for sale balance sheet information is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Investments in real estate |
|
|
|
|
|
|
|
|
Land |
|
$ |
355,000 |
|
|
$ |
355,000 |
|
Buildings and improvements, net |
|
|
1,262,000 |
|
|
|
1,265,000 |
|
Intangible lease assets, net |
|
|
104,000 |
|
|
|
106,000 |
|
|
|
|
|
|
|
|
Property held for sale, net |
|
|
1,721,000 |
|
|
|
1,726,000 |
|
|
Other assets |
|
|
|
|
|
|
|
|
Tenant and other receivables, net |
|
|
48,000 |
|
|
|
50,000 |
|
Prepaid expenses and other assets |
|
|
2,000 |
|
|
|
2,000 |
|
Leasing commissions, net |
|
|
31,000 |
|
|
|
22,000 |
|
|
|
|
|
|
|
|
Non-real estate assets associated with property held for sale |
|
|
81,000 |
|
|
|
74,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,802,000 |
|
|
$ |
1,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and prepaid rent |
|
$ |
35,000 |
|
|
$ |
42,000 |
|
Real estate taxes payable |
|
|
149,000 |
|
|
|
157,000 |
|
Tenant security deposits |
|
|
65,000 |
|
|
|
63,000 |
|
|
|
|
|
|
|
|
Liabilities associated with property held for sale |
|
$ |
249,000 |
|
|
$ |
262,000 |
|
|
|
|
|
|
|
|
9. Subsequent Events
During the
period from January 1, 2011 to March 16, 2011, we have not repurchased and retired any
units . In addition, on January 14, 2011 we made a distribution of approximately $0.6 million to
unit holders as of December 31, 2010.
Potential Liquidation Transaction
In anticipation of the Funds scheduled dissolution date of December 31, 2012, our Managing
Member has begun the process of evaluating strategic alternatives for winding up the Fund in order
to maximize overall returns for our unit holders. Our Managing Member has engaged a broker through
an exclusive listing arrangement to solicit interests in and pricing of our portfolio. Our
Managing Member initiated the examination at this time, rather than waiting until 2012 because of
the inherent uncertainty of the future and our Managing Members view of (i) the current market
conditions and (ii) the current increasing costs of corporate compliance (including, without
limitation, all federal, state and local regulatory requirements applicable to us, including the
Sarbanes-Oxley Act of 2002, as amended).
After a
thorough analysis and consultation with a real estate broker specializing in multitenant
industrial real estate in the geographical regions where our properties are located, our managing
member has concluded that a liquidation of the Fund at this time will more likely produce superior
returns within a reasonable period of time to our unit holders than other potential exit strategies
reasonably available to us, including waiting until 2012 to complete a liquidation. As a result,
our Managing Member currently expects to distribute a proxy statement to our unit holders to solicit
consents from our unit holders to authorize a plan of liquidation of the Fund involving the sale of
all of the Funds properties to an unaffiliated third party.
F-15
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
|
|
|
|
End of |
|
Description |
|
Period |
|
|
Expenses |
|
|
Deductions |
|
|
Period |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
105,000 |
|
|
$ |
107,000 |
|
|
$ |
(22,000 |
) |
|
$ |
190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
190,000 |
|
|
$ |
148,000 |
|
|
$ |
(40,000 |
) |
|
|
298,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
CORNERSTONE REALTY FUND, LLC
(a California limited liability company)
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
which |
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
Subsequent to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
Initial Cost to Fund |
|
|
Acquisition |
|
|
|
|
|
|
Gross Amount Invested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
|
Building |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement |
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
Carry |
|
|
|
|
|
|
|
|
|
|
Building and |
|
|
|
|
|
|
Accumulated |
|
|
Date of |
|
|
Date |
|
|
is |
|
Description |
|
Land |
|
|
Improvements |
|
|
Improvements |
|
|
Costs |
|
|
Impairment |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
Depreciation |
|
|
Construction |
|
|
Acquired |
|
|
Computed |
|
Investments in Real
Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normandie Business
Center Torrance, CA |
|
$ |
1,783,000 |
|
|
$ |
2,206,000 |
|
|
$ |
177,000 |
|
|
|
|
|
|
$ |
|
|
|
$ |
1,783,000 |
|
|
$ |
2,383,000 |
|
|
$ |
4,166,000 |
|
|
$ |
633,000 |
|
|
|
1989 |
|
|
|
09/27/02 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow Business
Center Irwindale,
CA |
|
|
2,338,000 |
|
|
|
3,660,000 |
|
|
|
205,000 |
|
|
|
|
|
|
|
|
|
|
|
2,338,000 |
|
|
|
3,865,000 |
|
|
|
6,203,000 |
|
|
|
946,000 |
|
|
|
1987 |
|
|
|
12/10/03 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paramount Business
Center Paramount,
CA |
|
|
1,100,000 |
|
|
|
1,926,000 |
|
|
|
159,000 |
|
|
|
|
|
|
|
(1,410,000 |
) |
|
|
668,000 |
|
|
|
1,107,000 |
|
|
|
1,775,000 |
|
|
|
26,000 |
|
|
|
1985 |
|
|
|
04/28/05 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interstate Commerce
Center Tempe, AZ |
|
|
1,750,000 |
|
|
|
5,495,000 |
|
|
|
373,000 |
|
|
|
|
|
|
|
|
|
|
|
1,750,000 |
|
|
|
5,868,000 |
|
|
|
7,618,000 |
|
|
|
925,000 |
|
|
|
1987 |
|
|
|
09/30/05 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shoemaker Ave,
Santa Fe Springs,
CA |
|
|
3,900,000 |
|
|
|
5,994,000 |
|
|
|
64,000 |
|
|
|
|
|
|
|
(3,558,000 |
) |
|
|
2,699,000 |
|
|
|
3,701,000 |
|
|
|
6,400,000 |
|
|
|
7,000 |
|
|
|
1974 |
|
|
|
06/28/06 |
|
|
36 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotals |
|
$ |
10,871,000 |
|
|
$ |
19,281,000 |
|
|
$ |
978,000 |
|
|
|
|
|
|
$ |
(4,968,000 |
) |
|
$ |
9,238,000 |
|
|
$ |
16,924,000 |
|
|
$ |
26,162,000 |
|
|
$ |
2,537,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zenith Business
Center Chicago, IL |
|
$ |
908,000 |
|
|
$ |
3,792,000 |
|
|
$ |
189,000 |
|
|
|
|
|
|
$ |
(3,250,000 |
) |
|
$ |
355,000 |
|
|
$ |
1,284,000 |
|
|
$ |
1,639,000 |
|
|
$ |
22,000 |
|
|
|
1978 |
|
|
|
01/25/05 |
|
|
34 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
11,779,000 |
|
|
$ |
23,073,000 |
|
|
$ |
1,167,000 |
|
|
|
|
|
|
|
(8,218,000 |
) |
|
$ |
9,593,000 |
|
|
$ |
18,208,000 |
|
|
$ |
27,801,000 |
|
|
$ |
2,559,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The changes in total real estate for the years ended December 31, 2010 and 2009 are as
follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
33,985,000 |
|
|
$ |
(2,626,000 |
) |
|
|
|
|
|
|
|
|
|
2009 Impairment of real estate |
|
|
(4,074,000 |
) |
|
|
1,053,000 |
|
2009 Additions |
|
|
221,000 |
|
|
|
(741,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
30,132,000 |
|
|
$ |
(2,314,000 |
) |
|
|
|
|
|
|
|
|
|
2010 Impairment of real estate |
|
|
(2,521,000 |
) |
|
|
428,000 |
|
2010 Additions |
|
|
190,000 |
|
|
|
(673,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
27,801,000 |
|
|
$ |
(2,559,000 |
) |
|
|
|
|
|
|
|
|
|
|
(b) |
|
For federal income tax purposes, the aggregate cost of the Funds six properties is
approximately $36.0 million. |
F-17