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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact name of registrant as specified in its charter)
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Maryland | 06-1722127 | |
(State or other jurisdiction incorporation or organization) |
(I.R.S. Employer of Identification No.) |
(Address of principal executive offices zip code)
(Registrants telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.001 Par Value Series A Cumulative Redeemable Preferred Stock, $0.001 Par Value |
New York Stock Exchange New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
As of March 14, 2014, there were 71,409,485 shares of the Registrants common stock outstanding. The aggregate market value of common stock held by non-affiliates of the registrant (55,372,672 shares) at June 30, 2013, was $249,177,024. The aggregate market value was calculated by using the closing price of the common stock as of that date on the New York Stock Exchange, which was $4.50 per share.
Portions of the registrants Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders expected to be filed within 120 days after the close of the registrants fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.
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ITEM 1. | BUSINESS |
Gramercy Property Trust Inc., or the Company or Gramercy, is a fully-integrated, self-managed commercial real estate investment company focused on acquiring and managing income-producing industrial and office properties net leased to high quality tenants in major markets throughout the United States. We also operate an asset management business that manages for third-parties, including our Bank of America Portfolio joint venture, commercial real estate assets.
Gramercy was founded in 2004 as a specialty finance Real Estate Investment Trust, or REIT, focused on originating and acquiring loans and securities related to commercial and multifamily properties. In July 2012, following a strategic review, our board of directors announced a repositioning of Gramercy as an equity REIT focused on acquiring and managing income producing net leased real estate. To reflect this transformation, in April 2013 we changed our name from Gramercy Capital Corp. to Gramercy Property Trust Inc. and changed our ticker symbol to GPT on the New York Stock Exchange.
As of December 31, 2013, we owned interests (either directly or through a joint venture) in 107 properties containing an aggregate of approximately 7.8 million rentable square feet.
We have achieved a number of important milestones since our board of directors elected to reposition our company as a REIT focused on acquiring and managing income producing net leased properties, including:
| In March 2013, we sold our collateral management and sub-special servicing contracts for our three Collateralized Debt Obligations, or CDOs, disposed of certain non-core legacy assets and exited the commercial real estate finance business; and, |
| We downsized our New York City headquarters office, closed one satellite property management office, reduced employee headcount, rebid our professional consulting and insurance contracts and reduced annual run rate management, general and administrative expenses, or MG&A expenses. |
| In September 2013, we entered into a $100.0 million senior secured credit facility which was increased to $150.0 million in February 2014; |
| In October 2013, we issued and sold 11.5 million shares of our common stock in a private placement at a price of $4.11 per share, resulting in total net proceeds to us of approximately $45.5 million; and, |
| In December 2013, our board of directors declared, and in January 2014 we paid in full, the accrued and unpaid dividends on our Cumulative Redeemable Preferred Stock, or Series A Preferred Stock, and began the timely payment of the quarterly preferred dividends beginning with the dividend due January 15, 2014, positioning us to re-commence dividends on our common stock. |
As of December 31, 2013, we owned, directly or through joint ventures, a portfolio that consists of 107 industrial, office and specialty properties totaling approximately 7.8 million square feet. As of December 31, 2013, our portfolio has the following characteristics:
| 99.1% occupancy; |
| a weighted average remaining lease term of 11.7 years (based on annualized base rent); |
| 53.5% investment grade tenancy (includes subsidiaries of non-guarantor investment grade parent companies) (based on annualized base rent); |
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| Industrial portfolio comprised of 4.2 million aggregate rentable square feet with an average base rent per square foot of $5.33; |
| Office portfolio comprised of 3.4 million aggregate rentable square feet with an average base rent per square foot of $9.53 (including the properties we own through joint ventures); |
| Specialty asset portfolio of three improved sites comprised of 186 acres of land and 256 thousand aggregate rentable square feet of building space that we lease to a car auction services company, a bus depot and a rental car company; and |
| Top five tenants by annualized base rent include: Bank of America, N.A. or Bank of America, guaranteed by Bank of America Corp. (31%); Adesa Texas, Inc., guaranteed by KAR Holdings, Inc. (11%); EF Transit, Inc., guaranteed by Monarch Beverage Co., Inc. (6%); AMCOR Rigid Plastics USA, Inc., guaranteed by Amcor Limited (6%); and Preferred Freezer Services of Hialeah, LLC, guaranteed by Preferred Freezer Services, LLC (5%). Our lease with Preferred Freezer Services of Hialeah, LLC starts upon completion of construction of the facility currently expected in the second quarter of 2014. |
| We executed or extended asset management contracts with third-party property owners, including our joint venture partners, resulting in an aggregate of $1.4 billion in assets under management at December 31, 2013; |
| During the year ended December 31, 2013, we generated $40.9 million in asset management revenue, including the collection of a $12.0 million out-performance fee (pre-tax) under our asset management agreement with an affiliate of KBS Real Estate Investment Trust, Inc., or KBS. |
In January 2014, we paid in full the accrued and unpaid dividends on our Series A Preferred Stock and began the timely payment of the quarterly preferred dividends beginning with the dividend due January 15, 2014.
In February 2014, we acquired a 115 thousand square foot industrial property located in Des Plaines, Illinois, for a purchase price of approximately $6.3 million. The property is leased to one tenant through October 2025. In connection with the acquisition, we assumed a $2.7 million mortgage loan that matures in October 2020 and bears a fixed interest rate of 5.25%.
In February 2014, we exercised and the lenders approved the accordion feature to increase our $100.0 million senior credit facility to $150.0 million.
In March 2014, we announced that we will resume payment of a dividend to our common stockholders after a hiatus of more than five years. Our board of directors declared a quarterly dividend of $0.035 per common share for the first quarter of 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014. We also announced that our board of directors declared the Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period January 15, 2014, through and including April 14, 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014.
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We were formed in April 2004 as a Maryland corporation and we completed our initial public offering in August 2004. We conduct substantially all of our operations through our operating partnership, GPT Property Trust LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Our Operating Partnership conducts our commercial real estate investment business through various wholly-owned entities and our third party asset management business primarily through a wholly-owned TRS. The chart below summarizes the organizational structure of our entities as of December 31, 2013:
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish, TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.
Unless the context requires otherwise, all references to Gramercy, the Company, we, our, and us in this Annual Report on Form 10-K mean Gramercy Property Trust Inc., a Maryland corporation, and one or more of its subsidiaries, including our Operating Partnership.
We seek to acquire and manage a diversified portfolio of high quality net leased properties that generates stable, predictable cash flows and protects investor capital over a long investment horizon. We expect that these properties generally will be leased to a single tenant. Under a net lease, the tenant typically bears the responsibility for all property related expenses such as real estate taxes, insurance, and repair and maintenance costs. We believe this lease structure provides an owner cash flows over the term of the lease that are more stable and predictable than other forms of leases, and minimizes the ongoing capital expenditures often required with other property types.
We approach the net leased market as a value investor, looking to identify and acquire net leased properties that we believe offer attractive risk adjusted returns throughout market cycles. We focus primarily on industrial and office properties, where we believe attractive investment opportunities currently exist. We focus on acquiring assets in major markets where strong demographic and economic growth offer, in our view, a higher probability of producing long term rent growth and/or capital appreciation. Our goal is to grow our existing portfolio and become a pre-eminent owner of net leased commercial industrial and office properties in the United States.
We believe that within the net leased industry, industrial and office investments offer a fundamentally different opportunity from the market for net leased retail assets. Industrial and office assets tend to be heterogeneous, and valuation is frequently influenced by local real estate market conditions and tenant
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preferences. In our view, the skillset required to properly underwrite industrial and office assets is specific to those assets and can be used to drive significant investment outperformance. We also believe that well-located industrial and office assets are better positioned to experience rent growth and asset price appreciation than single tenant retail assets in an inflationary environment.
Our strategy is to focus primarily on industrial properties and to pursue office properties on a more opportunistic basis. We believe industrial properties offer the most compelling risk adjusted returns in the net leased marketplace today. In our experience, industrial assets have more stable tenancy and a more direct and critical relationship to the tenants underlying operations. Industrial assets also have lower carrying costs when vacant, lower re-leasing costs to replace tenants and lower ongoing capital requirements during the period of ownership.
In our experience, net leased office and specifically single tenant suburban office properties can have contract rents that become very difficult to replicate at lease renewal. In addition, single tenant office properties can be difficult and costly to re-tenant and reconfigure as multi-tenant buildings. Office space also tends to be more generic, with weak links to the underlying operations making tenant switching costs very low for the tenants. We intend to pursue opportunistic net leased office transactions where we believe property specific factors and characteristics mitigate the above-referenced risks and the transaction offers compelling returns.
We do not plan to focus on net leased retail assets. We believe that there are many large, well-capitalized net leased REITs that currently focus on retail assets and we believe that the market for these assets is currently the most competitive within the overall net leased marketplace. In addition, retail leases typically have minimal rent increases, and many renewal options at fixed rents, which gives the tenant much of the benefit of any market or rent appreciation through an increase in the leasehold value of the asset. If specific opportunities arise or market conditions warrant, we may revisit this approach to net leased retail assets in the future.
We have observed that the net leased investing marketplace has evolved from a primarily credit-focused strategy with bond type net leased structures, very long lease terms, and bargain renewal options to one in which net leased investors face many of the same operational and market risks as other real estate investors. For this reason, we believe that real estate underwriting is an important aspect of our investment process. We believe that traditional real estate fundamentals will be the primary driver of investment performance in the net leased market for the foreseeable future, in contrast to the past practices where long lease terms and tenant credit quality were the primary drivers.
Target Markets with Attractive Characteristics We plan to concentrate our investment activity in select target markets with the following characteristics: high quality infrastructure, diversified local economies with multiple economic drivers, strong demographics, pro-business local governments and high quality local labor pools. We believe that these markets offer a higher probability of producing long term rent growth and/or capital appreciation. As of December 31, 2013, approximately 85% of our portfolio (based on purchase price) is located in our target markets (based on purchase price).
Properties with Competitive Rents to Market We target properties with contract rents that are at or below rents that are available in the market for similar properties as a way to reduce the volatility of cash flows that can occur upon the expiration of a lease. We specifically target properties where rents have been rolled down, post-financial crisis.
Properties with Long Lease Terms We generally target properties that have between 5 and 20 years of non-cancelable lease terms. We believe that longer lease terms provide more stable cash flows, are less susceptible to changes in market conditions and require less capital expenditure to maintain tenancy.
Core Properties Acquired at Above Market Yields Due to Some Market Inefficiency We seek opportunities to acquire core properties at attractive prices due to a mispricing of credit or real estate risk, or a misunderstanding of the nature of the investment that may limit the competitive environment.
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Complex Legacy Net Leased Portfolios We seek opportunities to acquire legacy net leased portfolios that through asset sales, lease restructurings and other value-add activities can be transformed into high quality net leased portfolios.
We target specialized properties that fall outside many traditional institutional investor parameters, but offer unique utility to a tenant or an industry and can therefore be acquired at attractive yields relative to the underlying risk. We look for properties that are difficult or costly to replicate due to a specific location, special zoning, unique physical attributes, below market rents or a significant tenant investment in the facility, all of which contribute to a higher probability of tenant renewals. Examples of specialized properties include cross-dock truck terminals, cold storage facilities, parking facilities, air-freight facilities, steel distribution facilities, properties with high parking requirements and other mission critical facilities. We purchase specialized corporate real estate if we believe the property is critical to the ongoing operations of the tenant and the profitable continuation of its business. We believe that the profitability of the operations and the relative difficulty in replicating or moving operations reflect the importance of the property to the tenants business.
Individual Properties We seek to acquire individual properties having a purchase price between $5 million and $30 million. We target properties of this size because we find in the current environment that there is less competition from larger institutions who generally look for larger properties and larger portfolios. We have an asset management team of significant scale that has significant experience negotiating, underwriting and acquiring these types of properties, which we believe gives us a competitive advantage over many local and regional investors that typically compete for these acquisitions.
Sale Leasebacks We believe our management team is among the most experienced and well known in the sale and leaseback industry, with long-standing contacts and reputations among bankers, advisors and private equity firms. We believe that we can source and effectively compete on sale and leaseback transactions and believe that there will be an increasing number of such opportunities due to still extensive holdings of commercial real estate on corporate balance sheets, financial metrics which discourage such ownership and the relative attractiveness of the capital that we and others in the sale and leaseback industry can offer.
Build-to-Suits Our management team has extensive experience in build-to-suit transactions whereby we provide construction funding for a property that we ultimately acquire. In a build-to-suit transaction, we generally pre-lease all or substantially all of the property to a single tenant under a long-term lease. We believe there is less competition for such investments due to investors relative lack of experience with such investments, the difficulties in obtaining inexpensive asset level financing and a lack of a mandate to make such investments.
Portfolios We believe there may be opportunities to purchase portfolios of properties from existing owners who are either investor owners or corporations that occupy their properties. We believe that we will have the opportunity to purchase portfolios in exchange for cash, our common stock, units of limited partnership interest in the Operating Partnership or a combination thereof. The market for large portfolios is currently very competitive with many well-capitalized buyers actively bidding for these portfolios and we expect this market to remain competitive for the foreseeable future.
Opportunities to Extend Leases through Expansions or Capital Investments We focus on net leased investment properties where, in our view, there is the potential to invest incremental capital to accommodate a tenants business, extend lease terms and increase the value of a property. We believe these opportunities can generate attractive returns due to the nature of the relationship between the landlord and tenant.
Assets with Cycle-Low Rent Levels We focus on industrial and office properties with rents that we believe are competitive with market rents. These rents have typically resulted in a lease-up of vacant space or a lease renewal completed following the financial crisis. We believe that the net leased marketplace does not properly differentiate and price these properties and that these investment opportunities can generate growth in income and residual value over time as the U.S. economy improves.
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Long-term Appreciation Opportunities We believe there are opportunities to acquire properties with longer term leases that provide current cash flow for the term of the lease and that, if correctly identified, have the potential upon lease expiration for a higher and better use that may provide capital appreciation over the long-run.
Underwrite and Structure Investments to Protect Downside and Preserve Cash Flows We seek to invest in properties that have steady, predictable cash flow through: (a) long term, well-structured leases, (b) high leasehold value for tenants and (c) a high likelihood of renewal. We further seek to protect our investment by purchasing properties at prices at or below estimated replacement cost.
Utilize Portfolio Diversification We seek to diversify our portfolio by property type, tenant credit, geography and tenant industry. As of December 31, 2013, our largest tenant was Bank of America, N.A., which accounted for approximately 31% of our annualized base rent revenue as of December 31, 2013. As we grow, we expect to further diversify our portfolio.
Utilize Moderate Leverage We will target moderate consolidated leverage across our entire company of debt to market capitalization of approximately 50% to 55% through a combination of mortgage debt and corporate-level debt. We aspire to be an unsecured borrower; however, until we reach sufficient scale to obtain that goal, we will utilize a mix of secured debt and entity level borrowings.
Actively Manage the Portfolio to Maximize Tenant Retention and Minimize Vacancy We believe there are opportunities within our portfolio to extend lease terms through property expansions or tenant improvement investments funded by us.
The following provides information regarding the various lease structures (including our lease with Preferred Freezer Services of Hialeah, LLC, which starts upon completion of construction of the facility currently expected in the second quarter of 2014) that we utilize in our operations.
Triple net lease. In our triple net leases, the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term. The landlord may have responsibility under the lease to perform or pay for certain capital repairs or replacements to the roof, structure or certain building systems, such as heating and air conditioning and fire suppression. In some instances the tenant may reimburse the landlord for capital repairs or replacements on an amortized basis. The tenant may have the right to terminate the lease or abate rent due to a major casualty or condemnation affecting a significant portion of the property or due to the landlords failure to perform its obligations under the lease. Substantially all of our wholly owned industrial and specialty asset properties are leased pursuant to triple net leases.
Modified gross lease. In our modified gross leases, the landlord is responsible for some property related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to the landlord. The tenant may have the right to terminate the lease or abate rent due to a major casualty or condemnation affecting a significant portion of the property or due to the landlords failure to perform its obligations under the lease. Bank of America leases the Bank of America Portfolio properties pursuant to a modified gross lease.
Gross lease. In our gross leases, the landlord is responsible for all aspects of and costs related to the property and its operation during the lease term. The tenant may have the right to terminate the lease or abate rent due to a major casualty or condemnation affecting a significant portion of the property or due to the landlords failure to perform its obligations under the lease. As of December 31, 2013, gross leases in our portfolio represented approximately 1.0% of our total contractual base rent.
Escalations/Renewals. The properties in our wholly owned and joint venture portfolio may be subject to varying provisions regarding rent escalations and renewals. The properties within our Bank of America Portfolio typically have 1.5% rent increases every five years on 10-year lease terms and six tenant renewal options of five years each. Our remaining leases have rent escalation and renewal options that vary in amount and duration.
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We believe that we distinguish ourselves from other net leased companies through the following competitive strengths:
| Management Team with Extensive Specialized Net Lease Expertise |
º | We are led by Gordon F. DuGan and Benjamin P. Harris, the former Chief Executive Officer and Head of US Investments of W.P. Carey & Co., or W.P. Carey, respectively, with a combined 35 years of real estate experience. |
º | Our seven senior officers have an average of approximately 20 years of real estate experience. |
| Demonstrated Track Record |
º | During his tenure at W.P. Carey as President from December 1999 to May 2004 and then CEO from May 2004 to July 2010, Mr. DuGan oversaw the growth of W.P. Careys assets under management from approximately $2 billion at December 31, 1999, to approximately $10 billion at June 30, 2010. |
º | For the period July 1, 2012 to December 31, 2013, we have sourced and acquired (directly or in joint ventures) approximately $873 million in net leased investments. |
º | For the period July 1, 2012 to December 31, 2013, we have marketed and sold for our company and third-parties 322 non-core properties for an aggregate gross sale price of approximately $905 million. |
| Focused and Disciplined Investment Strategy |
º | We are uniquely focused on acquiring well positioned net leased industrial and office properties. |
º | Our target markets consist of Metropolitan Statistical Areas, or MSAs, that have strong demographics and business-friendly environments, among other things. |
º | Our quantitative underwriting model allows us to evaluate opportunities from a risk/return perspective. |
| Strong, Long-Standing Industry Relationships |
º | Members of our management team have cultivated relationships with various constituents in the net leased market for over two decades. |
º | We believe our management teams experience in the sale leaseback space may result in our receiving a first-call from numerous companies, advisors, brokers and private equity firms interested in possible sale leaseback transactions. |
| Full Service Asset Management Platform |
º | We believe we have the in-house expertise and capability required to perform broad-scope asset management and construction management services for ourselves and for third parties, including our joint venture partners. |
| Ability to Move Fast |
º | We believe we have established a reputation for closing transactions quickly and efficiently. |
º | Our due diligence and closing group have extensive experience in closing transactions. |
| Stockholder-Aligned Compensation and Corporate Governance |
º | We use individual and corporate annual performance metrics to measure executive performance when determining annual incentive compensation bonuses. |
º | We maintain a policy that prohibits directors and officers from hedging, pledging or margining shares of our common stock. |
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º | Our stock ownership guidelines for our chief executive officer are based on a multiple of base salary. |
º | Pursuant to Mr. DuGans employment contract, Mr. DuGan purchased from us 1.0 million shares of our common stock at market prices immediately prior to commencing employment as our Chief Executive Officer on July 1, 2012 using his personal funds without any reimbursement or other financial assistance from us. |
º | Stock ownership guidelines for our non-employee directors are based on multiples of the annual retainer for our non-employee directors. |
º | Our directors are elected annually. |
º | We implemented majority voting in the election of directors. |
We utilize relationships with various real estate owners, real estate advisors and intermediaries, developers, investment and commercial banks, private equity sponsors, and other potential deal sources to identify a broad pipeline of investment opportunities. Our investment team actively reviews this pipeline and identifies a subset of properties that meet our investment criteria. Our initial review includes an evaluation of the credit of the tenant, the criticality of the property, an evaluation of the market and submarket where the property is located, the location, age, functionality and marketability of the property, the lease structure and how contract rents relate to rents for similar buildings in the submarket, the replacement cost for a similar asset, the expected returns and pricing, and other factors that go into the overall evaluation of the investment opportunity. Our management team actively looks to source proprietary investment opportunities that are not being generally marketed for sale.
As part of a potential property acquisition, we evaluate the creditworthiness of the tenant and the tenants ability to generate sufficient cash flow to make payments to us pursuant to the lease. We evaluate each potential tenant for its creditworthiness, considering factors such as the tenants rating by a national credit rating agency, if any, management experience, industry position and fundamentals, operating history and capital structure. We may seek tenants who are small to middle-market businesses, many of which do not have publicly rated debt. We may also lease properties to large, publicly traded companies in order to diversify the overall credit quality of our tenant base. The creditworthiness of a tenant is determined on a tenant-by-tenant and case-by-case basis. Therefore, general standards for creditworthiness cannot be applied.
We perform a due diligence review with respect to each potential property acquisition, such as evaluating the physical condition, evaluating compliance with zoning and site requirements, as well as completing an environmental site assessment in an attempt to determine potential environmental liabilities associated with a property prior to its acquisition, although there can be no assurance that hazardous substances or wastes (as defined by present or future federal or state laws or regulations) will not be discovered on the property after we acquire it.
We review the structural soundness of the improvements on the property and may engage a structural engineer to review all aspects of the structures in order to determine the longevity of each building on the property. This review normally also includes the components of each building, such as the roof, the electrical wiring, the heating and air-conditioning system, the plumbing, parking lot and various other aspects such as compliance with federal, state and local building codes.
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We physically inspect the real estate and surrounding area as part of our process for determining the value of the real estate. Our due diligence is structured to assist us in determining the value of the property, which is based on, among other things, historical and projected operating results as well as the value of the real estate under the assumption that it was not rented to the current tenant. As part of this process, we may consider one or more of the following items:
| the comparable value of similar real estate in the same general area of the prospective property; |
| the comparable real estate rental rates for similar properties in the same area of the prospective property; |
| alternative property uses that may offer higher value; |
| the cost of replacing the property; and |
| any barriers to entry to construct competing properties. |
We may supplement our valuation with a real estate appraisal. When appropriate, we may also engage experts to undertake some or all of the due diligence efforts described above.
As part of our investment process, we conduct a review of the tenants credit profile which may include a review of any or all of the following:
| the tenants and/or its affiliates historical financials; |
| the tenants and/or its affiliates industry and its competitive position; |
| the tenants and/or its affiliates business plan and financial projections; |
| the tenants and/or its affiliates capital structure; and |
| the tenant real estate and how a subject property fits into the tenants operations. |
We may also conduct interviews with management and owners of the tenant and/or its affiliates as a part of this process.
All real estate investments, dispositions and financings must be approved by a credit committee consisting of our most senior officers, including the affirmative approval of our chief executive officer. Real estate investments and dispositions at a loss (based on book value at the time of sale) having a transaction value greater than $20.0 million must also be approved by the investment committee of our board of directors. Our board of directors must approve all such transactions having a value greater than $50.0 million. Additionally, the investment committee must approve non-recourse financings greater than $20.0 million and our board of directors must approve all recourse financings, regardless of amount, and non-recourse financings greater than $50.0 million. For purposes of approval thresholds, joint ventures are calculated without regard for the joint venture structure and are calculated assuming we are acquiring 100% of the property or borrowing 100% of the financing.
We generally intend to hold the investment properties we acquire for an extended period. However, circumstances might arise which could result in the early sale of some properties. We also may acquire a portfolio of properties with the intention of holding only a core group of properties and disposing of the remainder of the portfolio in single or multiple sales. The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of all relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation. The selling price of a property will depend on many of the same factors identified above with respect to our investment process for acquisitions.
We may use TRSs to acquire or hold property, including assets that may not be deemed to be REIT-qualified assets. Taxes paid by such entity will reduce the cash available to us to fund our continuing operations and cash available for distributions to our stockholders.
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Some of our investments have been made and may continue to be made through joint ventures that permit us to own interests in larger properties or portfolios without restricting the diversity of our portfolio. We will not enter into a joint venture to make an investment that we would not otherwise purchase on our own under our existing investment policies. We currently have investments in two joint ventures. As of December 31, 2013, this included (i) a 50% interest in a 75 property portfolio referred to as the Bank of America Portfolio and (ii) a 25% interest in a fee interest in 200 Franklin Square Drive, Somerset New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics, through December 2021, or Philips HQ JV.
In addition to cash on hand and cash from operations, we anticipate using funds from various sources to finance our acquisitions and operations, including public and private equity issuances, bank credit facilities, term loans, property-level mortgage debt, operating partnership units and other sources that may become available from time to time. We believe that moderate leverage is prudent and generally target a debt to market capitalization ratio of 50% 55% across our entire portfolio. We may encumber certain properties with higher leverage while keeping other properties unencumbered or pledged as part of various corporate level borrowings. We aspire over time to become an investment grade rated, unsecured borrower. However, until we reach sufficient scale to obtain that goal, we will utilize a mix of secured debt and entity level borrowing.
We expect that any property-level mortgage borrowings will be structured as non-recourse to us, with limited exceptions that would trigger recourse to us only upon the occurrence of certain fraud, misconduct, environmental, bankruptcy or similar events.
We have a $150.0 million senior secured revolving credit facility with an initial term expiring September 4, 2015, with an option for a one-year extension. The credit facility included a $50.0 million accordion feature, which we exercised in February 2014, that allowed us to increase borrowing capacity from $100 million when we entered into the agreement in September 2013 to $150.0 million. The credit facility is fully guaranteed by Gramercy and certain subsidiaries and is secured by first priority mortgages on designated properties, or the Borrowing Base, as defined under the agreement. Availability under the credit facility is limited to the lesser of $150.0 million or 60% of the value of the Borrowing Base. We intend to use credit facilities and other entity level borrowings in the future as a part of our overall capital structure.
Our organizational documents do not limit the amount or percentage of indebtedness that we may incur. The amount of leverage we will deploy for particular investments will depend on an assessment of a variety of factors, which may include the availability and cost of financing the assets, the creditworthiness of our tenants, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, and the overall quality of the properties that secure the indebtedness. We can provide no assurance that financing will be available on terms acceptable to us or at all.
In addition to net leased investing, we also operate a commercial real estate management business for third-parties. As of December 31, 2013, this business, which operates under the name Gramercy Asset Management, managed approximately $1.4 billion of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. We manage properties for companies including KBS, Garrison Investment Group, L.P., or Garrison, through their investment in the Bank of America Portfolio Joint Venture, and Oak Tree Capital Management, L.P.
We have an integrated asset management platform within Gramercy Asset Management to consolidate responsibility for, and control over, leasing, lease administration, property management, operations, construction management, tenant relationship management and property accounting. To the extent that we provide asset management services for third-party property owners, we provide such services in consultation with and at the direction of such owners.
In December 2013, one of our wholly owned TRSs extended an Amended Restated Asset Management Services Agreement, or Management Agreement, with KBS. As part of the execution of the Management Agreement, KBS made a $12.0 million payment to our TRS in satisfaction of the profit participation provisions under the pre-amended Management Agreement. In addition, the Management Agreement provides
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for a base management fee of $7.5 million per year as well as certain other fees as provided therein. The term of the Management Agreement will continue to December 31, 2016 (with a one year extension option exercisable by KBS), unless earlier terminated as therein provided, and also provides incentive fees in the form of profit participation ranging from 10% 30% of incentive profits earned on sales.
In March 2013, we disposed of our Gramercy Finance segment, and exited the commercial real estate finance business. Our commercial real estate finance business invested in and managed a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, Commercial Mortgage-backed securities, or CMBS, and preferred equity involving commercial properties throughout the United States, and which held interests in real estate properties acquired through foreclosures. The disposal was completed pursuant to a sale and purchase agreement to transfer the collateral management and sub-special servicing agreements for our three CDOs to CWCapital Investments LLC, or CWCapital, for proceeds of $6.3 million in cash, after expenses. We retained our noninvestment grade subordinate bonds, preferred shares and ordinary shares, or the Retained CDO Bonds, in the CDOs, which may allow us to recoup additional proceeds over the remaining life of the CDOs based upon resolution of underlying assets within the CDOs. However, there is no guarantee that we will realize any proceeds from the Retained CDO Bonds or what the timing of these proceeds might be. On March 15, 2013, we deconsolidated the assets and liabilities of Gramercy Finance from our Consolidated Financial Statements and recognized a gain on the disposal of $389.1 million within discontinued operations. The carrying value of the Retained CDO Bonds was $6.8 million as of December 31, 2013.
In addition to our Retained CDO Bonds, we expect to receive additional cash proceeds for past CDO servicing advances when specific assets within the CDOs are liquidated. We received reimbursements of $6.1 million during the year ended December 31, 2013, and the carrying value of the receivable for servicing advance reimbursements as of December 31, 2013 is $8.8 million. We do not anticipate receiving a substantial portion of the remaining CDO servicing advance reimbursements until the second half of 2014.
We may use a variety of commonly used derivative instruments that are considered conventional, or plain vanilla derivatives, including interest rate swaps, caps, collars and floors, in our risk management strategy to limit the effects of changes in interest rates on our operations. We may from time to time use derivative instruments in connection with the private placement of equity.
Our hedging strategy consists of entering into interest rate swap and interest rate cap contracts. The value of our derivatives may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of the risk in our liabilities that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was expected when the hedging transaction was undertaken. We continuously monitor the effectiveness of our hedging strategies and we have retained the services of an outside financial services firm with expertise in the use of derivative instruments to advise us on our overall hedging strategy, to effect hedging trades, and to provide the appropriate designation and accounting of all hedging activities from a GAAP and tax accounting and reporting perspective.
These instruments are used to hedge as much of the interest rate risk as we determine is in the best interest of our stockholders, given the cost of such hedges. To the extent that we enter into a hedging contract to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income that we derive from the contract is not considered income for purposes of the REIT 95% gross income test and is either non-qualifying for the 75% gross income test (hedges entered into prior to August 1, 2008), or is not considered income for purposes of the 75% gross income test (hedges entered into after July 31, 2008). This change in character for the 75% gross income test was included in the Housing and Economic Recovery Act of 2008. We can elect to bear a level of interest rate risk that could otherwise be hedged when we believe, based on all relevant facts, that bearing such risk is advisable.
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Subject to applicable law and our charter, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate.
We may, under certain circumstances, repurchase our common or preferred stock in private transactions with our stockholders if those purchases are approved by our board of directors and are in accordance with our charter. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT, for so long as our board of directors concludes that we should remain a qualified REIT.
If our board of directors determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to REIT distribution requirements) or a combination of these methods. In the event that our board of directors decides to raise additional equity capital, it has the authority, without obtaining stockholder approval, to issue additional common stock or preferred stock in any manner and on such terms and for such consideration as it deems appropriate, at any time. Our investment guidelines and our portfolio and leverage are periodically reviewed by our board of directors.
The market for acquiring well-positioned net leased properties is currently very competitive and likely to remain very competitive for the foreseeable future. We compete for net leased real estate with a variety of other potential purchasers, including other public and private real estate investment companies, some of which have greater financial or other resources than we do. We also compete for tenants with other net leased property owners. Deteriorating investment opportunities in a highly competitive marketplace may negatively impact our pace of acquisitions, the prices we pay for the properties we acquire and our results from operations.
Although we believe that we are positioned to compete effectively in each facet of our business, there is considerable competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter increased competition in the future that could limit our ability to conduct our business effectively.
Properties that we acquire, and the properties underlying our investments, are required to meet federal requirements related to access and use by disabled persons as a result of the Americans with Disabilities Act of 1990, or the Americans with Disabilities Act. In addition, a number of additional federal, state and local laws may require modifications to any properties we purchase, or may restrict further renovations of our properties, with respect to access by disabled persons. Noncompliance with these laws or regulations could result in the imposition of fines or an award of damages to private litigants. Additional legislation could impose additional financial obligations or restrictions with respect to access by disabled persons. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis, our ability to make distributions could be adversely affected.
Our corporate offices are located in midtown Manhattan at 521 Fifth Avenue, 30th Floor, New York, New York 10175. We also have regional offices in Jenkintown, Pennsylvania, and St. Louis, Missouri. We can be contacted at (212) 297-1000. We maintain a website at www.gptreit.com. Our reference to our website is intended to be an inactive textual reference only. On our website, you can obtain, free of charge, a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
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Act of 1934, as amended, or the Exchange Act, as soon as practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission, or the SEC. We have also made available on our website our audit committee charter, compensation committee charter, nominating and corporate governance committee charter, code of business conduct and ethics and corporate governance principles. Information on, or accessible through, our website is not part of, and is not incorporated into, this report. You can also read and copy materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding the issuers that file electronically with the SEC.
As of December 31, 2013, we have two reportable operating segments: Investments/Corporate and Asset Management. The reportable segments were determined based on the management approach, which looks to our internal organizational structure. These two lines of business require different support infrastructures.
The Investments/Corporate segment includes all of our activities related to investment and ownership of commercial properties net leased to high quality tenants throughout the United States. The Investments/Corporate segment generates revenues from rental revenues from properties that we own.
The Asset Management segment includes substantially all of our activities related to third-party asset and property management of commercial. The Asset Management segment generates revenues from fee income related to the Management Agreement with third parties and from our Bank of America Portfolio joint venture.
In March 2013, we disposed of the Finance segment, which was classified as held-for-sale and included in discontinued operations at December 31, 2013. The Finance segment included all of our activities related to origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, CMBS and other real estate related securities.
Segment revenue and profit information is presented in Note 18 to the consolidated financial statements.
As of December 31, 2013, we had 83 employees. Our employees are not represented by a collective bargaining agreement.
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the Audit, Nominating and Corporate Governance, and Compensation Committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics.
We file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. Readers may read and copy any document that we file at the SECs Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public from the SECs internet site at www.sec.gov. Copies of these reports, proxy statements and other information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
Our internet site is www.gptreit.com. Our reference to our website is intended to be an inactive textual reference only. We make available free of charge through our internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the Investor Relations Corporate Governance section are charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance
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Committee as well as our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report.
The properties we own and will acquire are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur these costs even after we sell some of our properties. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owners ability to borrow using the property as collateral or to sell the property. Under applicable environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders.
We generally obtain Phase I environmental site assessments, or ESAs, on each property prior to acquiring it. However, these ESAs may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities. Additionally, our leases generally require our tenants to conduct their operations at our properties in compliance with applicable federal, state and local environmental laws, to promptly notify us of the occurrence of any environmental contaminations or similar issues and to indemnify us against claims resulting from their failure to so act. However, there can be no assurance that our tenants will notify us as required, or further, have funds or assets at the time indemnification is sought that are sufficient to properly indemnify us against any such claims.
While we purchase many of our properties on an as is basis, our purchase contracts for such properties contain an environmental contingency clause, which permits us to reject a property because of any environmental hazard at such property. However, we do acquire properties which may have asbestos abatement requirements, for which we set aside appropriate reserves.
We believe that our portfolio is in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters.
We carry commercial liability and all risk property insurance, including where required, flood, earthquake, wind and terrorism coverage, on substantially all of the properties that we own. For certain net leased properties, however, we rely on our tenants insurance and do not maintain separate coverage. We continue to monitor the state of the insurance market and the scope and costs of specialty coverage, including flood, earthquake, wind and terrorism. We cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. We believe that the insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice.
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ITEM 1A. | RISK FACTORS |
Our future growth will depend, in large part, upon our ability to acquire and lease properties. In order to grow we need to continue to acquire and finance investment properties and sell non-core properties. The acquisition and sale of investment properties is subject to competitive pressures from many market participants and we expect strong competition from other REITs, businesses, individuals, fiduciary accounts and plans, as well as other entities engaged in real estate investment and financing. Many of these competitors are larger than we are and have access to greater financial resources. Such competition may limit our ability to acquire properties and grow or may result in a higher cost to us for properties we wish to purchase.
Our ability to make acquisitions and lease properties will depend, in large part, upon our ability to raise additional capital. If we were to raise additional capital through the issuance of equity securities, we could dilute the interests of holders of our common stock. Our Board may authorize the issuance of additional classes or series of preferred stock which may have rights that could dilute, or otherwise adversely affect, the interest of holders of our common stock.
We intend to incur additional indebtedness in the future, which may include an additional corporate credit facility. Such indebtedness could also have other important consequences to holders of the notes and holders of our common and preferred stock, including subjecting us to covenants restricting our operating flexibility, increasing our vulnerability to general adverse economic and industry conditions, limiting our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, requiring the use of a portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements, and limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
We face significant competition with respect to our acquisition and origination of assets from many other companies, including other REITs, insurance companies, private investment funds, hedge funds, specialty finance companies and other investors. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, there is significant competition on a national, regional and local level with respect to property management services and in commercial real estate services generally, and we are subject to competition from large national and multi-national firms as well as local or regional firms that offer similar services to ours. Some of our competitors may have greater financial and operational resources, larger customer bases, and more established relationships with their customers and suppliers than we do. The competitive pressures we face, if not effectively managed, may have a material adverse effect on our business, financial condition, liquidity and results of operations.
Also, as a result of this competition, we may not be able to take advantage of attractive origination and investment opportunities and therefore may not be able to identify and pursue opportunities that are consistent with our objectives. Competition may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay our investment in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to declare and make distributions to our stockholders.
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We rely on a small number of persons who comprise our existing senior management team and our Board to implement our business and investment strategies. While we have entered into employment and/or retention agreements with certain members of our senior management team, they may nevertheless cease to provide services to us at any time.
The loss of services of any of our key management personnel or directors or significant numbers of other employees, or our inability to recruit and retain qualified personnel or directors in the future, could have an adverse effect on our business.
Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in our investment origination volume, impairments, the degree to which we encounter competition in our markets, tenant defaults and delinquencies and general economic conditions.
Various estimates are used in the preparation of our financial statements, including estimates related to asset and liability valuations (or potential impairments) and various receivables. Often these estimates require the use of market data values which may be difficult to assess, as well as estimates of future performance or receivables collectability which may be difficult to accurately predict. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our financial condition and results of operations.
We make acquisitions and operate our business in part through the utilization of leverage pursuant to loan agreements with various financial institutions. These loan agreements contain financial covenants that restrict our operations. These financial covenants, as well as any future financial covenants we may enter into through further loan agreements, could inhibit our financial flexibility in the future and prevent distributions to stockholders.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the course of our activities, incur losses due to these risks.
Our business is highly dependent on communications and information systems, some of which are provided by third parties. Any failure or interruption of our systems could cause delays or other problems, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
We own a 50% interest in a joint venture with Garrison in which nearly 100% of the properties in the portfolio are leased to Bank of America. The cash flow generated from these properties represents a significant
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portion of our rental income. If Bank of America defaults or is otherwise unable to perform under its lease obligations, it would negatively impact our cash flows and overall financial condition. Additionally, because Bank of America operates in the financial services industry, any disruptions in the financial markets or downturns in the financial services industry could cause us to experience higher rates of lease default or terminations than we otherwise would if our tenant base was more diversified.
If we acquire other property interests that are similarly large in relation to our overall size, our portfolio could become even more concentrated, increasing the risk of loss to stockholders if a default or other problem arises. Alternatively, property sales may reduce the aggregate amount of our property investment portfolio in value or number. As a result, our portfolio could become concentrated in larger assets, thereby reducing the benefits of diversification by geography, property type, tenancy or other measures.
We are presently a comparatively small net leased company with a limited number of warehouse and industrial properties and a proportionally large investment in the Bank of America Portfolio, resulting in a portfolio that lacks geographic and tenant diversity. While we intend to endeavor to grow and diversify our portfolio through additional property acquisitions, we may never reach a significant size to achieve true portfolio diversity.
We expect that a substantial number of our properties will be leased to middle-market businesses that generally have less financial and other resources than larger businesses. Middle-market companies are more likely to be adversely affected by a downturn in their respective businesses or in the regional, national or international economy. As such, negative market conditions affecting existing or potential middle-market tenants, or the industries in which they operate, could materially adversely affect our financial condition and results of operations.
Adverse conditions in the areas where our properties are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of, or reduced demand for, office, industrial or retail properties) may have an adverse effect on the value of our properties. A material decline in the demand or the ability of tenants to pay rent for office, industrial or retail space in these geographic areas may result in a material decline in our cash available for distribution to our stockholders.
We are subject to risks that upon expiration or earlier termination of the leases for space located at our properties the space may not be relet or, if relet, the terms of the renewal or reletting (including the costs of required renovations or concessions to tenants) may be less favorable than current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the spaces at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected, if our reserves for these purposes prove inadequate, or if we are required to make significant renovations or concessions to tenants as part of the renewal or reletting process, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders.
We lease our properties to tenants, and we receive rents from our tenants during the terms of their respective leases. A tenants ability to pay rent is often initially determined by the creditworthiness of the tenant. However, if a tenants credit deteriorates, the tenant may default on its obligations under its lease and
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the tenant may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate investments. Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or its property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenants bankruptcy filing could be required to be returned to the tenants bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under its lease. In other circumstances, where a tenants financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.
Certain of our properties, including a substantial majority of those in our Bank of America Portfolio joint venture, are leased to banks that are not eligible to be debtors under the federal bankruptcy code, but would be subject to the liquidation and insolvency provisions of applicable banking laws and regulations. If the Federal Deposit Insurance Corporation were appointed as receiver of a banking tenant because of a tenants insolvency, we would become an unsecured creditor of the tenant and be entitled to share with the other unsecured non-depositor creditors in the tenants assets on an equal basis after payment to the depositors of their claims. In this event, we may recover substantially less than the full value of any unsecured claims, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our stockholders at historical levels or at all.
We may enter into sale leaseback transactions, whereby we would purchase and then lease a property back to the seller. In the event of the bankruptcy of a tenant, a transaction structured as a sale leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition and cash flow.
If the sale leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale leaseback were re-characterized as a joint venture, our tenants and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the tenants relating to the property.
Lease defaults or terminations by one or more of our significant tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. In other circumstances, a tenant may have a contractual right to abate or suspend rent payments. Even without such right, a tenant might determine to do so. Any of these situations may result in
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extended periods during which there is a significant decline in revenues or no revenues generated by the property. If this were to occur, it could adversely affect our results of operations.
We could be adversely affected by various facts and events over which we have limited or no control, such as (i) oversupply of space and changes in market rental rates; (ii) economic or physical decline of the areas where the properties are located; and (iii) deterioration of the physical condition of our properties. Negative market conditions or adverse events affecting our existing or potential tenants, or the industries in which they operate, could have an adverse impact on our ability to attract new tenants, re-lease space, collect rent or renew leases, any of which could adversely affect our financial condition.
Although inflation has not materially impacted our results of operations in the recent past, increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations. During times when inflation is greater than increases in rent, the contracted rent increases called for under our leases may be unable to keep pace with the rate of inflation. Likewise, even though our triple-net leases generally reduce our exposure to rising property expenses resulting from inflation, substantial inflationary pressures and increased costs may have an adverse impact on our tenants, which may adversely affect the tenants ability to pay rent.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants are responsible for the payment of real estate taxes, insurance and ordinary maintenance and repairs. However, pursuant to certain of our current leases and leases we may assume or enter into in the future, we may be required to pay certain expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance, certain non-structural repairs and maintenance and other costs and expenses for which insurance proceeds or other means of recovery are not available. If one or more of our properties incur significant expenses under the terms of the leases, such property, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and to make distributions to our stockholders may be reduced.
Under certain of our leases, including the lease for the Bank of American Portfolio, tenants pay us as additional rent their proportionate share of the costs we incur to manage, operate and maintain the buildings and properties where they rent space. These leases often limit the types and amounts of expenses we can pass through to our tenants and allow the tenants to audit and contest our determination of the operating expenses they are required to pay. Given the complexity of certain additional rent calculations, tenant audit rights under large portfolio leases can remain unresolved for several years. The tenant under the Bank of America Portfolio lease, for example, is still auditing certain categories of operating expenses for the 2007 and subsequent lease years. If as a result of a tenant audit it is determined that we have collected more additional rent than we are permitted to collect under a lease, we must refund the excess amount back to the tenant and, sometimes, also reimburse the tenant for its audit costs. Such unexpected reimbursement payments could materially adversely affect our financial condition and results of operations.
The vast majority of our rental income comes from net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.
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Real estate investments are not as liquid as other types of investments. In addition, the instruments that we purchase in connection with privately negotiated transactions are not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to sell under-performing assets in our portfolio or respond to changes in economic and other conditions may be relatively limited.
We may, from time to time and as we have done in the past, co-invest with third parties through various arrangements, including, but not limited to, partnerships, joint ventures, co-tenancies or other entities, or acquire non-controlling interests in, or share responsibility for managing the affairs of, a property, partnership, joint venture, co-tenancy or other entity. With such investments, we may not be in a position to exercise sole decision-making authority regarding that property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may involve risks not present were a third party not involved, including the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions. Additionally, our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals. These investments may also have the potential risk of impasses on decisions such as a sale, because neither we nor the partner, co-tenant or co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner, co-tenant or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in specific circumstances be liable for the actions of our third-party partners, co-tenants or co-venturers.
We may continue to acquire and/or redevelop properties through joint ventures, limited liability companies, partnerships or other entities with other persons or entities when warranted by the circumstances. Such partners may share certain approval rights over major decisions. Such investments may involve risks not otherwise present with other methods of investment in real estate. We generally will seek to maintain sufficient control of our partnerships, limited liability companies, joint ventures or other entities to permit us to achieve our business objectives; however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our securities.
Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenants expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies issued by companies holding general policyholder ratings of at least A as set forth in the most current issue of Bests Insurance Guide. Insurance policies for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements and insure against all perils of fire, extended coverage, vandalism, malicious mischief and special extended perils (all risk, as that term is used in the insurance industry). Insurance policies are generally obtained by the tenant providing general liability coverage varying between $1.0 million and $10.0 million depending on the facts and circumstances surrounding the tenant and the industry in which it operates. These policies include liability coverage for bodily injury and property damage arising out of the ownership, use, occupancy or maintenance of the properties and all of their appurtenant areas. To the extent that losses are uninsured or underinsured, we could be subject to lost capital and revenue on those properties.
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We have entered into a Management Agreement with KBS to manage a portfolio of properties through December 31, 2016. The Management Agreement may be terminated early by KBS following the occurrence of certain events as defined in the Management Agreement. There can be no assurance a termination will not occur notwithstanding our efforts. Early termination of the Management Agreement would result in unexpected expenses, including severance fees, and the management fees and payments to be received would cease, thereby reducing our expected revenues, which could harm our business and results of operations.
We will encounter risks and difficulties as we operate our asset management business. In order to achieve our goals as an asset manager, we must:
| actively manage the assets in such portfolios in order to realize targeted performance; and |
| create incentives for our management and professional staff to develop and operate the asset management business. |
If we do not successfully operate our asset management business to achieve the investment returns that we or the market anticipates, our operations may be adversely impacted.
Our role as asset manager for a portfolio of properties for KBS exposes us to litigation risks. In this role, we make asset management and other decisions which could result in adverse financial impacts to third parties. These parties may pursue legal action against us as a result of these decisions, the outcomes of which cannot be certain and may materially adversely impact our financial condition and results of operations.
Part of our investment strategy may involve entering into derivative or hedging contracts that could require us to fund cash payments in the future under certain circumstances, such as the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses would be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition and results of operations.
Further, the cost of using derivative or hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our derivative or hedging activity and thus increase our related costs during periods when interest rates are volatile or rising and hedging costs have increased.
In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, in many cases, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot
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be assured that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new Securities and Exchange Commission regulations and NYSE rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Section 404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls and requires that we have our system of internal controls audited. If we fail to maintain adequate internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business and the trading price of our common stock. Section 404 of the Sarbanes-Oxley Act also requires that our independent registered public accounting firm report on the effectiveness of the Companys internal control over financial reporting. In addition, acquisition targets may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition.
If we identify any material weaknesses or significant deficiencies in our internal controls over financial reporting, we may need to take costly steps to implement improved controls and may be subject to sanctions for failure to comply with the requirements of the Sarbanes-Oxley Act. Such remedial costs or sanctions could have a material adverse effect on our results of operations and financial condition. Further, we would be required to disclose any material weakness in internal controls over financial reporting, and we would receive an adverse opinion on our internal controls over financial reporting from our independent auditors. These factors could cause investors to lose confidence in our reported financial information and could have a negative effect on the trading price of our stock.
As a result of our disposition and deconsolidation in 2013 of certain legacy business operations, our financial results for the year do not just report the results of our ongoing net lease and asset management operations, but also reflect revenues and expenses from discontinued operations. Our business and operations have changed substantially over the past two years, and you should not rely on period over period comparisons of our company, or revenues from discontinued operations, as an indication of future results.
Prior to March 2013, certain of our affiliates acted as collateral manager and sub-special servicer for our 2005, 2006 and 2007 collateralized debt obligations (CDOs and, collectively, the Gramercy CDOs). In these roles, we made investment, loan work-out and other decisions which could result in adverse financial
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impacts to third-parties. In particular, the discretion that we exercised in managing the collateral for the Gramercy CDOs could result in a liability due to inherent uncertainties surrounding the course of action that will result in the best long term results with respect to such collateral and investments. This risk could be increased due to the affiliated nature of our roles. In such roles, we could be subject to legal action as a result of these decisions, the outcomes of which cannot be certain and may materially adversely impact our financial condition and results of operations. If we were found liable for our actions as collateral manager or sub-special servicer and we were required to pay significant damages, our financial condition and results of operations could be materially adversely affected.
Our subsidiary that acted as collateral manager for the Gramercy CDOs provided separate limited indemnities to the trustee of our 2005 CDO and 2006 CDO in connection with CDO note cancellations we undertook in 2011 in accordance with the operative documents of each CDO. These cancellations were undertaken to reduce the total debt owed by our 2005 CDO and our 2006 CDO and improve their compliance with certain overcollateralization tests. Payments made by us in the future, if any, under these indemnities would reduce our liquidity available for general corporate purposes and investments.
We retain interests in certain subordinate bonds, preferred shares and ordinary shares in the Gramercy CDOs. These retained interests, or the Retained CDO Bonds, are highly speculative and subject to high fluctuations in purported value. The fair value of the Retained CDO Bonds, which are not publicly traded, may not be readily determinable. We value the Retained CDO Bonds quarterly. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for the Retained CDO Bonds existed. There is no guarantee that we will realize any proceeds from our Retained CDO Bonds, or what the timing of those proceeds might be, and the value of our common stock could be adversely affected if our determinations regarding the fair value of the Retained CDO Bonds were materially higher than the values that we ultimately realize upon their disposal.
Following the sale of the collateral manager agreements in March 2013, we continue to own the Retained CDO Bonds, which could continue to generate taxable income for us despite the fact that we will not receive cash distributions on our equity and subordinated note holdings from the Retained CDO Bonds until overcollateralization tests are met, if at all. Additionally, following the sale of the collateral manager agreements, we do not control or have influence over the factors that most directly affect the overcollateralization and interest coverage tests of the respective Retained CDO Bonds. Should these Retained CDO Bonds continue to generate taxable income with no corresponding receipt of cash flow, our taxable income would continue to be recognized on each underlying investment in the relevant CDO. We would continue to be required to distribute 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain) from these transactions to continue to qualify as a REIT, despite the fact that we may not receive cash distributions on our equity and subordinated note holdings from the Retained CDO Bonds.
Real estate investments are subject to risks particular to real property, including:
| acts of God, including earthquakes floods and other natural disasters, which may result in uninsured losses; |
| acts of war or terrorism, including the consequences of terrorist attacks; |
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| adverse changes in national and local economic and market conditions, including the credit and securitization markets; |
| changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; |
| takings by condemnation or eminent domain; |
| real estate conditions, such as an oversupply of or a reduction in demand for real estate space in the area; |
| the perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties; |
| competition from comparable properties; |
| the occupancy rate of our properties; |
| the ability to collect on a timely basis all rent from tenants; |
| the effects of any bankruptcies or insolvencies of major tenants; |
| the expense of re-leasing space; |
| changes in interest rates and in the availability, cost and terms of mortgage funding; |
| the impact of present or future environmental legislation and compliance with environmental laws; and |
| cost of compliance with the Americans with Disabilities Act. |
If any of these or similar events occur, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.
Terrorist attacks may harm our results of operations and the stockholders investment. We cannot assure the stockholders that there will not be further terrorist attacks against the U.S. or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our asset-based securities or the securities markets in general. Losses resulting from these types of events are uninsurable.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. Adverse economic conditions could harm the value of our properties, or the securities markets in general which could harm our operating results and revenues and may result in increased volatility of the value of our securities.
Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If we fail to disclose environmental issues, we could also be liable to a buyer or lessee of a property.
There may be environmental problems associated with our properties which we were unaware of at the time of acquisition. The presence of hazardous substances may adversely affect our ability to sell real estate, including the affected property, or borrow using real estate as collateral. The presence of hazardous substances, if any, on our properties may cause us to incur substantial remediation costs, thus harming our financial condition. In addition, although our leases will generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenants activities on the property, we nonetheless would be subject to strict liability by virtue of our ownership
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interest for environmental liabilities created by such tenants, and we cannot ensure the stockholders that any tenants we might have would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.
Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation 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. Environmental laws provide for sanctions in the event of 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, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims related to any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our security holders.
The properties in our portfolio are subject to various covenants and U.S. federal, state and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief or to comply with applicable laws could have an adverse effect on our financial condition, results of operations and cash flow.
In addition, under the Americans with Disabilities Act of 1990, or ADA, all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict further renovations of the properties, with respect to access thereto by disabled persons. Noncompliance with the ADA or other legislation could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. We do not conduct audits or investigations of all of these properties to determine their compliance and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our properties is not in compliance with the ADA or other legislation, then we could be required to incur additional costs to bring the property into compliance. If we incur substantial costs to comply with the ADA or other legislation, our financial condition, results of operations, cash flow, ability to satisfy debt service obligations and our ability to make distributions to our security holders could be adversely affected.
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We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. Our ability to satisfy some of the asset tests depends upon the fair market values of our assets, some of which are not able to be precisely determined and for which we will not obtain independent appraisals. Additionally, if either of our private REITs failed to qualify as a REIT, we would likely fail to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year, and certain statutory relief provisions were not available, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. Even if we qualify as a REIT, we may be may be subject to the corporate alternative minimum tax on our items of tax preference if our alternative minimum taxable income exceeds our taxable income.
In order to maintain our REIT status and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to corporate income tax to the extent we distribute less than 100% of our net taxable income including any net capital gain. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes (including, without limitation, taxable income from our Retained CDO Bonds that do not currently produce cash distributions), or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
Further, amounts distributed will not be available to fund investment activities. We expect to fund our investments by raising equity capital and through borrowings from financial institutions and the debt capital markets. If we fail to obtain debt or equity capital in the future, it could limit our ability to grow, which could have a material adverse effect on the value of our common stock.
We have substantial net operating and net capital loss carry forwards which we have used to offset our tax and/or distribution requirements. In January 2011, an ownership change for purposes of Section 382 of the Code occurred, which limits our ability to use these losses. In general, an ownership change occurs if there is a change in ownership of more than 50% of our common stock during any cumulative three year period. For this purpose, determinations of ownership changes are generally limited to shareholders deemed to own 5% or more of our common stock. Such a change in ownership may be triggered by regular trading
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activity in our common stock, which is generally beyond our control. While we believe we have not had an ownership change since January 2011, as a result of our January 2011 ownership change, sections 382 and 383 impose an annual limit on the amount of net operating loss and net capital loss carryforward that can be used by us to offset future ordinary taxable income and capital gains, beginning with our 2011 taxable year. Such limitations may increase our dividend distribution requirement, which could adversely affect our liquidity.
The existing REIT provisions of the Code may limit our ability to hedge our operations. Except to the extent provided by Treasury regulations, any income from a hedging transaction where the instrument hedges interest rate risk on liabilities used to carry or acquire real estate or hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests will be excluded from gross income for purposes of the 75% and 95% gross income tests. To qualify the preceding sentence, the hedging transaction must be clearly identified as specified in Treasury regulations before the close of the day on which it was acquired, originated or entered into. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions). As a result, we may have to limit our use of certain hedging techniques or implement those hedges through taxable REIT subsidiaries (TRSs). This could result in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to satisfy the 75% or 95% limitations, we could lose our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause and not due to willful neglect, and we meet certain other technical requirements. Even if our failure was due to reasonable cause, we might incur a penalty tax.
In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year. Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by the Board, no person may own more than 9.8% of the aggregate value of the outstanding shares of our stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. The Board may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of the value of our outstanding shares or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, would result in the termination of our status as a REIT. These ownership limits could delay or prevent a transaction or a change in our control that might be in the best interest of our stockholders.
The maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.
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A REITs gain from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans and real estate, held primarily for sale to customers in the ordinary course of business.
We might be subject to this tax if we were to sell or securitize loans or dispose of loans or real estate in a manner that was treated as a sale of the loans or real estate for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans or real estate and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial to us. It may be possible to reduce the impact of the prohibited transaction tax by engaging in securitization transactions treated as sales and loan and real estate dispositions through one or more of our TRSs, subject to certain limitations. Generally, to the extent that we engage in securitizations treated as sales or dispose of loans or real estate through one or more TRSs, the income associated with such activities would be subject to full corporate income tax at standard rates.
As a REIT, we are generally required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and not including net capital gains, each year to our stockholders. To qualify for the tax benefits accorded to REITs, we have and intend to continue to make distributions to our stockholders in amounts such that we distribute all or substantially all our net taxable income each year, subject to certain adjustments. However, our ability to make distributions may be adversely affected by the risk factors described herein. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, the size of our investment portfolio, operating expense levels, and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay distributions to our stockholders. In the event of a downturn in our operating results and financial performance or unanticipated declines in the value of our asset portfolio, we may be unable to declare or pay quarterly distributions or make distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our Board, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification requirements and other tax considerations and capital expenditure requirements as our Board may deem relevant from time to time.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS generally may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REITs assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arms-length basis.
Our TRSs, including GKK Management Co. LLC, GKK Trading Corp., GIT Trading Corp., Whiteface Holdings, LLC, GWF II SPE, LLC, Gramercy Loan Services LLC, GKK Manager LLC and GKK Liquidity LLC, will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income
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will be available for distribution to us but will not be required to be distributed to us. We anticipate that the aggregate value of TRS securities owned by us will be less than 25% of the value of our total assets (including such TRS securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with the rule that no more than 25% of the value of a REITs assets may consist of TRS securities (which is applied at the end of each calendar quarter). In addition, we will scrutinize all of our transactions with our TRSs for the purpose of ensuring that they are entered into on arms-length terms in order to avoid incurring the 100% excise tax described above. The value of the securities that we hold in our TRSs may not be subject to precise valuation. Accordingly, there can be no complete assurance that we will be able to comply with the 25%, limitation discussed above or avoid application of the 100% excise tax discussed above.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations or administrative interpretations.
We believe that the Operating Partnership will be treated as a partnership for federal income tax purposes. As a partnership, the Operating Partnership will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of the Operating Partnerships income. We cannot assure you, however, that the IRS will not challenge the status of the Operating Partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of the Operating Partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
Under Maryland law, certain business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, asset transfers or issuance or reclassification of equity securities. An interested stockholder is defined as:
| any person who beneficially owns 10% or more of the voting power of the corporations outstanding voting stock; or |
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation. |
| A person is not an interested stockholder under the statute if our Board approves in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board. |
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| After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by our Board approved by the affirmative vote of at least: |
| 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or by the interested stockholders affiliates or associates, voting together as a single group. |
The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
In addition, Maryland law provides that control shares of a corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a control share acquisition (defined as the direct or indirect acquisition of ownership or control of issued and outstanding control shares) have no voting rights except to the extent approved by the corporations stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have opted out of these provisions of the Maryland General Corporation Law (the MGCL), with respect to its business combination provisions and its control share provisions by resolution of the Board and a provision in our bylaws, respectively. However, in the future the Board may reverse its decision by resolution and elect to opt in to the MGCLs business combination provisions, or amend our bylaws and elect to opt in to the MGCLs control share provisions.
Additionally, Title 8, Subtitle 3 of the MGCL permits the Board, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement takeover defenses, some of which we do not have. These provisions may have the effect of inhibiting a third-party from making us an acquisition proposal or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the stockholders with an opportunity to realize a premium over the then-current market price.
We may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of investments described in this filing. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our ability to make distributions.
Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. Any such issuance could dilute our existing stockholders interests. In addition, the Board may classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, the Board may establish a class or series of preferred stock that could delay or prevent a transaction or a change in control that might be in the best interest of our stockholders.
We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to
30
include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
Sales of a substantial number of shares of common stock or other equity-related securities in the public market could depress the market price of our common stock, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of common stock or other equity-related securities would have on the market price of our common stock.
The trading price of our common stock may fluctuate significantly in response to many factors, including:
| actual or anticipated variations in our operating results, funds from operations, or FFO, cash flows, liquidity or distributions; |
| changes in our earnings estimates or those of analysts; |
| publication of research reports about it or the real estate industry or sector in which we operate; |
| increases in market interest rates that lead purchasers of our shares to demand a higher dividend yield; |
| changes in market valuations of companies similar to us; |
| adverse market reaction to any securities we may issue or additional debt it incurs in the future; |
| additions or departures of key management personnel; |
| actions by institutional stockholders; |
| speculation in the press or investment community; |
| continuing high levels of volatility in the credit markets; |
| the realization of any of the other risk factors included herein; and |
| general market and economic conditions. |
We are generally required to distribute to its stockholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year in order for us to qualify as a REIT under the Code, which we intend to satisfy through quarterly cash distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. From January 2009 to January 2014 we were prevented from paying dividends to holders of our common stock because we were in arrears in the payment of dividends on our 8.125% Series A cumulative redeemable preferred stock, or Series A Preferred Stock. Although such arrearages have been paid in full recently and we recently reinstituted the payment of a quarterly dividend on our common stock, we have not established a minimum distribution payment level, and our ability to make distributions may be adversely affected by a number of factors.
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Our Board will determine the amount and timing of any distributions. In making such determinations, our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditures, general operational requirements and applicable law. We intend over time to make regular quarterly distributions to holders of our common stock. However, we bear all expenses incurred by our operations, and the funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to stockholders. In addition, our Board, in its discretion, may retain any portion of such cash in excess of our REIT taxable income for working capital. We cannot predict the amount of distributions we may make, maintain or increase over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Because we may receive rents and income from our properties at various times during our fiscal year, distributions paid may not reflect our income earned in that particular distribution period. The amount of cash available for distribution will be affected by many factors, including without limitation, the amount of income we will earn from investments in target assets, the amount of its operating expenses and many other variables. Actual cash available for distribution may vary substantially from our expectations.
While we intend to fund the payment of quarterly distributions to holders of common stock entirely from distributable cash flows, we may fund quarterly distributions to its stockholders from a combination of available net cash flows, equity capital and proceeds from borrowings. In the event we are unable to consistently fund future quarterly distributions to stockholders entirely from distributable cash flows, the value of our common stock may be negatively impacted.
One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate on shares of common stock or seek alternative investments paying higher distributions or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of shares of our common stock. For instance, if interest rates rise without an increase in our distribution rate, the market price of shares of our common stock could decrease because potential investors may require a higher distribution yield on shares of our common stock as market rates on interest-bearing instruments such as bonds rise. In addition, to the extent we have variable rate debt, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting our cash flow and its ability to service our indebtedness and make distributions to our stockholders.
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This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as may, will, should, expect, believe, anticipate, estimate, intend, plan, project, continue, or any negative or other variations on such expressions. Forward-looking statements include information concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans, intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We have listed below some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from the forward-looking statements we make in this report. These risks, uncertainties and contingencies include, but are not limited to, the following:
| the success or failure of our efforts to implement our current business strategy; |
| our ability to identify and complete additional property acquisitions and risks of real estate acquisitions; |
| availability of investment opportunities on real estate assets and real estate-related and other securities; |
| the performance and financial condition of tenants and corporate customers; |
| the adequacy of our cash reserves, working capital and other forms of liquidity; |
| the availability, terms and deployment of short-term and long-term capital; |
| demand for industrial and office space; |
| the actions of our competitors and our ability to respond to those actions; |
| the timing of cash flows from our investments; |
| the cost and availability of our financings, which depends in part on our asset quality, the nature of our relationships with our lenders and other capital providers, our business prospects and outlook and general market conditions; |
| early termination of the Management Agreement; |
| economic conditions generally and in the commercial finance and real estate markets and the banking industry specifically; |
| unanticipated increases in financing and other costs, including a rise in interest rates; |
| reduction in cash flows received from our investments; |
| volatility or reduction in the value or uncertain timing in the realization of our Retained CDO Bonds; |
| our ability to profitably dispose of non-core assets; |
| the high tenant concentration of our Bank of America Portfolio; |
| availability of, and ability to retain, qualified personnel and directors; |
| changes to our management and board of directors; |
| changes in governmental regulations, tax rates and similar matters; |
| legislative and regulatory changes (including changes to real estate and zoning laws, laws governing the taxation of REITs or the exemptions from registration as an investment company); |
| environmental and/or safety requirements and risks related to natural disasters; |
| declining real estate valuations and impairment charges; |
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| our ability to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes and qualify for our exemption under the Investment Company Act, our operating partnerships ability to satisfy the rules in order for it to qualify as a partnership for federal income tax purposes, and the ability of certain of our subsidiaries to qualify as REITs and certain of our subsidiaries to qualify as TRSs for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules; |
| uninsured or underinsured losses relating to our properties; |
| our inability to comply with the laws, rules and regulations applicable to companies, and in particular, public companies; |
| tenant bankruptcies and defaults on or non-renewal of leases by tenants; |
| decreased rental rates or increased vacancy rates; |
| the continuing threat of terrorist attacks on the national, regional and local economies; and |
| other factors discussed under Item 1A, Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2013 and those factors that may be contained in any filing we make with the Securities and Exchange Commission, or the SEC, which are incorporated by reference herein. |
We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time-to-time in our reports and documents which are filed with the SEC, and you should not place undue reliance on those statements.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
| should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk tone of the parties if those statements provide to be inaccurate; |
| have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
| may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
| were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about our company may be found elsewhere in this Annual Report on Form 10-K and our other public filings, which are available without charge through the SECs website at http://www.sec.gov. See Item 1, Business Corporate Governance and Internet Address: Where Readers Can Find Additional Information.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
As of the date of this filing, we do not have any unresolved comments with the staff of the SEC.
ITEM 2. | PROPERTIES (Dollar amounts in thousands, except square feet and dollar per square foot amounts) |
Our corporate headquarters are located in midtown Manhattan at 521 Fifth Avenue, 30th Floor, New York, New York 10175. We also have regional offices located in Jenkintown, Pennsylvania and St. Louis, Missouri.
As of December 31, 2013, we owned interests either directly or through a joint venture in 107 properties containing an aggregate of approximately 7.8 million rentable square feet. The following table provides information about the properties in our wholly owned portfolio as of December 31, 2013:
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No. of Properties |
Location | Tenant(s) | Leased Square Ft | Contractual Base Rent Per Square Foot(1) |
Primary Term Expiry(2) |
Outside Term Expiry |
||||||||||||||||||||||
Industrial Properties |
||||||||||||||||||||||||||||
1 |
Greenwood, IN | Nestle Waters North America, Inc. |
294,388 | $ | 3.50 | 7/31/2024 | 7/31/2044 | |||||||||||||||||||||
1 |
Greenfield, IN | Stanley Security Solutions, Inc.(3) | 168,000 | $ | 3.23 | 2/28/2022 | 2/28/2032 | |||||||||||||||||||||
Harlan Laboratories, Inc.(3) | 77,041 | $ | 6.50 | 12/31/2018 | 12/31/2028 | |||||||||||||||||||||||
1 |
Olive Branch, MS | Five Below, Inc. | 605,427 | $ | 2.85 | 12/31/2022 | (4) | 12/31/2037 | ||||||||||||||||||||
1 |
Garland, TX | Apex Tool Group, LLC | 341,840 | $ | 2.23 | 10/31/2032 | 10/31/2052 | |||||||||||||||||||||
1 |
East Brunswick, NJ | (5) | Con-Way Freight, Inc. | 33,664 | $ | 27.93 | 1/31/2019 | 1/31/2049 | ||||||||||||||||||||
1 |
Atlanta, GA | (5) | FedEx Freight, Inc. | 129,535 | $ | 4.63 | 5/31/2020 | 5/31/2030 | ||||||||||||||||||||
1 |
Bellmawr, NJ | Federal Express Corporation | 62,230 | $ | 4.69 | 10/31/2022 | 10/31/2032 | |||||||||||||||||||||
1 |
Hialeah Gardens, FL | (6) | Preferred Freezer Services of Hialeah LLC |
117,591 | | (7) | 5/31/2039 | 5/31/2059 | ||||||||||||||||||||
1 |
Deer Park, NY (5) | YRC Inc. | 18,396 | $ | 16.12 | 12/31/2019 | 12/31/2049 | |||||||||||||||||||||
1 |
Elkridge, MD | (5) | New Penn Motor Express, Inc | 33,572 | $ | 14.84 | 5/31/2019 | 5/31/2039 | ||||||||||||||||||||
1 |
Orlando, FL | (5) | YRC Inc. | 46,458 | $ | 8.24 | 1/31/2019 | 1/31/2049 | ||||||||||||||||||||
1 |
Houston, TX | (5) | YRC Inc. | 101,940 | $ | 5.47 | 5/31/2019 | 5/31/2049 | ||||||||||||||||||||
1 |
Swedesboro, NJ | (6) | Albert's Organics, Inc. | 70,000 | $ | 10.30 | 5/31/2028 | 5/31/2038 | ||||||||||||||||||||
1 |
Atlanta, GA | KapStone Paper and Packaging Corp |
133,317 | $ | 2.60 | 4/30/2023 | 4/30/2028 | |||||||||||||||||||||
1 |
Manassas, VA | Retrievex Acquisition Corp. V | 40,018 | $ | 7.21 | 12/31/2024 | 12/31/2034 | |||||||||||||||||||||
1 |
Manassas, VA | Retrievex Acquisition Corp. V | 43,047 | $ | 7.21 | 12/31/2024 | 12/31/2034 | |||||||||||||||||||||
1 |
Yuma, AZ | (6) | Earthbound Holdings II, LLC | 216,727 | $ | 6.59 | 9/30/2033 | 9/30/2053 | ||||||||||||||||||||
1 |
Austin, TX | Angelica Textile Services, Inc. | 120,347 | $ | 6.03 | 10/31/2028 | 10/31/2048 | |||||||||||||||||||||
1 |
Galesburg, IL | Euclid Beverage Ltd. | 52,700 | $ | 3.41 | 10/9/2021 | 10/9/2037 | |||||||||||||||||||||
1 |
Peru, IL | Euclid Beverage Ltd. | 78,100 | $ | 6.86 | 6/9/2022 | 6/9/2037 | |||||||||||||||||||||
1 |
Lawrence, IN | EF Transit, Inc. | 534,769 | $ | 4.71 | 6/30/2024 | 6/30/2039 | |||||||||||||||||||||
1 |
Waco, TX | Associated Hygienic Products, LLC |
303,000 | $ | 6.27 | 7/31/2029 | 7/31/2039 | |||||||||||||||||||||
1 |
Allentown, PA | AMCOR Rigid Plastics USA, Inc. | 480,000 | $ | 5.20 | 12/23/2028 | 12/23/2038 | |||||||||||||||||||||
1 |
Vernon, CA | Douglas Steel Supply Company | 66,587 | $ | 7.65 | 12/31/2028 | 12/31/2038 | |||||||||||||||||||||
1 |
Vernon, CA | Douglas Steel Supply Company | 53,919 | $ | 7.65 | 12/31/2028 | 12/31/2038 | |||||||||||||||||||||
25 |
Subtotal | 4,222,613 | ||||||||||||||||||||||||||
Office/Banking Center Properties |
||||||||||||||||||||||||||||
1 |
Emmaus, PA | Sovereign Bank | 4,800 | $ | 31.60 | 2/28/2019 | 1/31/2029 | |||||||||||||||||||||
1 |
Calabash, SC | PNC Bank, N.A. | 2,048 | $ | 36.62 | 12/31/2018 | 12/31/2018 | |||||||||||||||||||||
1 |
Morristown, NJ | Wells Fargo Bank, N.A. | 29,537 | $ | 6.04 | 9/30/2024 | 9/30/2054 | |||||||||||||||||||||
U.S. Bank National Association | (3) | 12,324 | $ | 20.29 | 10/31/2018 | 10/31/2025 | ||||||||||||||||||||||
3 |
Subtotal | 48,709 | ||||||||||||||||||||||||||
Specialty Properties |
||||||||||||||||||||||||||||
1 |
Hutchins, TX | Adesa Texas, Inc. | 196,366 | $ | 24.97 | 7/31/2029 | 7/31/2049 | |||||||||||||||||||||
1 |
Franklin Park, IL | Enterprise Leasing Company of Chicago |
22,872 | $ | 26.26 | 4/30/2021 | 4/30/2031 | |||||||||||||||||||||
1 |
Chicago, IL | North American Central School Bus Int. Holding Co., LLC |
36,500 | $ | 12.98 | 10/31/2022 | 10/31/2027 | |||||||||||||||||||||
3 |
Subtotal | 255,738 | ||||||||||||||||||||||||||
31 |
TOTAL WHOLLY OWNED PORTFOLIO | 4,527,060 |
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No. of Properties |
Location | Tenant(s) | Leased Square Ft | Contractual Base Rent Per Square Foot(1) |
Primary Term Expiry(2) |
Outside Term Expiry |
||||||||||||||||||||||
Bank of America Portfolio(8)(10) |
||||||||||||||||||||||||||||
7 |
Arizona | Bank of America* | 566,616 | $ | 8.87 | 6/20/2023 | 6/30/2053 | |||||||||||||||||||||
32 |
California | Bank of America* | 607,661 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-9 tenants | 9,353 | various | various | various | ||||||||||||||||||||||||
17 |
Florida | Bank of America* | 1,483,679 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-10 tenants | 5,257 | various | various | various | ||||||||||||||||||||||||
1 |
Georgia | Bank of America* | 21,625 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
1 |
Kansas | Bank of America* | 12,158 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
2 |
Maryland | Bank of America* | 36,449 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
7 |
Missouri | Bank of America* | 88,161 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-9 tenants | 21,861 | various | various | various | ||||||||||||||||||||||||
1 |
New Mexico | Bank of America* | 37,029 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-1 tenant | 22,453 | $ | 12.28 | 2/28/2025 | 2/28/2035 | |||||||||||||||||||||||
3 |
Texas | Bank of America* | 65,748 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
3 |
Washington | Bank of America* | 115,439 | $ | 8.87 | 6/30/2023 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-1 tenant | 408 | $ | 8.52 | 2/28/2014 | 2/28/2014 | |||||||||||||||||||||||
1 |
Virginia | Bank of America* | 9,466 | $ | 8.87 | 12/31/2017 | 6/30/2053 | |||||||||||||||||||||
Non-Bank of America-1 tenant | 2,575 | $ | 8.26 | 6/30/2014 | 6/30/2014 | |||||||||||||||||||||||
75 |
Subtotal | 3,105,938 | ||||||||||||||||||||||||||
Philips Headquarters(9) |
||||||||||||||||||||||||||||
1 |
Somerset, NJ | Philips Holding, USA Inc. | 199,900 | $ | 18.81 | 12/31/2021 | 12/31/2041 | |||||||||||||||||||||
1 |
Subtotal | 199,900 | ||||||||||||||||||||||||||
76 |
TOTAL JOINT VENTURE PORTFOLIO | 3,305,838 | ||||||||||||||||||||||||||
107 |
TOTAL PORTFOLIO | 7,832,898 |
(1) | Represents contractual base rent per square foot in effect as of December 31, 2013. |
(2) | Primary term expiry represents the date on which the current lease will expire should the parties to the lease elect to not exercise a term extension option or provision. Outside term expiry represents the latest date on which the lease will expire should the parties exercise each of the term extension options provided for in the lease. |
(3) | Tenants lease spaces pursuant to a modified gross lease. |
(4) | The effective lease expiration date is May 1, 2021. Tenant has an early termination right effective November 1, 2018 upon payment of a termination fee equivalent to 31 months of rent. |
(5) | Truck terminal. |
(6) | Cold storage facility. |
(7) | Build-to-suit project. Anticipated completion is in May 2014 at which time the contractual base rent will be $17.01 per square foot. |
(8) | We own a 50% interest in the Bank of America Portfolio properties. |
(9) | We own a 25% interest in thePhilips Headquarters property. |
(10) | There are several leases with Bank of America that aggregate to 270,927 sq ft, primarily related to held-for-sale properties in the portfolio, that have slightly varying rental rates and a primary term expiry of 12/31/2017. States containing such a lease are denoted with *. |
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The following is a summary of the characteristics of our property portfolio, including properties owned in joint ventures, as of December 31, 2013, taking into account the lease for our build-to-suit project in Hialeah Gardens, Florida that is currently under construction and is anticipated to be completed in the second quarter of 2014 and be leased to Preferred Freezer Services of Hialeah, LLC upon completion of construction:
| 99.1% occupancy; |
| a weighted average remaining lease term of 11.7 years (based on annualized base rent); |
| 53.5% investment grade tenancy (includes subsidiaries of non-guarantor investment grade parent companies) (based on annualized base rent); |
| Industrial portfolio comprised of 4.2 million aggregate rentable square feet with an average base rent per square foot of $5.33; |
| Office portfolio comprised of 3.4 million aggregate rentable square feet with an average base rent per square foot of $9.53 (including the properties we own through joint ventures); |
| Specialty asset portfolio of three improved sites comprised of 186 acres of land and 256 thousand aggregate rentable square feet of building space that we lease to a car auction services company, a bus depot and a rental car company; and |
| Top five tenants by annualized base rent include Bank of America (31%), Adesa Texas, Inc. (11%), EF Transit, Inc. (6%), AMCOR Rigid Plastics USA, Inc. (6%), Preferred Freezer Services of Hialeah, LLC (5%). Each of the top five tenant leases is guaranteed by the respective tenants parent company. Our lease with Preferred Freezer Services of Hialeah, LLC starts upon completion of construction of the facility currently expected in the second quarter of 2014. |
Bank of America Portfolio We own a 50% joint venture interest in the Bank of America Portfolio, which is comprised of 75 office properties and banking centers located across the United States totaling approximately 3.2 million rentable square feet. As of December 2013, 95% of the rentable square feet in the Bank of America Portfolio is leased to Bank of America under a master lease with expiration dates through 2023. As of December 31, 2013, the Bank of America Portfolio had a total portfolio occupancy of approximately 96%. We acquired our joint venture interest in the Bank of America Portfolio in December 2012. The joint ventures acquisition of the Bank of America Portfolio was financed with a $200,000 floating rate, interest-only mortgage loan maturing in December 2014, collateralized by 67 properties of the portfolio. The mortgage note has three one-year extension options subject to satisfaction of certain terms and conditions. The remaining properties are unencumbered. During the year ended December 31, 2013, the joint venture sold 38 properties for aggregate net proceeds of approximately $43,284.
Philips Building We own a 25% interest in Philips HQ JV, which is owner of a fee interest in 200 Franklin Square Drive, a 199,900 square foot office building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics, through December 2021. The property is subject to a $41,000 fixed-rate mortgage with an anticipated repayment date in 2015.
Our corporate offices at 521 Fifth Avenue, 30th Floor, New York, New York are subject to an operating lease agreement with 521 Fifth Fee Owner, LLC, an affiliate of SL Green, effective as of September 2013. The lease is for approximately 6,580 square feet and carries a term of 10 years with rents of approximately $373 per annum for year one rising to $463 per annum in year ten. Our previous corporate offices at 420 Lexington Avenue, New York, New York, were subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, effective May 1, 2005, which was subsequently amended in May and June 2009 and in June 2012. In April 2013, we cancelled the lease for the corporate offices at 420 Lexington Avenue effective in September 2013 concurrently with the commencement of the lease for the new corporate offices at 521 Fifth Avenue.
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Our regional management office located at 610 Old York Road, Jenkintown, Pennsylvania, is subject to an operating lease with an affiliate of KBS. The lease is for approximately 19,000 square feet, and expires on April 30, 2014, with rents of approximately $322 per annum. Our regional management office located at 800 Market Street, St. Louis, Missouri, is subject to an operating lease with St. Louis BOA Plaza, LLC. The lease is for approximately 2,000 square feet, expires on September 30, 2014, and is cancelable with 60 days notice. The lease is subject to rents of $32 per annum.
As of December 31, 2013, we have no plans for development of new properties other than in connection with build-to-suit transactions where a tenant has signed a lease in advance of construction, and a developer or builder bears the risk of completion on-time and on-budget. We will, from time to time renovate, improve, expand or repair existing properties where we believe the incremental investment increases the value of the property and the incremental capital can be invested at attractive risk-adjusted returns. We will, from time to time acquire adjacent land parcels to properties in our portfolio in order to accommodate expansions of existing properties. We currently have one build-to-suit transaction in process pursuant to which we have committed to construct a 117,591 square foot cold storage facility in Hialeah Gardens, Florida. The facility will be 100% leased for an initial term of 25 years upon completion of construction, which is expected to occur in the second quarter of 2014.
ITEM 3. | LEGAL PROCEEDINGS |
In December 2010, we sold our 45% joint venture interest in the leased fee of the 2 Herald Square property in New York, New York, for approximately $25.6 million plus assumed mortgage debt of approximately $86.1 million or the 2 Herald Sale Transaction. Subsequent to the closing of the transaction, the New York City Department of Finance, or the NYC DOF, and New York State Department of Taxation, or the NYS DOT, issued notices of determination assessing, in the case of the NYC DOF notice, approximately $2.9 million of real property transfer tax, plus interest, and, in the case of the NYS DOT notice, approximately $446 thousand of real property transfer tax, plus interest, collectively, the Transfer Tax Assessments, against us in connection with the 2 Herald Sale Transaction. We believe that NYC DOF and NYS DOT erred in issuing the Transfer Tax Assessments and intend to vigorously defend against same. In September 2013, we filed a petition challenging the NYC DOF Transfer Tax Assessment with the New York City Tax Appeal Tribunal, and we intend to timely filing a similar petition challenging the NYS DOF Transfer Tax Assessment.
In November 2013, NYC DOF filed an answer to the petition reiterating their position that the 2 Herald Sale Transaction was taxable by NYC DOF. In January and February 2014, the parties held a preliminary conference with the trial judge assigned the matter, agreed to discuss whether a settlement could be reached and subsequently determined that no such settlement was possible. A follow-up conference with the judge is scheduled during March 2014, at which we anticipate that parties will advise the judge that they wish to proceed to trial, which we expect to occur in mid-2014.
An initial conciliation conference for our NYS DOT Transfer Tax Assessment was held in October 2013. In November 2013, the NYS DOT provided additional information in support of its position. In February 2014, following a discussion, we and the NYS DOT determined that the parties could not amicably settle the dispute. We expect that the conciliator will issue its determination shortly, following which we will formally file our petition challenging the NYS DOT Transfer Tax Assessment.
We believe that we have strong defenses against the Transfer Tax Assessments and intend to continue to vigorously assert same. We evaluate contingencies based on information currently available, including the advice of counsel. We establish accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. We will periodically review these contingences and may adjust the amount of the accrual if circumstances change. The outcome of a contingent matter and the amount or range of potential losses at particular points may be difficult to ascertain. If a range of loss is estimated and an amount within such range appears to be a better estimate than any other amount within that range, then that amount is accrued. Considering the recent developments as discussed above, as of December 31, 2013, we established an accrual of approximately $4.3 million for the Transfer Tax
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Assessments, which represents the full amount of the assessed tax plus estimated interest and penalties through December 31, 2013, within discontinued operations.
In addition, we and/or one or more of our subsidiaries is party to various litigation matters that are considered routine litigation incidental to our business, none of which are considered material.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock began trading on the New York Stock Exchange, or the NYSE, on August 2, 2004 under the symbol GKK. In April 2013, we changed our name from Gramercy Capital Corp. to Gramercy Property Trust Inc. reflecting our transformation into an equity real estate business, and on April 15, 2013, our NYSE ticker symbol was changed to GPT. On March 13, 2014, the reported closing sale price per share of common stock on the NYSE was $5.45 and there were approximately 247 holders of record of our common stock. This number does not include stockholders shares held in nominee or street name. The table below sets forth the quarterly high and low closing sales prices of our common stock on the NYSE for the years ended December 31, 2013 and 2012 and the distributions paid by us with respect to the periods indicated.
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2013 | 2012 | |||||||||||||||||||||||
Quarter Ended | High | Low | Dividends | High | Low | Dividends | ||||||||||||||||||
March 31 | $ | 5.21 | $ | 3.00 | $ | | $ | 3.07 | $ | 2.34 | $ | | ||||||||||||
June 30 | $ | 5.17 | $ | 4.34 | $ | | $ | 2.68 | $ | 2.45 | $ | | ||||||||||||
September 30 | $ | 4.83 | $ | 3.99 | $ | | $ | 3.09 | $ | 2.31 | $ | | ||||||||||||
December 31 | $ | 5.76 | $ | 3.99 | $ | | $ | 3.05 | $ | 2.56 | $ | |
If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. In December 2013, our board of directors authorized and we declared a catch-up dividend in the amount of $10.23524 per share of our 8.125% Series A Cumulative Redeemable Preferred Stock, representing all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, our board of directors also authorized and we declared a Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend were paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014. Both dividend payments will be taxable to the recipients primarily as ordinary income. In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.
In March 2014, our board of directors authorized and declared a quarterly dividend of $0.035 per common share for the first quarter of 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014. Our board of directors also authorized and declared the Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period January 15, 2014, through and including April 14, 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014. We expect to continue our policy of generally distributing 100% of our taxable income through dividends, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Dividends for additional information regarding our dividends.
In connection with Mr. Gordon F. DuGans agreement to serve as our Chief Executive Officer, on June 7, 2012, Mr. DuGan also agreed to purchase 1,000,000 shares of our common stock from us on June 29, 2012 for an aggregate purchase price of $2.5 million or $2.52 per share. The per share purchase price was equal to the closing price of our common stock on the New York Stock Exchange on the day prior to the date Mr. DuGan entered into the subscription agreement with us to purchase such shares of common stock. The issuance of such shares of common stock was a private placement exempt from the registration requirements of the Securities Act. We intend to use the net proceed from this issuance for general corporate purposes, which may include, but not limited to, acquisitions of single tenant lease investments.
We issued to KBS Acquisition Sub-Owner 2, LLC (i) 2,000,000 shares of our common stock; (ii) 2,000,000 shares of our Class B-1 non-voting common stock; and (iii) 2,000,000 shares of our Class B-2 non-voting common stock, on December 6, 2012. The shares were issued as consideration for the our contribution to the joint venture which purchased the Bank of America Portfolio on the same date and were valued at $2.75 which was the closing price of our common stock on the New York Stock Exchange as of the
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date of the executed purchase and sale agreement. Each share of the Class B-1 common stock and Class B-2 common stock is convertible into one share of our common stock at the option of the holder at any time on or after September 5, 2013 and December 6, 2013, respectively. During 2013, all Class B-1 and Class B-2 common stock were converted into an equal amount of shares of our common stock.
In October 2013, we issued 11,535,200 unregistered shares of common stock at a purchase price of $4.11 per share, raising gross proceeds of $47.4 million in a private placement pursuant to a common stock purchase agreement and related joinder agreements, or the Purchase Agreement. Each purchaser has agreed that it will not sell the common stock purchased until March 25, 2014, or the Lock-Up Date. Prior to the Lock-Up Date, if we issue common stock or securities convertible into common stock (except for certain permitted issuances), then the purchasers will have the ability to: (1) purchase their pro rata portion of all or any part of our new issuance, and (2) elect the benefit of any different terms provided to the new investors. We also entered into contingent value rights agreements, or the CVR Agreements, with the purchasers at the closing of the sale of common stock. We issued one Contingent Value Right, or CVR, to each purchaser per common stock purchased. The CVR entitles the purchasers to receive a one-time cash payment on April 1, 2014, not to exceed $0.46 per share, equal to the amount per share that our volume weighted average share price for the ten trading day period ending on the Lock-Up Date, is less than the per share purchase price of $4.11 per share.
This graph compares the performance of our shares with the Standard & Poors 500 Composite Index and the NAREIT All REIT Index. This graph assumes $100 invested on January 1, 2009 and assumes the reinvestment of dividends.
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The following table summarizes information, as of December 31, 2013, relating to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.
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Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights |
(b) Weighted-average exercise price of outstanding options, warrants and rights |
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
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Equity compensation plans approved by security holders(1) |
341,081 | $ | 14.70 | 2,070,416 | ||||||||
Equity compensation plans not approved by security holders(2) | | | 500,000 | |||||||||
Total | 341,081 | $ | 14.70 | 2,570,416 |
(1) | Includes information related to our 2004 Equity Incentive Plan. |
(2) | Includes information related to our 2012 Inducement Equity Incentive Plan. |
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ITEM 6. | SELECTED FINANCIAL DATA |
The following tables set forth our selected financial data and should be read in conjunction with our Financial Statements and notes thereto included in Item 8, Financial Statements and Supplementary Data and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. Certain prior year balances have been reclassified to conform with the current year presentation for assets classified as discontinued operations.
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For the year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Total revenues | $ | 56,704 | $ | 36,821 | $ | 7,772 | $ | 1,197 | $ | 72 | ||||||||||
Property operating expenses | 22,279 | 23,226 | 5,947 | 4,033 | 4,963 | |||||||||||||||
Other-than-temporary impairment | 2,002 | | | | | |||||||||||||||
Interest expense | 1,732 | | | 280 | 2 | |||||||||||||||
Depreciation and amortization | 5,675 | 256 | 136 | 174 | 251 | |||||||||||||||
Management, general and administrative | 18,210 | 25,335 | 22,150 | 22,369 | 37,365 | |||||||||||||||
Unrealized loss on derivative instruments | 115 | | | | | |||||||||||||||
Business acquistion costs | 2,808 | 111 | | | | |||||||||||||||
Total expenses | 52,821 | 48,928 | 28,233 | 26,856 | 42,581 | |||||||||||||||
Income (loss) from continuing operations before equity in income (loss) from joint ventures and provision for taxes | 3,883 | (12,107 | ) | (20,461 | ) | (25,659 | ) | (42,509 | ) | |||||||||||
Equity in net income (loss) of joint ventures | (5,662 | ) | (2,904 | ) | 121 | (303 | ) | 113 | ||||||||||||
Loss from continuing operations before provision for taxes, gain on extinguishment of debt, and discontinued operations | (1,779 | ) | (15,011 | ) | (20,340 | ) | (25,962 | ) | (42,396 | ) | ||||||||||
Gain on extinguishment of debt | | | | | 106,177 | |||||||||||||||
Provision for taxes | (6,393 | ) | (3,330 | ) | (563 | ) | (966 | ) | (2,534 | ) | ||||||||||
Net income (loss) from continuing operations |
(8,172 | ) | (18,341 | ) | (20,903 | ) | (26,928 | ) | 61,247 | |||||||||||
Net income (loss) from discontinued operations |
392,999 | (153,207 | ) | 358,380 | (946,315 | ) | (581,646 | ) | ||||||||||||
Net income (loss) | 384,827 | (171,548 | ) | 337,477 | (973,243 | ) | (520,399 | ) | ||||||||||||
Net (income) loss attributable to non-controlling interest | | | | (145 | ) | 770 | ||||||||||||||
Net income (loss) attributable to Gramercy Property Trust Inc. | 384,827 | (171,548 | ) | 337,477 | (973,388 | ) | (519,629 | ) | ||||||||||||
Accrued preferred stock dividends | (7,162 | ) | (7,162 | ) | (7,162 | ) | (8,798 | ) | (9,414 | ) | ||||||||||
Excess of carrying amount of tendered preferred stock over consideration paid | | | | 13,713 | | |||||||||||||||
Net income (loss) avaliable to common stockholders | $ | 377,665 | $ | (178,710 | ) | $ | 330,315 | $ | (968,473 | ) | $ | (529,043 | ) | |||||||
Net income (loss) per common share Basic |
$ | 6.14 | $ | (3.44 | ) | $ | 6.58 | $ | (19.40 | ) | $ | (10.61 | ) | |||||||
Net income (loss) per common share Diluted |
$ | 6.14 | $ | (3.44 | ) | $ | 6.58 | $ | (19.40 | ) | $ | (10.52 | ) | |||||||
Basic weighted average common shares outstanding | 61,500,847 | 51,976,462 | 50,229,102 | 49,923,930 | 49,854,174 | |||||||||||||||
Diluted weighted average common shares and common share equivalents outstanding | 61,500,847 | 51,976,462 | 50,229,102 | 49,923,930 | 50,306,816 |
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Year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Total real estate investments, net | $ | 333,465 | $ | 23,109 | $ | 7,631 | $ | 2,226,212 | $ | 3,148,790 | ||||||||||
Loans and other lending investments, net | | 73 | 828 | 1,512 | | |||||||||||||||
Assets held for sale, net | | 1,952,264 | 2,078,146 | 2,441,827 | 2,633,225 | |||||||||||||||
Investment in unconsolidated joint ventures | 39,385 | 72,742 | 496 | 3,650 | 84,865 | |||||||||||||||
Total assets | $ | 491,663 | $ | 2,168,836 | $ | 2,258,330 | $ | 5,491,993 | $ | 6,765,437 | ||||||||||
Mortgage note payable | 122,180 | | | 1,640,671 | 1,702,155 | |||||||||||||||
Mezzanine loans payable | | | | 549,713 | 553,522 | |||||||||||||||
Term loan, credit facility and repurchase facility | 45,000 | | | | | |||||||||||||||
Junior subordinated notes | | | | | 52,500 | |||||||||||||||
Total liablilites | 225,190 | 2,420,664 | 2,698,760 | 5,984,986 | 6,197,919 | |||||||||||||||
Stockholders' equity | $ | 266,473 | $ | (251,828 | ) | $ | (440,430 | ) | $ | (492,993 | ) | $ | 567,518 |
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For the year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Funds from operations(1) | $ | 1,267 | $ | (24,616 | ) | $ | (24,696 | ) | $ | (21,984 | ) | $ | 53,352 | |||||||
Cash flows provided by operating activities | $ | 29,403 | $ | 283 | $ | 87,105 | $ | 116,831 | $ | 86,960 | ||||||||||
Cash flows provided by (used by) investing activities | $ | (216,092 | ) | $ | 248,288 | $ | 51,133 | $ | 154,707 | $ | 131,121 | |||||||||
Cash flows provided by (used by) financing activities | $ | 124,620 | $ | (306,894 | ) | $ | (195,358 | ) | $ | (189,038 | ) | $ | (216,564 | ) |
(1) | We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-downs of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited. |
A reconciliation of FFO to net income computed in accordance with GAAP is provided under the heading of Managements Discussion and Analysis of Financial Condition and Results of Operations Funds from Operations.
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except Overview section, share and per share data) |
Gramercy Property Trust Inc. is a fully-integrated, self-managed commercial real estate investment company focused on acquiring and managing income-producing industrial and office properties net leased to high quality tenants in major markets throughout the United States. We also operate an asset management business that manages for third-parties, including our Bank of America Portfolio joint venture, commercial real estate assets.
We were founded in 2004 as a specialty finance Real Estate Investment Trust focused on originating and acquiring loans and securities related to commercial and multifamily properties. In July 2012, following a strategic review, our board of directors announced a repositioning of us as an equity REIT. To reflect this transformation, in April 2013 we changed our name from Gramercy Capital Corp. to Gramercy Property Trust Inc. and began trading on the New York Stock Exchange under our new symbol GPT.
We seek to acquire and manage a diversified portfolio of high quality net leased properties that generates stable, predictable cash flows and protects investor capital over a long investment horizon. We expect that these properties generally will be leased to a single tenant. Under a net lease, the tenant typically bears the responsibility for all property related expenses such as real estate taxes, insurance, and repair and maintenance costs. We believe this lease structure provides an owner cash flows over the term of the lease that are more stable and predictable than other forms of leases, and minimizes the ongoing capital expenditures often required with other property types.
We approach the net leased market as a value investor, looking to identify and acquire net leased properties that we believe offer attractive risk adjusted returns throughout market cycles. We focus primarily on industrial and office properties, where we believe attractive investment opportunities currently exist. We focus on acquiring assets in major markets where strong demographic and economic growth offer, in our view, a higher probability of producing long term rent growth and/or capital appreciation. Our goal is to grow our existing portfolio and become a pre-eminent owner of net leased commercial industrial and office properties in the United States.
We believe that within the net leased industry, industrial and office investments offer a fundamentally different opportunity from the market for net leased retail assets. Industrial and office assets tend to be heterogeneous, and valuation is frequently influenced by local real estate market conditions and tenant preferences. In our view, the skillset required to properly underwrite industrial and office assets is specific to those assets and can be used to drive significant investment outperformance. We also believe that well-located industrial and office assets are better positioned to experience rent growth and asset price appreciation than single tenant retail assets in an inflationary environment.
As of December 31, 2013, we owned interests (either directly or through a joint venture) in 107 properties containing an aggregate of approximately 7.8 million rentable square feet. The following is a summary of the characteristics of our property portfolio at December 31, 2013 and also taking into account the lease for our build-to-suit project in Hialeah Gardens, Florida that is currently under construction and is anticipated to be completed in the second quarter of 2014 and leased to Preferred Freezer Services of Hialeah, LLC upon completion of construction:
| 99.1% occupancy; |
| a weighted average remaining lease term of 11.7 years (based on annualized base rent); |
| 53.5% investment grade tenancy (includes subsidiaries of non-guarantor investment grade parent companies) (based on annualized base rent); |
| Industrial portfolio comprised of 4.2 million aggregate rentable square feet with an average base rent per square foot of $5.33; |
| Office portfolio comprised of 3.4 million aggregate rentable square feet with an average base rent per square foot of $9.53 (including the properties we own through joint ventures); |
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| Specialty asset portfolio of three improved sites comprised of 186 acres of land and 256 thousand aggregate rentable square feet of building space that we lease to a car auction services company, a bus depot and a rental car company; and, |
| Top five tenants by annualized base rent include: Bank of America (31%); Adesa Texas, Inc., (11%); EF Transit, Inc., (6%); AMCOR Rigid Plastics USA, Inc., (6%); and Preferred Freezer Services of Hialeah, LLC, (5%). Our lease with Preferred Freezer Services of Hialeah, LLC starts upon completion of construction of the facility currently expected in the second quarter of 2014. |
We have achieved a number of important milestones since our board of directors elected to reposition our company as a REIT focused on acquiring and managing income producing net leased properties, including:
| During the year ended December 31, 2013, we acquired 29 properties aggregating approximately 4.0 million square feet for a total purchase price of approximately $340.8 million. |
| As of December 31, 2013, our property portfolio is 99.1% occupied for a weighted average lease term of 11.7 years, 53.5% is leased to investment grade tenants. |
| In March 2013, we sold our collateral management and sub-special servicing contracts for our three CDOs, disposed of certain non-core legacy assets and exited the commercial real estate finance business. |
| We downsized our New York City headquarters office, closed one satellite property management office, reduced employee headcount, rebid our professional consulting and insurance contracts, and reduced annual run rate management, general and administrative expenses. |
| In September 2013, we entered into a $100.0 million senior secured credit facility with an accordion feature to increase the facility to $150.0 million, which was exercised by us and approved by the lenders in February 2014. |
| In October 2013, we issued and sold 11.5 million shares of our common stock in a private placement at a price of $4.11 per share, resulting in total net proceeds to us of approximately $45.5 million. |
| In December 2013, our board declared, and in January 2014, we paid in full, the accrued and unpaid dividends on our Series A Preferred Stock and began the timely payment of the quarterly preferred dividends beginning with the dividend due January 15, 2014, positioning us to re-commence dividends on our common stock. |
| We executed or extended asset management contracts with third-party property owners, including our joint venture partners, resulting in an aggregate of $1.4 billion in assets under management at December 31, 2013; |
| During the year ended December 31, 2013, we generated $40.9 million in asset management revenue, including a $12.0 million out-performance fee (pre-tax) under our asset management agreement with KBS. |
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We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.
We conduct substantially all of our operations through our operating partnership, GPT Property Trust LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Our Operating Partnership conducts our commercial real estate investment business through various wholly-owned entities and our realty management business primarily through a wholly-owned TRS.
Unless the context requires otherwise, all references to Gramercy, our Company, we, our and us mean Gramercy Property Trust Inc., a Maryland corporation, and one or more of its subsidiaries, including our Operating Partnership.
During the year ended December 31, 2013, we acquired 29 properties aggregating approximately 4.0 million square feet for a total purchase price of approximately $340.8 million. A summary of our consolidated portfolio as of December 31, 2013 and 2012 is presented below:
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Number of Properties | Rentable Square Feet | Occupancy | Weighted-average Lease Term(1) |
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Properties | December 31, 2013 | December 31, 2012(3) | December 31, 2013 | December 31, 2012(3) | December 31, 2013 | December 31, 2012(3) | December 31, 2013 | December 31, 2012(3) | ||||||||||||||||||||||||
Office/Banking Centers | 3 | | 48,709 | | 100.0 | % | 0.0 | % | 8.45 | | ||||||||||||||||||||||
Industrial Properties(2) |
25 | 2 | 4,222,613 | 539,429 | 100.0 | % | 100.0 | % | 10.38 | 10.04 | ||||||||||||||||||||||
Specialty Assets | 3 | | 255,738 | | 100.0 | % | 0.0 | % | 13.87 | | ||||||||||||||||||||||
Total | 31 | 2 | 4,527,060 | 539,429 | 100.0 | % | 100.0 | % | 10.55 | 10.04 |
(1) | Weighted-average lease term is based upon the remaining non-cancelable lease term as of December 31, 2013 and 2012, respectively. The weighted-average calculation is based upon square footage. |
(2) | The Industrial properties line includes the build-to-suit property in Hialeah Gardens, Florida, which was purchased on May 30, 2013 and represents a 118 thousand square foot cold storage facility currently being constructed, which will be 100% leased for an initial term of 25 years when completed in the second quarter of 2014. |
(3) | Properties classified as held-for-sale at 12/31/2012 are not included in the table above. |
Bank of America Portfolio We own a 50% joint venture interest in the Bank of America Portfolio, which is comprised of 75 office properties and banking centers located across the United States totaling approximately 3.2 million rentable square feet. As of December 2013, 95% of the rentable square feet in the Bank of America Portfolio is leased to Bank of America, N.A. under a master lease with expiration dates through 2023. As of December 31, 2013, the Bank of America Portfolio had a total portfolio occupancy of approximately 96%. We acquired our joint venture interest in the Bank of America Portfolio in December 2012. The joint ventures acquisition of the Bank of America Portfolio was financed with a $200.0 million floating rate, interest-only mortgage loan maturing in December 2014, collateralized by 67 properties of the portfolio. The remaining eight properties are unencumbered. During the year ended December 31, 2013, the joint venture sold 38 properties for aggregate net proceeds of approximately $43.3 million.
Philips Electronics We own a 25% interest in Philips HQ JV, which is owner of a fee interest in 200 Franklin Square Drive, a 200 thousand square foot office building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics, through December 2021. The property is subject to a $41.0 million fixed-rate mortgage loan with an anticipated repayment date in 2015.
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In addition to net leased investing, we also operate a commercial real estate management business for third-parties including our Bank of America Portfolio Joint Venture. As of December 31, 2013, this business, which operates under the name Gramercy Asset Management, managed approximately $1.4 billion of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. We manage properties for companies including KBS, Garrison through their investment in the Bank of America Portfolio Joint Venture, and Oak Tree Capital Management, L.P.
We have an integrated asset management platform within Gramercy Asset Management to consolidate responsibility for, and control over, leasing, lease administration, property management, operations, construction management, tenant relationship management and property accounting. To the extent that we provide asset management services for third-party property owners, we provide such services in consultation with and at the direction of such owners.
In December, 2013, one of our wholly owned TRSs extended the Original Management Agreement with KBS. The Original Management Agreement was extended through execution of an Amended and Restated Asset Management Services Agreement, or the Management Agreement, effective as of December 1, 2013. As part of the execution of the Management Agreement, KBS made a $12.0 million payment to our TRS in satisfaction of the profit participation provisions under the Original Management Agreement. In addition, the Management Agreement provides for a base management fee of $7.5 million per year as well as certain other fees as provided therein. The term of the Management Agreement will continue to December 31, 2016 (with a one year extension option exercisable by KBS), unless earlier terminated as therein provided, and also provides incentive fees in the form of profit participation ranging from 10% 30% of incentive profits earned on sales.
On March 15, 2013, we disposed of our Gramercy Finance segment, and exited the commercial real estate finance business. Our commercial real estate finance business invested in and managed a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, CMBS and preferred equity involving commercial properties throughout the United States, and which held interests in real estate properties acquired through foreclosures. The disposal was completed pursuant to a sale and purchase agreement to transfer the collateral management and sub-special servicing agreements for our three Collateralized Debt Obligations, or CDOs, to CWCapital Investments LLC, or CWCapital, for proceeds of $6.3 million in cash, after expenses. We retained our subordinate debt and equity ownership, or Retained CDO Bonds, in the CDOs, which may allow us to recoup additional proceeds over the remaining life of the CDOs based upon resolution of underlying assets within the CDOs. However, there is no guarantee that we will realize any proceeds from the Retained CDO Bonds or what the timing of these proceeds might be. On March 15, 2013, we deconsolidated the assets and liabilities of Gramercy Finance from our Consolidated Financial Statements and recognized a gain on the disposal of $389.1 million within discontinued operations. The carrying value of the retained CDO bonds was $6.8 million as of December 31, 2013.
In addition to our Retained CDO Bonds, we expect to receive additional cash proceeds for past CDO servicing advances when specific assets within the CDOs are liquidated. We received reimbursements of $6.1 million during the year ended December 31, 2013, and the carrying value of the receivable for servicing advance reimbursements as of December 31, 2013 is $8.8 million. We do not anticipate receiving a substantial portion of the remaining CDO servicing advance reimbursements until the second half of 2014.
The following discussion related to our Consolidated Financial Statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form 10-K.
Our discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which
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could significantly affect our reported assets, liabilities and contingencies, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time and made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies to be the following:
As of December 31, 2013, we had no consolidated VIEs.
On March 15, 2013, as a result of the disposal of the Gramercy Finance segment, we deconsolidated three VIEs, the CDOs. We were the collateral manager of the three CDOs and in our capacity as collateral manager, we made decisions related to the collateral that most significantly impacted the economic outcome of the CDOs, which was the basis upon which we concluded that we were the primary beneficiary of the CDOs as of December 31, 2012. In connection with the disposal of Gramercy Finance, we transferred the collateral management and sub-special servicing agreements for our three CDOs to CWCapital, thereby removing ourselves as the collateral manager and our ability to make any and all decisions related to the collateral, including those that would most significantly impact the economic outcome of the CDOs. As of March 15, 2013, we had no continuing involvement with the collateral to the CDOs, and as a result, we determined that we were no longer the primary beneficiary of the CDOs, and therefore deconsolidated the CDOs.
We have retained our subordinate debt and equity ownership, or the Retained CDO Bonds, in the CDOs, which were previously eliminated in consolidation and were not sold as part of the disposal of Gramercy Finance. The Retained CDO Bonds may provide us with the potential to receive continuing cash flows in the future, however, there is no guarantee that we will realize any proceeds from the Retained CDO Bonds, or what the timing of these proceeds might be. These interests have been recognized at fair value as the Retained CDO Bonds on the Consolidated Balance Sheets.
As further discussed above, on March 15, 2013, we recognized an asset in Retained CDO Bonds in connection with the disposal of the Gramercy Finance segment. We are not obligated to provide any financial support to these CDOs. Our maximum exposure to loss is limited to our interest in the Retained CDO Bonds and we do not control the activities that most significantly impact the VIEs economic performance.
We record acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. We allocate the purchase price of real estate to land, building and intangibles, such as the value of above-, below- and at-market leases and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase in the case of below-market leases or a decrease in the case of above-market leases to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized over the expected term of the associated lease. We assess the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, we amortize such below-market lease value into rental revenue over the renewal period.
Acquired real estate definitions that do not meet the definition of a business combination are recorded at cost. Acquired real estate investments which are under construction are considered build-to-suit transactions
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and are also recorded at cost. In build-to-suit transactions, we engage a developer to construct a property or provide funds to a tenant to develop a property. We capitalize the funds provided to the developer/tenant and the internal costs of interest and real estate taxes, if applicable, during the construction period.
Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.
In leasing office space, we may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner of the leasehold improvements, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.
We also review the recoverability of the propertys carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the propertys use and eventual disposition. These estimates consider factors such as changes in strategy resulting in an increased or decreased holding period, expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose for assets held for sale. These assessments are recorded as an impairment loss in our Consolidated Statements of Comprehensive Income (loss) in the period the determination is made. The estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset.
During 2013, we recorded no impairment charges related to our investments in real estate. During 2012, we recorded impairment charges of $35,043 related to our investments in real estate, which were classified as discontinued operations related to the disposal of Gramercy Finance. During 2011, we recorded impairment charges of $1,237 related to our investments in real estate, which were re-classified as discontinued operations as part of the Settlement Agreement with KBS.
We account for our investments in joint ventures under the equity method of accounting since we exercise significant influence, but do not unilaterally control the entities, and we are not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to us. As of December 31, 2013 and 2012, we had investments of $39,385 and $72,742 in joint ventures, respectively.
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As of December 31, 2013, we had no assets classified as held for sale.
In connection with our efforts to exit Gramercy Finance and the commercial real estate finance business, we classified the assets and liabilities of Gramercy Finance as held-for-sale. As of December 31, 2012, we had assets classified as held-for-sale of $1,952,264 related to the disposal of Gramercy Finance. We recorded impairment charges of $27,180 within discontinued operations on loans and real estate investments to adjust the carrying value to the lower of cost or fair value and other-than-temporary impairments of $128,087 within discontinued operations as we no longer could express the intent to hold CMBS investments until the recovery of amortized cost for all CMBS in an unrealized loss position. On March 15, 2013, we completed the disposal of Gramercy Finance. For a further discussion regarding the measurement of financial instruments and real estate assets of the Gramercy Finance segment see Note 11 and Note 3 in the accompanying notes to our Consolidated Financial Statements.
Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less costs to sell. Once an asset is classified as held-for-sale, depreciation expense is no longer recorded on real estate assets and current and prior periods are reclassified as discontinued operations. As of December 31, 2013 and 2012, we had real estate investments held-for-sale of $0 and $88,806, respectively. We recorded impairment charges of $0, $35,043 and $1,237 during the years ended December 31, 2013, 2012 and 2011, respectively, related to real estate investments within discontinued operations.
A gain on settlement of debt is recorded when the carrying amount of the liability settled exceeds the fair value of the assets transferred to the lender or special servicer. In 2013 and 2012, we did not recognize any gain on settlement of debt.
Pursuant to the execution of the Settlement Agreement, the transfer of 867 Gramercy Asset Management properties, with an aggregate carrying value of $2,631,902 and associated mortgage, mezzanine and other liabilities of $2,843,345, occurred in September and December 2011 and we recognized a gain on settlement of debt of $285,634 in connection with such transfer as part of discontinued operations. The gain on settlement of debt includes $54,083 of gain on disposal of assets. During the year ended December 31, 2011, we recorded $2,489 of legal and professional fees related to the restructuring of the Goldman Mortgage Loan and the Goldman Mezzanine Loans.
In July 2011, the Dana portfolio, which consisted of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. We recognized gain on settlement of debt of $74,191 year ended December 31, 2011 as part of discontinued operations. We realized a $15,892 gain on the disposal the assets, which is included in the gain on settlement of debt.
Tenant and other receivables are derived from management fees, rental revenue and tenant reimbursements.
Management fees, including incentive management fees, are recognized as earned in accordance with the terms of the management agreements. The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.
Rental revenue is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.
We continually review receivables related to rent, tenant reimbursements, management fees, including incentive fees, and unbilled rent receivables and determines collectability by taking into consideration the
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tenant or asset management clients payment history, the financial condition of the tenant or asset management client, business conditions in the industry in which the tenant or asset management client operates and economic conditions in the area in which the property or asset management client is located. In the event that the collectability of a receivable is in doubt, we increase the allowance for doubtful accounts or record a direct write-off of the receivable.
We follow the acquisition method of accounting for business combinations. We allocate the purchase price of acquired properties to tangible and identifiable intangible assets and liabilities acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets and liabilities acquired.
Above-market and below-market lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and managements estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The above-market lease values are amortized as a reduction of rental revenue over the remaining non-cancelable terms of the respective leases. The below-market lease values are amortized as an increase to rental revenue over the initial term of the respective leases. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the market lease intangibles will be written off to rental revenue.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as-if vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six months. Management also estimates costs to execute similar leases including leasing commissions and other related expenses. The value of in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable term of the respective leases. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the in-place lease intangible would be written off to depreciation and amortization expense.
Servicing advances receivable is comprised of the accrual for the reimbursement of servicing advances recognized as part of the disposal of Gramercy Finance. The accrual for reimbursement of servicing advances incurred while we were the collateral manager of the CDOs includes expenses such as legal fees incurred to negotiate modifications and foreclosures on loan investments, professional fees incurred on certain loans, or fees for services such as appraisals obtained on real estate properties that served as collateral for loan investments. These reimbursement proceeds will be realized when the related assets within the CDOs are liquidated in accordance with the terms of the collateral management and sub-special servicing agreements, which were sold in connection with the disposal of Gramercy Finance. We have no control over the timing of the resolution of the related assets, however, we earn accrued interest at the prime rate for the time that these reimbursements are outstanding. For the year ended December 31, 2013 we received reimbursements of $6,055. As of December 31, 2013, the servicing advances receivable is $8,758.
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We review the servicing advances receivable on a quarterly basis and determine collectability by reviewing the expected resolution and timing of the underlying assets of the CDOs. As of December 31, 2013, we have reviewed the outstanding servicing advances and have determined that all amounts are collectible.
The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three CDOs, which we recognized at fair value in March 2013 in conjunction with the disposal of Gramercy Finance. Our management estimated the timing and amount of cash flows expected to be collected and recognized an investment in the Retained CDO Bonds equal to the net present value of these discounted cash flows. There is no guarantee that we will realize any proceeds from this investment, or what the timing of investment income for the expected remaining life of the Retained CDO Bonds. We consider these investments to be not of high credit quality and do not expect a full recovery of interest and principal. Therefore, we have suspended interest income accruals on these investments. On a quarterly basis, we evaluate the Retained CDO Bonds to determine whether significant changes in estimated cash flows or unrealized losses on these investments, if any, reflect a decline in value which is other-than-temporary. If there is a decrease in estimated cash flows and the investment is in an unrealized loss position, we will record an other-than-temporary impairment in the Consolidated Statements of Operations and Comprehensive Income (Loss). To determine the component of the other-than-temporary impairment related to expected credit losses, we compare the amortized cost basis of the Retained CDO Bonds to the present value of our revised expected cash flows, discounted using our pre-impairment yield. Conversely, if the security is in an unrealized gain position and there is a decrease or significant increase in expected cash flows, we will prospectively adjust the yield using the effective yield method.
As of December 31, 2013, the Retained CDO Bonds had an amortized cost of $7,981 and a fair value of $6,762. For the year ended December 31, 2013, we recognized an other-than-temporary impairment, or OTTI, of $2,002 on the Retained CDO Bonds.
At December 31, 2013, we measured financial instruments, including Retained CDO Bonds and derivative instruments on a recurring and non-recurring basis. At December 31, 2012, we measured financial instruments that were disposed of in the first quarter of 2013 in connection with the disposal of Gramercy Finance at fair value on a recurring basis and non-recurring basis. These financial instruments were deconsolidated at fair value in connection with the disposal of Gramercy Finance on March 15, 2013.
ASC 820-10, Fair Value Measurements and Disclosures, among other things, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts that we could realize on disposition of the financial instruments. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment utilized in measuring fair value financial instruments such as with readily available actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability is generally affected by such items as the
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type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.
The three broad levels defined are as follows:
Level I This level is comprised of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in this category are highly liquid instruments with actively quoted prices.
Level II This level is comprised of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III This level is comprised of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions. Instruments that are generally included in this category are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.
At December 31, 2013, we measured financial instruments, including Retained CDO bonds and derivative instruments on a recurring basis. At December 31, 2012, we measured financial instruments, including CMBS available for sale and derivative instruments on a recurring basis.
Retained CDO Bonds: Retained CDO Bonds are valued on a recurring basis using an internally developed discounted cash flow model. Management estimates the timing and amount of cash flows expected to be collected and applies a discount rate equal to the yield that we would expect to pay for similar securities with similar risks at the valuation date. Future expected cash flows generated by management require significant assumptions and judgment regarding the expected resolution of the underlying collateral, which includes loans and other lending investments, real estate investments, and CMBS. The resolution of the underlying collateral requires further management assumptions regarding capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements, net property operating income, timing of workouts and recoveries, loan loss severities and other factors. The models are most sensitive to the unobservable inputs such as the timing of a loan default or property sale and the severity of loan losses. Significant increases (decreases) in any of those inputs in isolation as well as any change in the expected timing of those inputs would result in a significantly lower (higher) fair value measurement.
Derivative instruments: Fair values of our derivative instruments, such as interest rate swaps, are valued using advice from a third-party derivative specialist, based on a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due to the risk of non-performance. Fair value of our derivative instruments, such our CVR investments are valued using a Black-Scholes model. This model requires inputs such as expected term, expected volatility, and risk-free interest rate.
At December 31, 2013, we did not measure any financial instruments on a non-recurring basis. At December 31, 2012, we measured real estate investments and loans subject to impairment or reserves for loan loss at fair value on a nonrecurring basis.
Real Estate investments: The real estate investments identified for impairment have been classified as assets held-for-sale. The impairment on properties classified as held-for-sale is calculated by comparing unsolicited purchase offers to the carrying value of the respective property. The marketing valuations are based on internally developed discounted cash flow models which include assumptions that require significant management judgment regarding capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements and other factors deemed necessary by management. The impairment is calculated by comparing our internally developed discounted cash flow methodology to the carrying value of the respective property.
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The valuations of financial instruments derived from pricing models may include adjustments to the financial instruments. These adjustments may be made when, in managements judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived from a model typically reflects managements judgment that other participants in the market for the financial instrument being measured at fair value would also consider such an adjustment in pricing that same financial instrument.
Assets and liabilities presented at fair value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements.
Rental revenue from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse us for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when we are the primary obligor for these expenses and assume the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.
Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.
Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by us, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.
We recognize sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and we are not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.
The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.
Certain of our asset management contracts include provisions that may allow us to earn additional fees, generally described as incentive fees or profit participation interests, based on the achievement of a targeted valuation of the managed assets or the achievement of a certain internal rate of return on the managed assets. We recognize incentive fees on our asset management contracts based upon the amount that would be due pursuant to the contract, if the contract were terminated at the reporting date, through the measurement date. If the contact may be terminated at will, revenue will only be recognized to the amount that would be due pursuant to that termination. If the incentive fee is a fixed amount, only a proportionate share of revenue is recognized at the reporting date, with the remaining fees recognized on a straight-line basis over the measurement period. The values of incentive management fees are periodically evaluated by management.
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The Original Management Agreement, originally entered into March 30, 2012, was extended in 2013 through execution of an Amended and Restated Asset Management Services Agreement, or the Management Agreement, effective as of December 1, 2013 and provides for a base management fee of $7,500 per year, payable monthly, plus the reimbursement of certain administrative and property related expenses. The Management Agreement is effective through December 31, 2016 with a one-year extension option through December 31, 2017, exercisable by KBS, and also provides incentive fees in the form of profit participation ranging from 10% 30% of incentive profits earned on sales.
Our Original Management Agreement with KBS, which was in effect through December 1, 2013, provided a base management fee of $9,000 per year, payable monthly, plus the reimbursement of all property related expenses paid, and an incentive fee, or the Threshold Value Profits Participation, in an amount equal to the greater of: (a) $3,500 or (b) 10% of the amount, if any, by which the portfolio equity value exceeds $375,000 (as adjusted for future cash contributions into, and distributions out of, KBS). The Threshold Value Profits Participation was capped at a maximum of $12,000 and was payable 60 days after the earlier to occur of June 30, 2014 (or March 31, 2015 upon satisfaction of certain extension conditions including the payment by KBS of a $750 extension fee) and the date on which KBS, directly or indirectly sells, conveys or otherwise transfers at least 90% of the KBS portfolio.
In the second quarter of 2013, after consideration of the termination provisions of the agreement and the sales of real estate assets made to date, we recognized incentive fees of $5,700 related to our Original Management Agreement with KBS, pursuant to which we provide asset management services to KBS with respect to a portfolio of office and banks branches, or the KBS Portfolio. Subsequently, following the signing of the Management Agreement, KBS paid $12,000 to us in satisfaction of our profit participation interest under the Original Management Agreement. For the year ended December 31, 2013, 2012 and 2011 we recognized incentive fees of $10,223, $1,277 and $500, respectively.
Rent expense is recognized on a straight-line basis regardless of when payments are due. Accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets as of December 31, 2013 and 2012 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in management, general and administrative expense.
We have a stock-based compensation plan, described more fully in Note 13 in the accompanying financial statements. We account for this plan using the fair value recognition provisions. We use the Black-Scholes option-pricing model to estimate the fair value of a stock option award. This model requires inputs such as expected term, expected volatility, and risk-free interest rate. Further, the forfeiture rate also impacts the amount of aggregate compensation cost. These inputs are highly subjective and generally require significant analysis and judgment to develop.
Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award. Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation on a current basis over the benefit period.
The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2013 and 2012.
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2013 | 2012 | |||||||
Dividend yield | 5.50 | % | 5.00 | % | ||||
Expected life of option | 5.0 years | 5.0 years | ||||||
Risk-free interest rate | 0.72 | % | 0.89 | % | ||||
Expected stock price volatility | 53.00 | % | 80.00 | % |
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In the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including the use of derivatives. We use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. We use a variety of commonly used derivative products that are considered plain vanilla derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. We expressly prohibit the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.
We may from time to time use derivative instruments in connection with the private placement of equity. In October 2013, we entered into contingent value rights agreements, or CVR agreements, with the share purchasers. Pursuant to each CVR Agreement, we issued to each purchaser the number of contingent value rights, or CVRs, equal to the number of common stock purchased. On March 25, 2014, or the CVR Test Date, we will calculate the volume-weighted average price, or the VWAP, for the common stock for the 10 trading days period ending on, and including, March 25, 2014, or the CVR Period VWAP. On April 1, 2014, we will pay to the holder of the contingent value rights, in immediately available funds, an amount in cash, equal to (a) the number of contingent value rights held by the holder on the CVR Test Date multiplied by (b) the amount, not to exceed $0.46 equal to the difference between the per share purchase price of $4.11 and the CVR Period VWAP. These CVRs are not designated as hedge instruments. The CVRs do not qualify, nor did we intend for these instruments to qualify, as hedging instruments.
To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
We recognize all derivatives on the balance sheet at fair value. Derivative instruments that were assets and liabilities of the CDOs were classified as held-for-sale as of December 31, 2012 and then disposed of in the first quarter of 2013 in connection with the disposal of Gramercy Finance. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.
All hedges held by us are deemed effective based upon the hedging objectives established by our corporate policy governing interest rate risk management. The effect of our derivative instruments on our financial statements is discussed more fully in Note 12.
We elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income, if any, to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates and we will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief
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under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distributions to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT and we intend to operate in the foreseeable future in such a manner so that we will qualify as a REIT for U.S. federal income tax purposes. We may, however, be subject to certain state and local taxes. Our TRSs are subject to federal, state and local taxes.
For the years ended December 31, 2013, 2012 and 2011, we recorded $8,908, $3,330, and $563 of income tax expense, including $2,515, $0, and $0 within discontinued operations, respectively. Tax expense for each year is comprised of federal, state and local taxes. Income taxes, primarily related to our TRSs, are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if we believe it is more likely than not that all or a portion of a deferred tax asset will not be realized. Any increase or decrease in a valuation allowance is included in the tax provision when such a change occurs.
Our policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating expense, respectively. As of December 31, 2013, 2012 and 2011, we did not incur any material interest or penalties.
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2013 | 2012 | Change | ||||||||||
Management fees | $ | 40,896 | $ | 34,667 | $ | 6,229 | ||||||
Rental revenue | 12,181 | 267 | 11,914 | |||||||||
Investment income | 1,717 | 600 | 1,117 | |||||||||
Operating expense reimbursements | 1,203 | 174 | 1,029 | |||||||||
Other income | 707 | 1,113 | (406 | ) | ||||||||
Total Revenue | $ | 56,704 | $ | 36,821 | $ | 19,883 | ||||||
Equity in net loss of joint ventures | $ | (5,662 | ) | $ | (2,904 | ) | $ | (2,758 | ) |
Management fees for the year ended December 31, 2013 are $40,896 as compared to $34,667 for the year ended December 31, 2012. Management fees are comprised of asset management, property management, incentive and administration fees earned pursuant to the Management Agreement with KBS and the Bank of America Portfolio Joint Venture which commenced in December 2012. For the year ended December 31, 2013, we earned $29,794 from our contract with KBS, $8,330 from our contract with the Bank of America Portfolio Joint Venture, and $2,772 from other management contracts. For the year ended December 31, 2012, we earned $34,667 from our contract with KBS. The increase in management fees is primarily attributable to $10,223 of incentive fees recognized for the year ended December 31, 2013 as compared to $1,277 recognized for the year ended December 31, 2012.
Rental revenue was $12,181 and $267 for the years ended December 31, 2013 and 2012, respectively. The increase of $11,914 is due to the acquisition of 29 properties in the year ended December 31, 2013 compared to the acquisition of 2 properties in the year ended December 31, 2012.
Investment income for the years ended December 31, 2013 and 2012 was $1,717 and $600, respectively. Investment income for the year ended December 31, 2013 was primarily attributable to income accretion on the Retained CDO Bonds subsequent to our disposal of our Gramercy Finance segment and exit from the commercial real estate finance business in March 2013. For the year ended December 31, 2012, investment income was primarily generated from a mezzanine loan investment made in connection with the acquisition of our Bank of America Portfolio Joint Venture.
Operating expense reimbursements are comprised of amounts reimbursed by tenants for property operating expenses we are responsible for paying, and the costs are passed through to the tenants. Operating
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expense reimbursements were $1,203 and $174 for the year ended December 31, 2013 and 2012, respectively. The increase in operating expense reimbursements is attributable to acquisitions made during the year ended December 31, 2013. For the year ended December 31, 2012, operating expense reimbursements were only attributable to the Indianapolis Industrial Portfolio, which was acquired in November 2012.
For the year ended December 31, 2013, other income is primarily comprised of $611 gain on the liquidation of a joint venture and interest earned on cash balances held by us. For the year ended December 31, 2012, other income is primarily comprised of $1,000 payment received related to settlement of a previously defaulted loan investment held outside of our commercial real estate finance segment and interest earned on cash balances held by us.
The equity in net loss of joint ventures of $5,662 and $2,904 for the year ended December 31, 2013 and 2012, respectively, represents our proportionate share of the loss generated by our joint venture interests, including our Bank of America Portfolio Joint Venture acquired in December 2012. The Bank of America Portfolio Joint Venture net loss for the year ended December 31, 2013 includes our pro-rata share of impairments of $4,866 and gains on sales of $399 related to held-for-sale and sold properties and $4,534 loss from the sale of successor borrower of a defeased mortgage acquired as part of the joint ventures acquisition. The pool of government securities which served as collateral for the mortgage, generated sufficient cash flows to cover the debt service requirements, but did not generate income to offset the corresponding interest expense. Our proportionate share of the income (loss) generated by our joint venture interests includes $8,878 and $669 of real estate-related depreciation and amortization, which when added back with the impairments and gains, results in a contribution to Funds from Operations, or FFO, of $5,449 and $7,846 for the years ended December 31, 2013 and 2012, respectively. For the year ended December 31, 2012, there was $5,611 of equity in net income of joint ventures classified as discontinued operations.
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2013 | 2012 | Change | ||||||||||
Property operating expenses | $ | 22,279 | $ | 23,226 | $ | (947 | ) | |||||
Other-than-temporary impairment | 2,002 | | 2,002 | |||||||||
Depreciation and amortization | 5,675 | 256 | 5,419 | |||||||||
Interest expense | 1,732 | | 1,732 | |||||||||
Management, general and administrative | 18,210 | 25,335 | (7,125 | ) | ||||||||
Unrealized loss on derivatives | 115 | | 115 | |||||||||
Acquisition expenses | 2,808 | 111 | 2,697 | |||||||||
Provision for taxes | 6,393 | 3,330 | 3,063 | |||||||||
Total Expenses | $ | 59,214 | $ | 52,258 | $ | 6,956 |
Property operating expenses are comprised of costs related to our asset and property management business as well as expenses directly attributable to our owned portfolio of income producing industrial and office properties. Property operating expenses include those costs in our owned portfolio which we are responsible for during the lease term but the cost is passed through to the tenant as operating expense reimbursement revenue. Property operating expenses were $22,279 and $23,226 for the year ended December 31, 2013 and 2012 respectively. The decrease in property operating expenses is primarily attributable reduced professional fees related to rebidding professional consulting and other contracts in an effort to reduce our annual operating costs and reduction in salaries and benefits.
During the year ended December 31, 2013, we recorded other-than-temporary impairments of $2,002 on our retained CDO Bonds, due to adverse changes in expected cash flows related to the retained bonds subsequent to our disposal of our Gramercy Finance segment and exit from the commercial real estate finance business in March 2013. Accordingly there was no other-than-temporary impairments during the year ended December 31, 2012.
We recorded depreciation and amortization expenses of $5,675 for the year ended December 31, 2013, compared to $256 for the year ended December 31, 2012. The increase of $5,419 in depreciation expense is primarily due to the acquisition of 29 properties in the year ended December 31, 2013, compared to the acquisition of 2 properties in the year ended December 31, 2012.
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Interest expense is incurred from borrowings under our senior secured credit facility as well as expenses incurred in connection with other secured financing arrangements encumbering eight other properties. We recorded interest expenses of $1,732 for the year ended December 31, 2013 related to long-term secured debt aggregating $167,180 as of December 31, 2013. For the year ended December 31, 2012, we had no long term secured debt and accordingly no interest expense was incurred.
Management, general and administrative expenses were $18,210 for the year ended December 31, 2013 as compared to $25,335 for the year ended 2012. The decrease of $7,125 is primarily related to $2,615 of costs incurred in connection with our strategic review process completed in 2012, and reduced employee headcount and corresponding decreases in salary and employee benefit costs of $1,696, a reduction in legal and professional fees of $1,095, a reduction in compliance and auditing costs of $1,004 and reduced insurance costs of $336, all of which related to rebiding professional and consulting arrangements as well as savings achieved in connection with reduced complexity of our business subsequent to our disposal of our Gramercy Finance segment and exit from the commercial real estate finance business in March 2013. The remainder of the decrease in management, general and administrative costs for the year ended December 31, 2013 is primarily attributable to lower occupancy costs for leased corporate and regional management offices.
Real estate acquisition costs were $2,808 and $111 for the year ended December 31, 2013 and 2012, respectively, and were comprised of costs incurred to complete the acquisition of properties accounted for as business combinations.
The provision for taxes is primarily attributable to federal, state and local taxes incurred in connection with our asset and property management business conducted in a TRS. The provision for taxes was $6,393 and $3,330 for the year ended December 31, 2013 and 2012, respectively. The increase in the provision is primarily attributable to additional incentive fee revenue recognized during the year ended December 31, 2013.
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2012 | 2011 | Change | ||||||||||
Management fees | $ | 34,667 | $ | 7,336 | $ | 27,331 | ||||||
Rental revenue | 267 | | 267 | |||||||||
Investment income | 600 | | 600 | |||||||||
Operating expense reimbursements | 174 | | 174 | |||||||||
Other income | 1,113 | 436 | 677 | |||||||||
Total Revenue | $ | 36,821 | $ | 7,772 | $ | 29,049 | ||||||
Equity in net income (loss) of joint ventures | $ | (2,904 | ) | $ | 121 | $ | (3,025 | ) |
Management fees for the year ended December 31, 2012 were $34,667 and for the year ended December 31, 2011 were $7,336. Management fees are comprised of asset management, property management and administration fees earned pursuant to the Management Agreement which was effective September 1, 2011.
Rental revenue was $267 and $0 for the years ended December 31, 2012 and 2011, respectively. The increase of $267 is due to the acquisition of two industrial properties in November 2012.
Investment income was primarily generated from a mezzanine loan investment made in connection with the acquisition of our Bank of America Portfolio Joint Venture.
Operating expense reimbursements were $174 the year ended December 31, 2012 and were related two industrial properties acquired in November 2012.
Other income of $1,113 for the year ended December 31, 2012 is primarily comprised of a $1,000 payment received related to settlement of a previously defaulted loan investment held outside of our commercial real estate finance segment. The remainder of other income for the year ended December 31, 2012 and 2011 is related to interest earned on cash balances held by us.
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The equity in net income (loss) of joint ventures of $2,904 for the year ended December 31, 2012 represents our proportionate share of the loss generated by two joint venture interests, including our Bank of America Portfolio Joint Venture acquired in December 2012. The equity in net income of joint ventures of $121 for the year ended December 31, 2011 represents our proportionate share of the income generated by one joint venture interest. Our proportionate share of the income (loss) generated by our joint venture interests including $669 and $3,219 of real estate-related depreciation and amortization, which when added back, results in a reduction of Funds from Operations, or FFO, of $7,846 for the year ended December 31, 2012 and a contribution to FFO, of $1,242 for the year ended December 31, 2011, including losses of $5,611 and $2,098 classified as discontinued operations, respectively.
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2012 | 2011 | Change | ||||||||||
Property operating expenses | $ | 23,226 | $ | 5,947 | $ | 17,279 | ||||||
Other-than-temporary impairment | | | | |||||||||
Depreciation and amortization | 256 | 136 | 120 | |||||||||
Interest expense | | | | |||||||||
Management, general and administrative | 25,335 | 22,150 | 3,185 | |||||||||
Unrealized loss on derivatives | | | | |||||||||
Acquisition expenses | $ | 111 | | $ | 111 | |||||||
Provision for taxes | 3,330 | 563 | 2,767 | |||||||||
Total Expenses | $ | 52,258 | $ | 28,796 | $ | 23,462 |
Property operating expenses increased by $17,279 from the $5,947 recorded in the year ended December 31, 2011 to $23,226 recorded in the year ended December 31, 2012. The increase is attributable to additional costs incurred in connection with management of the KBS portfolio for twelve months of 2012 as compared to only four months in 2011. Property operating expenses in 2011 was also reduced by the reversal of a reserve for litigation of approximately $5,392 which was settled in 2011.
We recorded depreciation and amortization expenses of $256 for the year ended December 31, 2012, compared to $136 for the year ended December 31, 2011. The increase of $120 is primarily due to the acquisition of the Indianapolis Industrial Portfolio in November 2012.
Management, general and administrative expenses were $25,446 for the year ended December 31, 2012, compared to $22,150 for the same period in 2011. The increase of $3,296 is primarily related to the write off of $2,615 in costs related to our strategic review process completed in the second quarter of 2012, $111 of acquisition costs for two industrial properties, increases of corporate legal fees of $715 and salary and employee benefit costs of $1,201, which were partially offset by reductions in audit fees, other professional fees and insurance of $1,347.
The provision for taxes was $3,330 for the year ended December 31, 2012, versus $563 for the year ended December 31, 2011. The increase of $2,767 is primarily related to taxes on our asset management business which is conducted in a TRS.
Liquidity is a measurement of our ability to meet cash requirements, including ongoing commitments to fund acquisitions of real estate assets, repay borrowings, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term and long-term liquidity requirements, including working capital, distributions, debt service and additional investments, consist of: (i) cash flow from operations; (ii) proceeds from our private placement of common equity; (iii) borrowings under our credit facility; (iv) new financings, and; (v) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short-term and long-term liquidity requirements. Our future growth will depend, in large part, upon our ability to raise additional capital. In the event we are not able to successfully access new equity or debt capital, we will rely primarily on cash on hand and cash flows from operations to satisfy our liquidity requirements. As of the date of this filing, we expect that our cash on hand and cash flow from operations will be sufficient to satisfy our anticipated
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short-term and long-term liquidity needs as well as our recourse liabilities, if any. Our ability to fund our short-term liquidity needs, including debt service and general operations (including employment related benefit expenses), through cash flow from operations can be evaluated through the Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
Our debt financing terms may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain minimum tangible net worth, to maintain a certain portion of our assets free from liens and to secure such borrowings with assets. These conditions could limit our ability to do further borrowings and may have a material adverse effect on our liquidity, the value of our common stock, and our ability to make distributions to our stockholders.
Beginning with the third quarter of 2008 our board of directors elected not to pay a dividend on our common stock. Additionally our board of directors elected not to pay the Series A Preferred Stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of December 31, 2013 and December 31, 2012, we accrued $37,600 and $30,438, respectively, for the Series A Preferred Stock dividends. In December 2013, our board of directors authorized and we declared a catch-up dividend for all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, our board of directors also authorized and we declared a Series A Preferred Stock quarterly dividend payment for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend will be paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014.
In March 2014, our board of directors authorized and declared a quarterly dividend of $0.035 per common share for the first quarter of 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014. Our board of directors also authorized and declared the Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period January 15, 2014, through and including April 14, 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014.
To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital for operations. In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.
Net cash provided by operating activities increased $29,120 to $29,403 for the year ended December 31, 2013 compared to $283 for the same period in 2012. Operating cash flow was generated primarily by management fees, servicing advance recoveries and net rental revenue from our real estate investments.
Net cash used by investing activities for the year ended December 31, 2013 was $216,092 compared to net cash provided by investing activities of $248,288 during the same period in 2012. The decrease in cash flow from investing activities is primarily attributable to the acquisition of 29 properties net of assumed mortgages. The change is also attributable to activities in our commercial real estate finance business which we disposed of in the first quarter of 2013 and classified as discontinued operations. The decrease in cash flows from our finance business is attributable to the decrease in proceeds from real estate sales and principal collections on investments, which is offset by proceeds from the sale of the collateral management and sub-special servicing agreements for our three CDOs and the sale of a joint venture to a related party.
Net cash provided by financing activities for the year ended December 31, 2013 was $124,620 as compared to net cash used by financing activities of $306,894 during the same period in 2012. The change is primarily attributable to the decrease in restricted cash within the CDOs and proceeds from the sale of repurchased CDO bonds, and partially offset by an increase in repayments of liabilities issued by our CDOs. The decrease in cash flows in 2013 is also attributable to proceeds received from the origination of a mortgage note payable on our real estate assets.
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Our authorized capital stock consists of 200,000,000 shares, $0.001 par value per share, of which we are authorize to issue up to 100,000,000 shares of common stock, $0.001 par value per share, 25,000,000 shares of preferred stock, $0.001 par value per share, and 75,000,000 shares of excess stock, $0.001 par value per share. As of December 31, 2013, 71,313,043 shares of common stock, 3,525,822 shares of preferred stock and no shares of excess stock were issued and outstanding, respectively.
In connection with Mr. Gordon F. DuGans agreement to serve as our Chief Executive Officer, on June 7, 2012, Mr. DuGan also agreed to purchase 1,000,000 shares of our common stock on June 29, 2012 for an aggregate purchase price of $2,520 or $2.52 per share. The per share purchase price was equal to the closing price our common stock on the New York Stock Exchange on the day prior to the date Mr. DuGan entered into the subscription agreement with us to purchase such shares of common stock. The issuance of such shares of common stock was a private placement exempt from the registration requirements of the Securities Act.
We issued to KBS Acquisition Sub-Owner 2, LLC (i) 2,000,000 shares of our common stock, par value $0.001 per share; (ii) 2,000,000 shares of Class B-1 non-voting common stock, par value $0.001 per share; and (iii) 2,000,000 shares of Class B-2 non-voting common stock, par value $0.001 per share on December 6, 2012. The shares were issued as consideration for our contribution to the joint venture with Garrison in connection with the acquisition of the Bank of America Portfolio on the same date and were valued at $2.75 which was the closing price of our common stock on the New York Stock Exchange on the day prior. Each share of the Class B-1 common stock and Class B-2 common stock will be convertible into one share of our common stock at the option of the holder at any time on or after September 5, 2013 and December 6, 2013, respectively. Each share of Class B-1 common stock and Class B-2 common stock that has not previously been converted and remains outstanding on March 5, 2014 shall, automatically and without any action on the part of the holder thereof, convert into one share of common stock on such date. During 2013, all Class B-1 and Class B-2 common stock was converted into an equal amount of shares of our common stock. In December, 2013, we filed an articles supplementary to our charter to reclassify 2,000,000 authorized shares of Class B-1 common stock and 2,000,000 authorized shares of Class B-2 common stock into the same number of authorized but unissued shares of our common stock. The reclassification (i) increased the number of shares of common stock from 96,000,000 shares immediately prior to the reclassification to 100,000,000 shares of common stock immediately after the reclassification; (ii) decreased the number of shares classified as Class B-1 Common Stock from 2,000,000 shares immediately prior to the reclassification to no shares immediately after the reclassification; and (iii) decreased the number of shares classified as Class B-2 Common Stock from 2,000,000 shares immediately prior to the reclassification to no shares immediately after the reclassification.
In October 2013, we entered into a common stock purchase agreement and related joinder agreements, or the Purchase Agreement, for the issuance of 11,535,200 unregistered shares of common stock at a purchase price of $4.11 per share, raising net proceeds of $45,520. Pursuant to the Purchase Agreement, each purchaser has agreed that it will not, without our prior written consent, offer, sell, contract to sell, pledge or otherwise dispose any or all of the common stock purchased pursuant to the purchase agreement until March 25, 2014, or the Lock-Up Period. During the Lock-Up Period, if we issue common stock or securities convertible into common stock, except for certain permitted issuances, then the purchasers will have the ability to: (1) purchase their pro rata portion of all or any part of the new issuance and (2) elect the benefit of any different terms provided to the new investors.
Pursuant to the Purchase Agreement, we entered into contingent value rights agreements, or CVR agreements, with the purchasers at the closing of the sale of common stock. Pursuant to each CVR Agreement, we issued to each purchaser the number of contingent value rights, or CVRs, equal to the number of common stock purchased. On March 25, 2014, or the CVR Test Date, we will calculate the volume-weighted average price, or the VWAP, for the common stock for the 10 trading days period ending on, and including, March 25, 2014, or the CVR Period VWAP. On April 1, 2014, we will pay to the holder of the contingent value rights, in immediately available funds, an amount in cash, equal to (a) the number of contingent value rights held by the holder on the CVR Test Date multiplied by (b) the amount, not to exceed $0.46 equal to the difference between the per share purchase price of $4.11 and the CVR Period VWAP.
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In April 2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock (including the underwriters over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share, or the Series A Preferred Stock. Holders of the Series A Preferred Stock are entitled to annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, we may at our option redeem the Series A Preferred Stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205. In November 2010, we repurchased 1,074,178 shares of the Series A Preferred Stock pursuant to a tender offer.
Beginning with the fourth quarter of 2008, our board of directors elected not to pay the quarterly Series A Preferred Stock dividends of $0.50781 per share. As of December 31, 2013 and 2012, we accrued Series A Preferred Stock dividends of $37,600 and $30,438, respectively. In December 2013, our board of directors authorized and we declared a catch-up dividend in the amount of $10.23524 per share of our 8.125% Series A Cumulative Redeemable Preferred Stock, representing all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, our board of directors also authorized and we declared a Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend were paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014.
Under our Independent Directors Deferral Program, which commenced April 2005, our independent directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors termination of service from the board of directors or a change in control by us, as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter. If dividends are declared by us, each participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter or have dividends paid in cash.
As of December 31, 2013, there were approximately 534,038 phantom stock units outstanding, of which 528,538 units are vested.
At December 31, 2013, our consolidated market capitalization is $665,376 based on a common stock price of $5.75 per share and the closing price of our common stock on the New York Stock Exchange on December 31, 2013. Market capitalization includes consolidated debt and common and preferred stock.
In connection with the hiring of Gordon F. DuGan, Benjamin P. Harris, and Nicholas L. Pell, who joined on July 1, 2012 as Chief Executive Officer, President and Managing Director, respectively, we have granted equity awards to these new executives pursuant to a newly adopted outperformance plan, or the 2012 Outperformance Plan. Pursuant to the 2012 Outperformance Plan, these executives, in the aggregate, may earn up to $20,000 of LTIP Units based on our common stock price appreciation over a four-year performance period ending June 30, 2016. The amount of LTIP Units earned under the 2012 Outperformance Plan will range from $4,000 if our common stock price equals a minimum hurdle of $5.00 per share (less any dividends paid during the performance period) to $20,000 if our common stock price equals or exceeds $9.00 per share (less any dividends paid during the performance period) at the end of the performance period. In the event that the performance hurdles are not met on a vesting date, the award scheduled to vest on that vesting date may vest on a subsequent vesting date if the common stock price hurdle is met as of such subsequent vesting date. The executives will not earn any LTIP Units under the 2012 Outperformance Plan to the extent that our
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common stock price is less than the minimum hurdle. Messrs. DuGan, Harris and Pell were granted awards under the 2012 Outperformance Plan pursuant to which they may earn up to $10,000, $6,000 and $4,000 of LTIP Units, respectively. During the performance period, the executives may earn up to 12%, 24% and 36% of the maximum amount under the 2012 Outperformance Plan at the end of the first, second and third years, respectively, of the performance period if our common stock price has equaled or exceeded the stock price hurdles as of the end of such years. If the minimum stock price hurdle is met as of the end of any such year, the actual amount earned will range on a sliding scale from 20% of the maximum amount that may be earned as of such date (at the minimum stock price hurdle) to 100% of the maximum amount that may be earned as of such date (at the maximum stock price hurdle). Any LTIP Units earned under the 2012 Outperformance Plan will remain subject to vesting, with 50% of any LTIP Units earned vesting on June 30, 2016 and the remaining 50% vesting on June 30, 2017 based, in each case, on continued employment through the vesting date. The LTIP Units issued in July 2012 in connection with the hiring of new executives had a fair value of $1,870 on the date of grant, which was calculated in accordance with ASC 718. In March 2013, we granted four senior officers equity awards pursuant to the 2012 Outperformance Plan in the form of LTIP units having an aggregate maximum value of $4,000, and a fair value of $845, which was calculated in accordance with ASC 718. We used a probabilistic valuation approach to estimate the inherent uncertainty that the LTIP Units may have with respect to our common stock. Compensation expense of $555 and $210 was recorded for the years ended December 31, 2013 and 2012 for the 2012 Outperformance Plan. Compensation expense of $1,943 will be recorded over the course of the next 36 months, representing the remaining weighted average vesting period of the LTIP Units as of December 31, 2013.
In connection with the equity awards made to Messrs. DuGan, Harris and Pell in connection with the hiring of these executives, we adopted the 2012 Inducement Equity Incentive Plan, or the Inducement Plan. Under the Inducement Plan, we may grant equity awards for up to 4,500,000 shares of common stock pursuant to the employment inducement award exemption provided by the New York Stock Exchange Listed Company Manual. The Inducement Plan permits us to issue a variety of equity awards, including stock options, restricted stock, phantom shares, dividend equivalent rights and other equity-based awards. All of the shares available under the Inducement Plan were issued or reserved for issuance to Messrs. DuGan, Harris and Pell in connection with the equity awards made upon the commencement of their employment. Equity awards issued under the Inducement Plan had a fair value of $3,830 on the date of grant. Compensation expense of $766 and $383 was recorded for years ended December 31, 2013 and 2012 for the 2012 Inducement Equity Incentive Plan. Compensation expense of $2,681 will be recorded over the course of the next 30 months representing the remaining weighted average vesting period of equity awards issued under the Inducement Plan as of December 31, 2012. In March 2013, we granted to four senior officers pursuant to the Equity Incentive Plan a total of 115,000 time-based restricted stock awards and 345,000 performance-based restricted stock units. The time-based awards vest in five equal annual installments commencing December 15, 2013, subject to continued employment. Vesting of the performance-based units requires, in addition to continued employment over a 5-year period, achievement of absolute increases in either our stock price or an adjusted funds from operations (as defined by our compensation committee).
The table below summarizes secured and other debt at December 31, 2013 and 2012:
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December 31, 2013 |
December 31, 2012 |
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Mortgage notes payable | $ | 122,180 | $ | | ||||
Secured revolving credit facility | 45,000 | | ||||||
Collateralized debt obligations | | 2,188,597 | ||||||
Total | $ | 167,180 | $ | 2,188,597 | ||||
Cost of debt | 0.00% to 6.95 | % | LIBOR+0.47 | % |
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On September 4, 2013, we entered into a Credit and Guaranty Agreement, with Deutsche Bank Securities, Inc., as lead arranger and bookrunner, and Deutsche Bank AG New York Branch, as administrative agent, for a $100,000 senior secured revolving credit facility, which Credit and Guaranty Agreement was amended and restated on September 24, 2013, or the Credit Facility. The aggregate amount of the Credit Facility may be increased to a total of up to $150,000, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The maturity date of the revolving credit facility is September 2015, with one 12-month extension option exercisable by us, subject, among other things, to there being an absence of an event of default under the Credit Facility and to the payment of an extension fee. The Credit Facility is guaranteed by Gramercy Property Trust Inc. and certain subsidiaries and is secured by first priority mortgages on designated properties, or the Borrowing Base. Outstanding borrowings under the Credit Facility are limited to the lesser of (i) the sum of the $100,000 revolving commitment and the maximum $50,000 commitment increase available or (ii) 60.0% of the value of the Borrowing Base. Interest on advances made on the Credit Facility, will be incurred at a floating rate based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin, or (ii) the applicable base rate which is the greater of the Prime Rate, 0.50% above the Federal Funds Rate, or 30-day LIBOR plus 1.00%. The applicable LIBOR margin will range from 1.90% to 2.75%, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross assets. The Credit Facility will have an initial borrowing rate of LIBOR plus 1.90%. The Credit Facility includes a series of financial and other covenants that we must comply with in order to borrow under the facility. We are in compliance with the covenants under the Credit Facility at December 31, 2013. As of December 31, 2013, there were borrowings of $45,000 outstanding under the Credit Facility and 18 properties were in the borrowing base.
Certain real estate assets are subject to mortgage and mezzanine liens. During 2013, we entered into $72,245 non-recourse mortgage loans with weighted average fixed-rate of 4.83% and a weighted-average floating rate of LIBOR + 2.10%. These mortgages were secured by six properties. We also assumed $48,898 of non-recourse mortgages in connection with the acquisition of two real estate acquisitions.
We are obligated under certain tenant leases, to construct the underlying leased property or fund tenant expansions. As of December 31, 2013, we had four outstanding commitments: (1) the construction of an approximately 118,000 square foot cold storage facility located in Hialeah Gardens, Florida, of which the unfunded amounts were estimated to be $16,772; (2) the contribution of $1,500 towards tenant improvements on a warehouse/industrial property in Garland, Texas, of which the unfunded amounts were estimated to be $854; (3) the expansion of a property located in Olive Branch, Mississippi whereby the tenant has a one-time option to expand the building by 250,000 square feet; and (4) the expansion of a property located in Logan Township, New Jersey whereby the tenant has a one-time option to expand the building by 25,000 square feet. The tenants have not noticed us for the building expansion options and therefore, no amounts are due and no unfunded amounts have been estimated.
Combined aggregate principal maturities of our credit facility, non-recourse mortgages and operating leases as of December 31, 2013 are as follows:
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Credit Facility | Mortgage Notes Payable | Interest Payments | Total | |||||||||||||
2014 | $ | | $ | 7,576 | $ | 6,203 | $ | 13,779 | ||||||||
2015 | 45,000 | 2,763 | 5,939 | 53,702 | ||||||||||||
2016 | | 2,895 | 5,091 | 7,986 | ||||||||||||
2017 | | 3,045 | 4,935 | 7,980 | ||||||||||||
2018 | | 15,986 | 4,563 | 20,549 | ||||||||||||
Thereafter | | 88,108 | 18,137 | 106,245 | ||||||||||||
Above/Below Market Interest | | | 1,807 | 1,807 | ||||||||||||
Total | $ | 45,000 | $ | 120,373 | $ | 46,675 | $ | 212,048 |
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Future minimum rental revenue under non-cancelable and excluding reimbursements for operating expenses, as of December 31, 2013 are as follows:
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Operating Leases | ||||
2014 | $ | 28,917 | ||
2015 | 30,398 | |||
2016 | 30,694 | |||
2017 | 31,040 | |||
2018 | 31,575 | |||
Thereafter | 284,577 | |||
Total minimum lease rental income | $ | 437,201 |
We have off-balance-sheet investments, including joint ventures. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet arrangements are discussed in Note 5 in the accompanying financial statements.
To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking into consideration the dividends paid deduction and net capital gains. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.
Beginning with the third quarter of 2008, our board of directors elected not to pay a dividend on our common stock. Our board of directors also elected not to pay the Series A Preferred Stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividends were accrued for 21 quarters through December 31, 2013. In December 2013, our board of directors authorized and we declared a catch-up dividend in the amount of $10.23524 per share of our 8.125% Series A Cumulative Redeemable Preferred Stock, representing all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, our board of directors also authorized and we declared a Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend were paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014.
In addition, the board of directors authorized and we declared a dividend of $0.035 per common share for the first quarter of 2014, to be paid on April 15, 2014 to holders of record as of March 31, 2014.
A majority of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Further, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated for tax purposes, in each case, our activities and balance sheet are measured with reference to historical costs or fair market value without considering inflation.
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The Chief Executive Officer of SL Green Realty Corp. (NYSE: SLG), or SL Green, is one of our directors.
In June 2013, we signed a lease agreement with 521 Fifth Fee Owner LLC, an affiliate of SL Green, for new corporate office space located at 521 Fifth Avenue, 30th Floor, New York, New York. The lease commenced in September 2013, following the completion of certain improvements to the space. The lease is for approximately 6,580 square feet and carries a term of 10 years with rents of approximately $373 per annum for year one rising to $463 per annum in year ten. There were four months of rent abated at the commencement of the lease and as such we did not pay any rent under the lease for the year ended December 31, 2013.
From May 2005 through September 2013, we were party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our previous corporate offices at 420 Lexington Avenue, New York, New York. In April 2013, we gave notice that we were cancelling the lease for the corporate offices at 420 Lexington Avenue effective in September 2013 concurrently with the commencement of the lease for the new corporate offices at 521 Fifth Avenue.
In September 2012, we recapitalized a portfolio of office buildings, which were part of the Gramercy Finance segment and owned within our CDOs, and located in Southern California, or the Southern California Office Portfolio, with an affiliate of SL Green and several other unrelated parties, through the contribution of an existing preferred equity investment to a newly formed joint venture. In January 2013, we sold the 10.6% interest in a joint venture of the Southern California Office Portfolio to an affiliate of SL Green for proceeds of $8,275 and recorded a gain on disposition to a director related entity of $1,317.
We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-downs of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.
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FFO for the years ended December 31, 2013, 2012 and 2011 are as follows:
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For the Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income (loss) available to common shareholders | $ | 377,665 | $ | (178,710 | ) | $ | 330,315 | |||||
Add: |
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Depreciation and amortization | 6,449 | 5,205 | 70,215 | |||||||||
FFO adjustments for unconsolidated joint ventures | 11,111 | 669 | 3,219 | |||||||||
Non-cash impairment of real estate investments | | 35,043 | 1,296 | |||||||||
(Income) loss from discontinued operations | (392,999 | ) | 153,207 | (358,380 | ) | |||||||
Less: |
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Non real estate depreciation and amortization | (952 | ) | (4,059 | ) | (7,044 | ) | ||||||
Gain on sale | | (15,915 | ) | (2,713 | ) | |||||||
FFO adjustment for discontinued operations | (7 | ) | (20,056 | ) | (61,604 | ) | ||||||
Funds from operations | $ | 1,267 | $ | (24,616 | ) | $ | (24,696 | ) | ||||
Funds from operations per share basic | $ | 0.02 | $ | (0.47 | ) | $ | (0.49 | ) | ||||
Funds from operations per share diluted | $ | 0.02 | $ | (0.47 | ) | $ | (0.49 | ) |
In February 2013, the FASB issued additional guidance on comprehensive income which requires the provision of information about the amounts reclassified out of accumulated other comprehensive income by component. This guidance also requires presentation on the Consolidated Statements of Operations and Comprehensive Income (Loss) or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, a cross-reference must be provided to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for reporting periods beginning after December 15, 2012 with early adoption permitted. We adopted this guidance for the first quarter of 2013, and our adoption resulted in increased disclosures but did not have a material effect on our Consolidated Financial Statements.
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Market risk includes risks that arise from changes in interest rates, credit, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate, interest rate and credit risks. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
Commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions, local real estate conditions (such as an oversupply of retail, industrial, office or other commercial or multi-family space), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). We may seek to mitigate these risks by employing careful business selection, rigorous underwriting and credit approval processes and attentive asset management.
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Our real estate assets generate income principally from fixed long-term leases and we are exposed to changes in interest rates primarily from floating rate borrowing arrangements. We expect that we will primarily finance our investment in commercial real estate with fixed rate, non-recourse mortgage financing, however, to the extent that we use floating rate borrowing arrangements, our net income from our real estate investments will generally decease if LIBOR increases. We have used, and may continue to use, interest rate caps or swaps to manage our exposure to interest rate changes. We currently have a $45,000 floating rate secured line of credit and our Bank of America Joint Venture financed the acquisition of its portfolio with a $200,000 floating rate, interest-only first mortgage note. The following chart shows a hypothetical 100 basis point increase in interest rates along the entire interest rate curve:
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Change in LIBOR | Projected Increase (Decrease) in Net Income | |||
Base case |
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+100 bps | $ | ( 266 | ) | |
+200 bps | $ | ( 532 | ) | |
+300 bps | $ | ( 798 | ) |
Credit risk refers to the ability of each tenant in our portfolio of real estate investments to make contractual lease payments on the scheduled due dates. We seek to reduce credit risk of our real estate investments by entering into long-term leases with tenants after a careful evaluation of credit worthiness as part of our property acquisition process. If defaults occur, we employ our asset management resources to mitigate the severity of any losses and seek to relet the property. In the event of a significant rising interest rate environment and/or economic downturn, tenant delinquencies and defaults may increase and result in credit losses that would materially and adversely affect our business, financial condition and results of operations.
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All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
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The Board of Directors and Stockholders of Gramercy Property Trust Inc.
We have audited the accompanying consolidated balance sheets of Gramercy Property Trust Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity (deficit) and non-controlling interests, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gramercy Property Trust Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gramercy Property Trust Inc.s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 14, 2014 expressed an unqualified opinion.
/s/ Ernst & Young LLP
New York, New York
March 14, 2014
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The Board of Directors and Stockholders of Gramercy Property Trust Inc.
We have audited Gramercy Property Trust Inc.s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Gramercy Property Trusts Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Gramercy Property Trust Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2013 consolidated financial statements of Gramercy Property Trust Inc. and our report dated March 14, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 14, 2014
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December 31, 2013 | December 31, 2012 | |||||||
Assets: |
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Real estate investments, at cost: |
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Land | $ | 73,131 | $ | 1,800 | ||||
Building and improvements | 264,581 | 21,359 | ||||||
Less: accumulated depreciation | (4,247 | ) | (50 | ) | ||||
Total real estate investments, net | 333,465 | 23,109 | ||||||
Cash and cash equivalents | 43,333 | 105,402 | ||||||
Restricted cash | 179 | 12 | ||||||
Investment in joint ventures | 39,385 | 72,742 | ||||||
Servicing advances receivable | 8,758 | | ||||||
Retained CDO bonds available for sale | 6,762 | | ||||||
Assets held-for-sale, net (includes consolidated VIEs of $0 and $1,913,353, respectively) | | 1,952,264 | ||||||
Tenant and other receivables, net | 5,976 | 4,123 | ||||||
Acquired lease assets, net of accumulated amortization of $1,596 and $42 | 40,960 | 4,386 | ||||||
Deferred costs, net of accumulated amortization of $634 and $2,033 | 5,815 | 415 | ||||||
Other assets | 7,030 | 6,383 | ||||||
Total assets | $ | 491,663 | $ | 2,168,836 | ||||
Liabilities and Equity (Deficit): |
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Liabilities: |
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Secured revolving credit facility | $ | 45,000 | $ | | ||||
Mortgage notes payable | 122,180 | | ||||||
Total long term, secured debt | 167,180 | | ||||||
Accounts payable and accrued expenses | 11,517 | 8,908 | ||||||
Dividends payable | 37,600 | 30,438 | ||||||
Accrued interest payable | 81 | | ||||||
Deferred revenue | 1,581 | 33 | ||||||
Below-market lease liabilities, net of accumulated amortization of $300 and $4 | 6,077 | 458 | ||||||
Liabilities related to assets held-for-sale (includes consolidated VIEs of $0 and $2,374,516, respectively) | | 2,380,162 | ||||||
Derivative instruments, at fair value | 302 | | ||||||
Other liabilities | 852 | 665 | ||||||
Total liabilities | 225,190 | 2,420,664 | ||||||
Commitments and contingencies | | | ||||||
Equity (Deficit): |
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Common stock, par value $0.001, 100,000,000 and 96,000,000 shares authorized, 71,313,043 and 56,731,002 shares issued and outstanding at December 31, 2013 and 2012, respectively. | 71 | 57 | ||||||
Common stock, Class B-1, par value $0.001, 0 and 2,000,000 shares authorized, issued and outstanding at December 31, 2013 and 2012, respectively. | | 2 | ||||||
Common stock, Class B-2, par value $0.001, 0 and 2,000,000 shares authorized, issued and outstanding at December 31, 2013 and 2012, respectively. | | 2 | ||||||
Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $88,146, 3,525,822 shares authorized, issued and outstanding at December 31, 2013 and 2012, respectively. | 85,235 | 85,235 | ||||||
Additional paid-in-capital | 1,149,896 | 1,102,227 | ||||||
Accumulated other comprehensive loss | (1,405 | ) | (95,265 | ) | ||||
Accumulated deficit | (967,324 | ) | (1,344,989 | ) | ||||
Total Gramercy Property Trust Inc. stockholders' equity (deficit) | 266,473 | (252,731 | ) | |||||
Non-controlling interest | | 903 | ||||||
Total equity (deficit) | 266,473 | (251,828 | ) | |||||
Total liabilities and equity (deficit) | $ | 491,663 | $ | 2,168,836 |
The accompanying notes are an integral part of these financial statements.
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Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues |
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Management fees | $ | 40,896 | $ | 34,667 | $ | 7,336 | ||||||
Rental revenue | 12,181 | 267 | | |||||||||
Investment income | 1,717 | 600 | | |||||||||
Operating expense reimbursements | 1,203 | 174 | | |||||||||
Other income | 707 | 1,113 | 436 | |||||||||
Total revenues | 56,704 | 36,821 | 7,772 | |||||||||
Expenses |
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Property operating expenses: |
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Property management expenses | 20,868 | 21,380 | 10,099 | |||||||||
Property operating expenses: | 1,411 | 1,846 | (4,152 | ) | ||||||||
Total property operating expenses | 22,279 | 23,226 | 5,947 | |||||||||
Other-than-temporary impairment | 3,339 | | | |||||||||
Portion of impairment recognized in other comprehensive loss | (1,337 | ) | | | ||||||||
Net impairment recognized in earnings | 2,002 | | | |||||||||
Interest expense | 1,732 | | | |||||||||
Depreciation and amortization | 5,675 | 256 | 136 | |||||||||
Management, general and administrative | 18,210 | 25,335 | 22,150 | |||||||||
Unrealized loss on derivative instruments | 115 | | | |||||||||
Acquisition expenses | 2,808 | 111 | | |||||||||
Total expenses | 52,821 | 48,928 | 28,233 | |||||||||
Income (loss) from continuing operations before equity in income (loss) from joint ventures and provisions for taxes | 3,883 | (12,107 | ) | (20,461 | ) | |||||||
Equity in net income (loss) of joint ventures | (5,662 | ) | (2,904 | ) | 121 | |||||||
Loss from continuing operations before provision for taxes and discontinued operations | (1,779 | ) | (15,011 | ) | (20,340 | ) | ||||||
Provision for taxes | (6,393 | ) | (3,330 | ) | (563 | ) | ||||||
Loss from continuing operations | (8,172 | ) | (18,341 | ) | (20,903 | ) | ||||||
Income (loss) from discontinued operations | 5,057 | (169,174 | ) | 70,034 | ||||||||
Gain on sale of joint venture interest to a director related entity | 1,317 | | | |||||||||
Gain on settlement of debt | | | 285,634 | |||||||||
Net gains from disposals | 389,140 | 15,967 | 2,712 | |||||||||
Provision for taxes | (2,515 | ) | | | ||||||||
Income (loss) from discontinued operations | 392,999 | (153,207 | ) | 358,380 | ||||||||
Net income (loss) attributable to Gramercy Property Trust Inc. | 384,827 | (171,548 | ) | 337,477 | ||||||||
Accrued preferred stock dividends | (7,162 | ) | (7,162 | ) | (7,162 | ) | ||||||
Net income (loss) available to common stockholders | $ | 377,665 | $ | (178,710 | ) | $ | 330,315 | |||||
Other comprehensive income (loss): |
||||||||||||
Unrealized gain (loss) on available for sale debt securities | (3,221 | ) | 174,331 | (279,243 | ) | |||||||
Reclassification adjustment for other-than-temporary impairment in net income (loss) |
2,002 | 169,197 | 18,423 | |||||||||
Unrealized gain (loss) on derivative instruments | (187 | ) | 2,146 | (19,334 | ) | |||||||
Reclassification of unrealized holding gains on securities and derivative instruments due to the disposal of Gramery Finance | 95,265 | | | |||||||||
Other comprehensive income (loss) | 93,859 | 345,674 | (280,154 | ) | ||||||||
Comprehensive income (loss) attributable to Gramercy Property Trust Inc. | 478,686 | 174,126 | 57,323 | |||||||||
Comprehensive income (loss) attributable to common stockholders | $ | 471,524 | $ | 166,964 | $ | 50,161 | ||||||
Basic earnings per share: |
||||||||||||
Net loss from continuing operations, after preferred dividends | $ | (0.25 | ) | $ | (0.49 | ) | $ | (0.55 | ) | |||
Net income (loss) from discontinued operations | 6.39 | (2.95 | ) | 7.13 | ||||||||
Net income (loss) available to common stockholders | $ | 6.14 | $ | (3.44 | ) | $ | 6.58 | |||||
Diluted earnings per share: |
||||||||||||
Net loss from continuing operations, after preferred dividends | $ | (0.25 | ) | $ | (0.49 | ) | $ | (0.55 | ) | |||
Net income (loss) from discontinued operations | 6.39 | (2.95 | ) | 7.13 | ||||||||
Net income (loss) available to common stockholders | $ | 6.14 | $ | (3.44 | ) | $ | 6.58 | |||||
Basic weighted average common shares outstanding | 61,500,847 | 51,976,462 | 50,229,102 | |||||||||
Diluted weighted average common shares and common share equivalents outstanding | 61,500,847 | 51,976,462 | 50,229,102 |
The accompanying notes are an integral part of these financial statements.
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Common Stock | Common Stock, Class B-1 | Common Stock, Class B-2 | Series A Preferred Stock | Additional Paid-In-Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings/ (Accumulated Deficit) |
Total Gramercy Property Trust Inc. |
Non-controlling interest | Total | |||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 49,984,559 | $ | 50 | | $ | | | $ | | $ | 85,235 | $ | 1,078,198 | $ | (160,785 | ) | $ | (1,496,594 | ) | $ | (493,896 | ) | $ | 903 | $ | (492,993 | ) | |||||||||||||||||||||||||
Net income | | | | | | | | | | 337,477 | 337,477 | | 337,477 | |||||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on derivative instruments | | | | | | | | | (19,334 | ) | | (19,334 | ) | | (19,334 | ) | ||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities available for sale | | | | | | | | | (260,820 | ) | | (260,820 | ) | | (260,820 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of stock stock purchase plan | 20,448 | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||||||
Stock based compensation fair value | 1,081,259 | | | | | | | 2,402 | | | 2,402 | | 2,402 | |||||||||||||||||||||||||||||||||||||||
Dividends accrued on preferred stock | | | | | | | | | | (7,162 | ) | (7,162 | ) | | (7,162 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2011 | 51,086,266 | $ | 50 | | $ | | | $ | | $ | 85,235 | $ | 1,080,600 | $ | (440,939 | ) | $ | (1,166,279 | ) | $ | (441,333 | ) | $ | 903 | $ | (440,430 | ) | |||||||||||||||||||||||||
Net loss | | | | | | | | | | (171,548 | ) | (171,548 | ) | | (171,548 | ) | ||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on derivative instruments | | | | | | | | | 2,146 | | 2,146 | | 2,146 | |||||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities available for sale | | | | | | | | | 343,528 | | 343,528 | | 343,528 | |||||||||||||||||||||||||||||||||||||||
Issuance of stock stock purchase plan | 36,324 | 1 | | | | | | 185 | | | 186 | | 186 | |||||||||||||||||||||||||||||||||||||||
Stock based compensation fair value | 2,608,412 | 3 | | | | | | 2,429 | | | 2,432 | | 2,432 | |||||||||||||||||||||||||||||||||||||||
Issuance of stock | 3,000,000 | 3 | 2,000,000 | 2 | 2,000,000 | 2 | | 19,013 | | | 19,020 | | 19,020 | |||||||||||||||||||||||||||||||||||||||
Dividends accrued on preferred stock | | | | | | | | | | (7,162 | ) | (7,162 | ) | | (7,162 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2012 | 56,731,002 | $ | 57 | 2,000,000 | $ | 2 | 2,000,000 | $ | 2 | $ | 85,235 | $ | 1,102,227 | $ | (95,265 | ) | $ | (1,344,989 | ) | $ | (252,731 | ) | $ | 903 | $ | (251,828 | ) |
The accompanying notes are an integral part of these financial statements.
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Common Stock | Common Stock, Class B-1 | Common Stock, Class B-2 | Series A Preferred Stock | Additional Paid-In-Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings/ (Accumulated Deficit) |
Total Gramercy Property Trust Inc. |
Non-controlling interest | Total | |||||||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2012 | 56,731,002 | $ | 57 | 2,000,000 | $ | 2 | 2,000,000 | $ | 2 | $ | 85,235 | $ | 1,102,227 | $ | (95,265 | ) | $ | (1,344,989 | ) | $ | (252,731 | ) | $ | 903 | $ | (251,828 | ) | |||||||||||||||||||||||||
Net income | | | | | | | | | | 384,827 | 384,827 | | 384,827 | |||||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on derivative instruments | | | | | | | | | 9,914 | | 9,914 | | 9,914 | |||||||||||||||||||||||||||||||||||||||
Change in net unrealized gain on debt securities available for sale | | | | | | | | | (1,219 | ) | | (1,219 | ) | | (1,219 | ) | ||||||||||||||||||||||||||||||||||||
Change in net unrealized loss on securities available for sale | | | | | | | | | 23,083 | | 23,083 | | 23,083 | |||||||||||||||||||||||||||||||||||||||
Gramercy Finance disposal |
| | | | | | | | 62,082 | | 62,082 | (42 | ) | 62,040 | ||||||||||||||||||||||||||||||||||||||
Conversion of Class B-1 & Class B-2 shares into common stock | 4,000,000 | 4 | (2,000,000 | ) | (2 | ) | (2,000,000 | ) | (2 | ) | | | | | | | | |||||||||||||||||||||||||||||||||||
Issuance of stock | 11,535,200 | 12 | | | | | | 45,520 | | | 45,532 | | 45,532 | |||||||||||||||||||||||||||||||||||||||
Issuance of stock stock purchase plan | 9,002 | | | | | | | 13 | | | 13 | | 13 | |||||||||||||||||||||||||||||||||||||||
Stock based compensation fair value(1) | (962,161 | ) | (2 | ) | | | | | | 2,136 | | | 2,134 | | 2,134 | |||||||||||||||||||||||||||||||||||||
Liquidation of non- controlling interest | | | | | | | | | | | | (861 | ) | (861 | ) | |||||||||||||||||||||||||||||||||||||
Dividends accrued on preferred stock | | | | | | | | | | (7,162 | ) | (7,162 | ) | | (7,162 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 71,313,043 | $ | 71 | | $ | | | $ | | $ | 85,235 | $ | 1,149,896 | $ | (1,405 | ) | $ | (967,324 | ) | $ | 266,473 | $ | | $ | 266,473 |
(1) | In the first quarter of 2013, the Company excluded unvested restricted share units from the outstanding share count. |
The accompanying notes are an integral part of these financial statements.
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Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating Activities |
||||||||||||
Net income (loss) | $ | 384,827 | $ | (171,548 | ) | $ | 337,477 | |||||
Adjustments to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization | 6,383 | 1,195 | 69,430 | |||||||||
Amortization of leasehold interests | | | (2,698 | ) | ||||||||
Amortization of acquired leases to rental revenue | (65 | ) | (188 | ) | (54,420 | ) | ||||||
Amortization of deferred costs | 175 | 3,719 | 4,749 | |||||||||
Amortization of discount and other fees | (10,577 | ) | (25,704 | ) | (33,312 | ) | ||||||
Payment of capitalized tenant leasing costs | | (61 | ) | (2,072 | ) | |||||||
Payment for lease inducement costs | (2,630 | ) | | | ||||||||
Straight-line rent adjustment | (2,225 | ) | (188 | ) | (6,772 | ) | ||||||
Non-cash impairment charges | 9,643 | 206,122 | 19,492 | |||||||||
Gain on liquidation of non-controlling interest | (611 | ) | | | ||||||||
Net gain on sale of properties and lease terminations | | (15,915 | ) | (2,712 | ) | |||||||
Impairment on business acquisition, net | | | (59 | ) | ||||||||
Net realized gain on loans | | 108 | (16,643 | ) | ||||||||
Net realized gain on disposal of Gramercy Finance | (389,140 | ) | | | ||||||||
Distributions from joint ventures | 7,985 | | | |||||||||
Equity in net loss of joint ventures | 6,466 | 8,515 | 1,977 | |||||||||
Gain on extinguishment of debt | | | (300,909 | ) | ||||||||
Amortization of stock compensation | 2,149 | 2,433 | 2,243 | |||||||||
Provision for loan losses | | (7,181 | ) | 48,180 | ||||||||
Unrealized gain on derivative instruments | 115 | | 16 | |||||||||
Net realized loss on sale of joint venture investment to a director related entity |
(1,317 | ) | | | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Restricted cash | (1,108 | ) | 412 | 2,803 | ||||||||
Tenant and other receivables | 588 | (2,803 | ) | 27,693 | ||||||||
Accrued interest | 5,780 | 12,393 | 1,097 | |||||||||
Other assets | 13,710 | (11,285 | ) | 8,896 | ||||||||
Accounts payable, accrued expenses and other liabities | (2,362 | ) | 777 | 22,306 | ||||||||
Deferred revenue | 1,617 | (518 | ) | (39,657 | ) | |||||||
Net cash provided by operating activities | 29,403 | 283 | 87,105 | |||||||||
Investing Activities |
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Capital expenditures and leasehold costs | (8,345 | ) | (2,649 | ) | (7,752 | ) | ||||||
Payment for acquistions of real estate investments | (283,148 | ) | (27,125 | ) | | |||||||
Proceeds from sale of joint venture investment | | | 387 | |||||||||
Proceeds from sale of securities available for sale | | | 65,584 | |||||||||
Proceeds from sale of joint venture investment to a director related entity | 8,275 | | | |||||||||
Proceeds from sale of real estate | | 77,257 | 22,895 | |||||||||
Proceeds from disposal of Gramercy Finance | 6,291 | | | |||||||||
New loan investment originations and funded commitments | | (19,295 | ) | (293,450 | ) | |||||||
Principal collections on investments | 34,990 | 254,789 | 329,975 | |||||||||
Proceeds from loan syndications | | 15,300 | | |||||||||
Investment in commercial mortgage-backed securities | | (535 | ) | (84,871 | ) | |||||||
Distribution received from joint ventures | 21,642 | 411 | 668 | |||||||||
Investment in joint ventures | (1,750 | ) | (58,911 | ) | 372 | |||||||
Change in accrued interest income | | | 71 | |||||||||
Proceeds from repayments of servicing advance receivable | 5,953 | | | |||||||||
Sale of marketable investments | | | 6,560 | |||||||||
Change in restricted cash from investing activities | | 7,887 | 8,271 | |||||||||
Deferred investment costs | | 1,159 | 2,423 | |||||||||
Net cash provided by (used by) investing activities | (216,092 | ) | 248,288 | 51,133 |
The accompanying notes are an integral part of these financial statements.
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Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Financing Activities |
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Distribution to non-controlling interest holders | (250 | ) | | | ||||||||
Purchase of interest rate caps | | | (1,277 | ) | ||||||||
Repayment of collateralized debt obligations | (85,912 | ) | (282,548 | ) | (164,977 | ) | ||||||
(Repurchase) issuance of collateralized debt obligations | | | (33,997 | ) | ||||||||
Proceeds from mortgage note payables | 67,255 | | | |||||||||
Repayment of mortgage notes | (771 | ) | | (33,315 | ) | |||||||
Proceeds from stock options excerised | | | 160 | |||||||||
Cash transfer pursuant to Settlement Agreement | | | (37,148 | ) | ||||||||
Proceeds from secured credit faciliity | 45,000 | | | |||||||||
Proceeds from acquisition financing | | | | |||||||||
Deferred financing costs and other liabilities | (3,546 | ) | | (3,742 | ) | |||||||
Net proceeds of sale of common stock | 45,532 | 2,555 | | |||||||||
Proceeds from sale of repurchased bonds | 34,364 | | | |||||||||
Change in restricted cash from financing activities | 22,948 | (26,901 | ) | 78,938 | ||||||||
Net cash (used by) provided by financing activities | 124,620 | (306,894 | ) | (195,358 | ) | |||||||
Net (decrease) increase in cash and cash equivalents | (62,069 | ) | (58,323 | ) | (57,120 | ) | ||||||
Cash and cash equivalents at beginning of period | 105,402 | 163,725 | 220,845 | |||||||||
Cash and cash equivalents at end of period | $ | 43,333 | $ | 105,402 | $ | 163,725 | ||||||
Non-cash activity |
||||||||||||
Deferred gain (loss) and other non-cash activity related to derivatives | $ | | $ | | $ | (19,334 | ) | |||||
Land acquired for consideration of a note payable | $ | 4,839 | $ | | $ | | ||||||
Debt assumed in acquisition of real estate | $ | 53,889 | $ | | $ | | ||||||
Mortgage loans, mezzanine loans and related interest satisfied in connection with deed-in-lieu of foreclosure and settlement agreement | $ | | $ | | $ | 721,404 | ||||||
Non-cash assets transferred in connection with deed-in-lieu of foreclosure and settlement agreement | $ | | $ | | $ | 2,776,447 | ||||||
Mortgages and liabilities transferred in connection with deed-in-lieu of foreclosure and settlement agreement | $ | | $ | | $ | 2,378,324 | ||||||
Supplemental cash flow disclosures |
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Interest paid | $ | 17,902 | $ | 67,110 | $ | 140,687 | ||||||
Income taxes paid | $ | 9,237 | $ | 5,624 | $ | 955 |
The accompanying notes are an integral part of these financial statements.
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Gramercy Property Trust Inc., or the Company, is a fully-integrated, self-managed commercial real estate investment company focused on acquiring and managing income-producing industrial and office properties net leased to high quality tenants in major markets throughout the United States. The Company also operates an asset management business that manages for third-parties, including the Companys Bank of America Portfolio joint venture, commercial real estate assets.
The Company was founded in 2004 as a specialty finance Real Estate Investment Trust, or REIT, focused on originating and acquiring loans and securities related to commercial and multifamily properties. In July 2012, following a strategic review, the Companys board of directors announced a repositioning of the Company as an equity REIT focused on acquiring and managing income producing net leased real estate. To reflect this transformation, in April 2013 the Company changed its name from Gramercy Capital Corp. to Gramercy Property Trust Inc. and began trading on the New York Stock Exchange under the new symbol GPT.
The Company seeks to acquire and manage a diversified portfolio of high quality net leased properties that generates stable, predictable cash flows and protects investor capital over a long investment horizon. The Company expects that these properties generally will be leased to a single tenant. Under a net lease, the tenant typically bears the responsibility for all property related expenses such as real estate taxes, insurance, and repair and maintenance costs. This lease structure provides an owner cash flows over the term of the lease that are more stable and predictable than other forms of leases, and minimizes the ongoing capital expenditures often required with other property types.
The Company approaches the net leased market as a value investor, looking to identify and acquire net leased properties that offer attractive risk adjusted returns throughout market cycles. The Company focuses primarily on industrial and office properties, in major markets where strong demographic and economic growth offer, a higher probability of producing long term rent growth and/or capital appreciation.
As of December 31, 2013, the Company owns, either directly or in joint ventures, a portfolio of 107 net leased industrial and office properties with 99% occupancy. Tenants include Bank of America, N.A, Kar Auction Services, E.F. Transit, Amcor Rigid Plastics USA, Preferred Freezer Services of Hialeah LLC and others. As of that date, the Companys asset management business, which operates under the name Gramercy Asset Management, manages for third-parties approximately $1,400,000 of commercial real estate assets.
During the year ended December 31, 2013, the Company acquired 29 properties aggregating approximately 3,892,000 square feet for a total purchase price of approximately $340,786.
The Company has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent it distributes its taxable income, if any, to its stockholders. The Company has in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.
The Company conducts substantially all of its operations through its operating partnership, GPT Property Trust LP, or the Operating Partnership. The Company is the sole general partner of its Operating Partnership. The Companys Operating Partnership conducts its commercial real estate investment business through various wholly-owned entities and its realty management business primarily through a wholly-owned TRS.
On March 15, 2013, the Company disposed of its Gramercy Finance segment and exited the commercial real estate finance business. The disposal was completed pursuant a purchase and sale agreement to transfer the collateral management and subspecial servicing agreements for the Companys three Collateralized Debt Obligations, CDO 2005-1, CDO 2006-1 and CDO 2007-1, or the CDOs, to CWCapital Investments LLC or
80
CWCapital for $6,291, in cash after expenses. The Company retained its non-investment grade subordinate bonds, preferred shares and ordinary shares, or the Retained CDO Bonds, which may provide the Company with the potential to recoup additional proceeds over the remaining life of the CDOs based upon resolution of underlying assets within the CDOs. However, there is no guarantee that the Company will realize any proceeds from the Retained CDO Bonds, or what the timing of these proceeds may be. The carrying value of the Retained CDO Bonds as of December 31, 2013 is approximately $6,762. In February 2013, the Company also sold a portfolio of repurchased notes previously issued by two of its three CDOs, generating cash proceeds of $34,381. In addition, the Company expects to receive additional cash proceeds for past CDO servicing advances including accrued interest at the prime rate of 3.25%, when specific assets within the CDOs are liquidated. For the year ended December 31, 2013, the Company received reimbursements of $6,055 and the carrying value of the receivable for servicing advance reimbursements as of December 31, 2013 is $8,758, including accrued interest. On March 15, 2013, the Company deconsolidated the assets and liabilities of Gramercy Finance from the Companys Condensed Consolidated Financial Statements and recognized a gain on the disposal of $389,140 within discontinued operations. For a further discussion regarding the disposal of the Gramercy Finance segment see Note 3 Dispositions and Assets Held-for-Sale.
Certain prior year balances have been reclassified to conform with the current year presentation for assets classified as discontinued operations. Certain reclassifications were made to the Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income (Loss) and footnote disclosures for all periods presented to reflect held-for-sale and discontinued operations as of December 31, 2013.
The Consolidated Financial Statements include the Companys accounts and those of the Companys subsidiaries which are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIEs, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIEs anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each entitys equity investment at risk to absorb losses. As of December 31, 2012, the Company had consolidated its three CDOs, which were classified as held-for-sale VIEs. On March 15, 2013, following the disposal of the Gramercy Finance segment as more fully discussed in Note 1, the CDOs were deconsolidated as the Company determined that it was no longer the primary beneficiary of the VIEs. For further discussion on the deconsolidation of the CDOs, see the discussion on VIEs below.
Entities which the Company does not control and are considered VIEs, but where the Company is not the primary beneficiary are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.
The Company records acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. The Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above- and below-market leases and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase in the case of below-market leases or a decrease in the case of above-market leases to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized to depreciation and amortization expense over the remaining term of the associated lease.
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The Company assesses the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, the Company amortizes such below-market lease value into rental revenue over the renewal period.
Acquired real estate investments that do not meet the definition of a business combination are recorded at cost. Acquired real estate investments which are under construction are considered build-to-suit transactions and are also recorded at cost. In build-to-suit transactions, the Company engages a developer to construct a property or provide funds to a tenant to develop a property. The Company capitalizes the funds provided to the developer/tenant and the internal costs of interest and real estate taxes, if applicable, during the construction period.
Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.
In leasing space, the Company may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership of such improvements. If the Company is considered the owner of the leasehold improvements, the Company capitalizes the amount of the tenant allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.
The Company also reviews the recoverability of the propertys carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the propertys use and eventual disposition. These estimates consider factors such as changes in strategy resulting in an increased or decreased holding period, expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose. These assessments are recorded as an impairment loss in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made. The estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset to be held and used, the new cost basis will be depreciated or amortized over the remaining useful life of that asset.
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The Company accounts for its investments in joint ventures under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity interest in net income (loss) and cash contributions and distributions. The amount of the investments on the Consolidated Balance Sheets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to the Company. As of December 31, 2013 and 2012, the Company had equity investments of $39,385 and $72,742 in unconsolidated joint ventures at December 31, 2013 and 2012, respectively.
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Restricted Cash
The Company has restricted cash of $179 and $12 at December 31, 2013 and 2012, respectively, which includes cash held in escrow in connection with property acquisitions and reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.
The Company had no consolidated VIEs as of December 31, 2013. The following is a summary of the Companys involvement with unconsolidated VIEs as of December 31, 2013:
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Company carrying value assets |
Company carrying value liabilities |
Face value of assets held by the VIEs |
Face value of liabilities issued by the VIEs |
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Assets |
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Unconsolidated VIEs | ||||||||||||||||
Retained CDO Bonds(1) | $ | 6,762 | (1) | $ | | $ | 2,156,218 | $ | 1,948,901 |
(1) | Retained CDO Bonds were previously eliminated in consolidation. |
The following is a summary of the Companys involvement with VIEs as of December 31, 2012:
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Company carrying value assets |
Company carrying value liabilities |
Face value of assets held by the VIE |
Face value of liabilities issued by the VIE |
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Liabilities of assets held for sale |
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Consolidated VIEs | ||||||||||||||||
Collateralized debt obligations | $ | 1,913,353 | (1) | $ | 2,374,516 | $ | 2,469,856 | $ | 2,593,392 |
(1) | Collateralized debt obligations are a component of non-recourse liabilities of consolidated VIEs held for sale on the Consolidated Balance Sheets. |
On March 15, 2013, as a result of the disposal of the Gramercy Finance segment as more fully described in Note 1, the Company deconsolidated three VIEs, the CDOs. The Company was the collateral manager of
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the three CDOs and in its capacity as collateral manager the Company made decisions related to the collateral that most significantly impacted the economic outcome of the CDOs, which was the basis upon which the Company concluded that it was the primary beneficiary of the CDOs as of December 31, 2012. In connection with the disposal of Gramercy Finance, the Company transferred the collateral management and sub-special servicing agreements for its three CDOs to CWCapital, thereby removing the Company as the collateral manager and its ability to make any and all decisions related to the collateral, including those that would most significantly impact the economic outcome of the CDOs. As of March 15, 2013, the Company had no continuing involvement with the collateral to the CDOs, and as a result, the Company determined that it was no longer the primary beneficiary of the CDOs, and therefore deconsolidated the CDOs.
The Company has retained its subordinate debt and equity ownership, or the Retained CDO Bonds, in the CDOs, which were previously eliminated in consolidation and were not sold as part of the disposal of Gramercy Finance. The Retained CDO Bonds may provide the potential for the Company to receive continuing cash flows in the future, however, there is no guarantee that the Company will realize any proceeds from the Retained CDO Bonds, or what the timing of these proceeds might be. These interests have been recognized at fair value as the Retained CDO Bonds on the Consolidated Balance Sheets. For further discussion of the measurement of fair value of the Retained CDO Bonds see Note 11.
As further discussed above, on March 15, 2013, the Company recognized an asset in Retained CDO Bonds in connection with the disposal of the Gramercy Finance segment. The Company is not obligated to provide any financial support to these CDOs. The Companys maximum exposure to loss is limited to its interest in the Retained CDO Bonds and the Company does not control the activities that most significantly impact the VIEs economic performance.
As of December 31, 2013, the Company had no assets classified as held for sale.
As of December 31, 2012, in connection with the Companys efforts to exit Gramercy Finance and the commercial real estate finance business, the Company classified the assets and liabilities of Gramercy Finance as held-for-sale. As of December 31, 2012, the Company had assets classified as held for sale of $1,952,264 related to the disposal of Gramercy Finance. For the year ended December 31, 2012, the Company recorded impairment charges of $27,180 within discontinued operations on loans and real estate investments owned to adjust the carrying value to the lower of cost or fair value and other-than-temporary impairments of $128,087 within discontinued operations as the Company no longer could express the intent to hold CMBS investments until the recovery of amortized cost for all CMBS in an unrealized loss position. On March 15, 2013, the Company completed the disposal of Gramercy Finance. For a further discussion regarding the measurement of financial instruments and real estate assets of the Gramercy Finance segment see Note 11 for the discussion on the valuation and Note 3 and Note 6 for the discussion on the disposal of the assets and liabilities related to the assets of Gramercy Finance.
Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less costs to sell. Once an asset is classified as held-for-sale, depreciation expense is no longer recorded and current and prior periods are reclassified as discontinued operations. As of December 31, 2013 and 2012, the Company had real estate investments held-for-sale of $0 and $88,806, respectively. The Company recorded impairment charges of $0, $35,043 and $1,237 during the years ended December 31, 2013, 2012 and 2011, respectively, within discontinued operations related to real estate investments classified as held-for-sale.
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A gain on settlement of debt is recorded when the carrying amount of the liability settled exceeds the fair value of the assets transferred to the lender or special servicer. In 2013 and 2012, the Company did not recognize any gain on settlement of debt.
Pursuant to the execution of the Settlement Agreement, the transfer of 867 Gramercy Asset Management properties, with an aggregate carrying value of $2,631,902 and associated mortgage, mezzanine and other liabilities of $2,843,345, occurred in September and December 2011 and the Company recognized a gain on settlement of debt of $285,634 in connection with such transfer as part of discontinued operations on the Consolidated Statements of Operations and Comprehensive Income (Loss). The gain on settlement of debt includes $54,083 of gain on disposal of assets. During the year ended December 31, 2011, the Company recorded $2,489 of legal and professional fees related to the restructuring of the Goldman Mortgage Loan and the Goldman Mezzanine Loans in the Consolidated Statements of Operations and Comprehensive Income (Loss).
In July 2011, the Dana portfolio, which consisted of 15 properties totaling approximately 3,800,000 rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. The Company recognized gain on settlement of debt of $74,191 for the year ended December 31, 2011 as part of discontinued operations on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company realized a $15,892 gain on the disposal the assets, which is included in the gain on settlement of debt.
Tenant and other receivables are derived from management fees, rental revenue and tenant reimbursements.
Management fees, including incentive management fees, are recognized as earned in accordance with the terms of the management agreements. The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.
Rental revenue is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.
Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of December 31, 2013 and 2012 were $449 and $211, respectively. The Company continually reviews receivables related to rent, tenant reimbursements, management fees, including incentive fees, and unbilled rent receivables and determines collectability by taking into consideration the tenant or asset management clients payment history, the financial condition of the tenant or asset management client, business conditions in the industry in which the tenant or asset management client operates and economic conditions in the area in which the property or asset management client is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable.
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Servicing advances receivable is comprised of the accrual for the reimbursement of servicing advances recognized as part of the disposal of Gramercy Finance in March 2013. The accrual for reimbursement of servicing advances incurred while the Company was the collateral manager of the CDOs includes expenses such as legal fees incurred to negotiate modifications and foreclosures on loan investments, professional fees incurred on certain loans, or fees for services such as appraisals obtained on real estate properties that served as collateral for loan investments. These reimbursement proceeds will be realized when the related assets within the CDOs are liquidated in accordance with the terms of the collateral management and sub-special servicing agreements, which were sold in connection with the disposal of Gramercy Finance. The Company has no control over the timing of the resolution of the related assets, however, the Company earns accrued interest at the prime rate for the time that these reimbursements are outstanding. For the year ended December 31, 2013 the Company received reimbursements of $6,055. As of December 31, 2013, the servicing advances receivable is $8,758.
The Company reviews the servicing advances receivable on a quarterly basis and determines collectability by reviewing the expected resolution and timing of the underlying assets of the CDOs. As of December 31, 2013, the Company has reviewed the outstanding servicing advances and has determined that all amounts are collectible.
The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three CDOs, which the Company recognized at fair value in March 2013 in conjunction with the disposal of Gramercy Finance. Management estimated the timing and amount of cash flows expected to be collected and recognized an investment in the Retained CDO Bonds equal to the net present value of these discounted cash flows. There is no guarantee that the Company will realize any proceeds from this investment, or what the timing of investment income for the expected remaining life of the Retained CDO Bonds. The Company considers these investments to be not of high credit quality and does not expect a full recovery of interest and principal. Therefore, the Company has suspended interest income accruals on these investments. On a quarterly basis, the Company evaluates the Retained CDO Bonds to determine whether significant changes in estimated cash flows or unrealized losses on these investments, if any, reflect a decline in value which is other-than-temporary. If there is a decrease in estimated cash flows and the investment is in an unrealized loss position, the Company will record an other-than-temporary impairment in the Consolidated Statements of Operations and Comprehensive Income (Loss). To determine the component of the other-than-temporary impairment related to expected credit losses, the Company compares the amortized cost basis of the Retained CDO Bonds to the present value of the revised expected cash flows, discounted using the pre-impairment yield. Conversely, if the security is in an unrealized gain position and there is a decrease or significant increase in expected cash flows, the Company will prospectively adjust the yield using the effective yield method.
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For the year ended December 31, 2013, the Company recognized an other-than-temporary impairment, or OTTI, of $2,002, respectively, on its Retained CDO Bonds. The Companys Retained CDO Bonds have been in an unrealized loss position for less than twelve months. A summary of the Companys Retained CDO Bonds as of December 31, 2013 is as follows:
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Description | Number of Securities | Face Value |
Amortized Cost | Gross Unrealized Gain (Loss) | Other-than-temporary impairment | Fair Value |
Weighted Average Expected Life | |||||||||||||||||||||
Available for Sale, Non-investment Grade: |
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Retained CDO Bonds | 9 | $ | 356,711 | $ | 7,981 | $ | (1,219 | ) | $ | 2,002 | $ | 6,762 | 5.6 years | |||||||||||||||
Total | 9 | $ | 356,711 | $ | 7,981 | $ | (1,219 | ) | $ | 2,002 | $ | 6,762 | 5.6 years |
The following table summarizes the activity related to credit losses on the Retained CDO Bonds for the year ended December 31, 2013:
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Balance as of December 31, 2012 of credit losses on Retained CDO Bonds for which a portion of an OTTI was recognized in other comprehensive income | $ | | ||
Additions to credit losses: |
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On Retained CDO Bonds for which an OTTI was not previously recognized | 1,682 | |||
On Retained CDO Bonds for which an OTTI was previously recognized and a portion of an other-than-temporary impairment was recognized in other comprehensive income | 320 | |||
On Retained CDO Bonds for which an OTTI was previously recognized without any portion of other-than-temporary impairment recognized in other comprehensive income | | |||
Reduction for credit losses: | | |||
On Retained CDO Bonds for which no other-than-temporary impairment was recognized in other comprehensive income at current measurement date | | |||
On Retained CDO Bonds sold during the period | | |||
On Retained CDO Bonds charged off during the period | | |||
For increases in cash flows expected to be collected that are recognized over the remaining life of the Retained CDO Bonds | | |||
Balance as of December 31, 2013 of credit losses on Retained CDO Bonds for which a portion of an OTTI was recognized in other comprehensive income | $ | 2,002 |
The Company follows the acquisition method of accounting for business combinations. The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets and liabilities acquired.
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Above-market and below-market lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and managements estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The above-market lease values are amortized as a reduction of rental revenue over the remaining non-cancelable terms of the respective leases. The below-market lease values are amortized as an increase to rental revenue over the initial term of the respective leases. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the market lease intangibles will be written off to rental revenue.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as-if vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six months. Management also estimates costs to execute similar leases including leasing commissions and other related expenses. The value of in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable term of the respective leases. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the in-place lease intangible would be written off to depreciation and amortization expense.
Intangible assets and acquired lease obligations consist of the following:
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December 31, 2013 | December 31, 2012 | |||||||
Intangible assets: |
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In-place leases, net of accumulated amortization of $1,318 and $359 |
$ | 32,773 | $ | 3,639 | ||||
Above-market leases, net of accumulated amortization of $278 and $48 |
8,187 | 935 | ||||||
Amounts related to assets held for sale, net of accumulated amortization of $0 and $365 | | (188 | ) | |||||
Total intangible assets | $ | 40,960 | $ | 4,386 | ||||
Intangible liabilities: |
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Below-market leases, net of accumulated amortization of $300 and $1,395 |
$ | 6,077 | $ | 2,161 | ||||
Amounts related to liabilities held for sale, net of accumulated amortization of $0 and $1,391 | | (1,703 | ) | |||||
Total intangible liabilities | $ | 6,077 | $ | 458 |
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The following table provides the weighted-average amortization period as of December 31, 2013 for intangible assets and liabilities and the projected amortization expense for the next five years.
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Weighted-Average Amortization Period | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||
In-place leases | 12.3 | $ | 2,986 | $ | 2,986 | $ | 2,986 | $ | 2,986 | $ | 2,986 | |||||||||||||
Total to be included in depreciation and amorization expense | $ | 2,986 | $ | 2,986 | $ | 2,986 | $ | 2,986 | $ | 2,986 | ||||||||||||||
Above-market lease assets | 10.6 | $ | 843 | $ | 843 | $ | 843 | $ | 843 | $ | 843 | |||||||||||||
Below-market lease liabilities | 13.5 | (507 | ) | (507 | ) | (507 | ) | (507 | ) | (507 | ) | |||||||||||||
Total to be included as a reduction to rental revenue | $ | 336 | $ | 336 | $ | 336 | $ | 336 | $ | 336 |
The Company recorded $1,291, $80 and $23,374 of amortization of intangible assets as part of depreciation and amortization, including $3, $50 and $23,374 within discontinued operations for the years ended December 2013, 2012, and 2011, respectively. The Company recorded ($64), $188, and $54,420 of amortization of intangible assets and liabilities as an increase (decrease) to rental revenue, including ($34), $196 and $54,420 within discontinued operations for the years ended December 2013, 2012, and 2011, respectively.
Deferred costs include deferred financing costs that represent commitment fees, legal and other third-party costs associated with obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization is reflected as interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.
The Company has deferred certain expenditures related to the leasing of certain properties. Direct costs of leasing are deferred and amortized over the terms of the underlying leases.
The Company makes payments for certain expenses such as insurance and property taxes in advance of the period in which it receives the benefit. These payments are classified as other assets and amortized over the respective period of benefit relating to the contractual arrangement. The Company also escrows deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred financing costs at the time the transaction is completed.
The Company capitalizes its costs of software purchased for internal use and once the software is placed into service, the costs are amortized into expense on a straight-line basis over the assets' estimated useful life, which is generally three years. During the years ended December 31, 2013 and 2012, the Company had $705 and $0 of unamortized computer software costs, respectively. The Company did not record any amortization expense on capitalized software costs during the years ended December 31, 2013, 2012 or 2011. The Company will begin amortizing the software costs capitalized during the year ended December 31, 2013 in January 2014.
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The following table provides the weighted-average amortization period as of December 31, 2013 for capitalized software and the projected amortization expense for the next five years.
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Weighted-Average Amortization Period | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||
Capitalized software costs(1) | 3.0 | $ | 235 | $ | 235 | $ | 235 | $ | | $ | | |||||||||||||
Total to be included in depreciation and amorization expense | $ | 235 | $ | 235 | $ | 235 | $ | | $ | |
(1) | The Company may capitalize additional costs incurred related to the purchase of internal use software during 2014. |
Accounting for asset retirement obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation is recognized when incurred generally upon acquisition, construction, or development and (or) through the normal operation of the asset. The Company assessed the cost associated with its legal obligation to remediate asbestos in its properties known to contain asbestos and recorded the present value of the asset retirement obligation. As of December 31, 2013 and December 31, 2012 the Company has not recorded an asset retirement obligation liability. The Company recorded an expense of $0, $0, and $139 for the years ended December 31, 2013, 2012, and 2011, respectively, within discontinued operations.
At December 31, 2013, the Company measured financial instruments, including Retained CDO Bonds and derivative instruments on a recurring basis. At December 31, 2012, the Company measured financial instruments that were disposed of in the first quarter of 2013 in connection with the disposal of Gramercy Finance at fair value on a recurring basis and non-recurring basis. These financial instruments were deconsolidated at fair value in connection with the disposal of Gramercy Finance on March 15, 2013.
ASC 820-10, Fair Value Measurements and Disclosures, among other things, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The level of
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pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment utilized in measuring fair value financial instruments such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.
The three broad levels defined are as follows:
Level I This level is comprised of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in this category are highly liquid instruments with actively quoted prices.
Level II This level is comprised of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III This level is comprised of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions. Instruments that are generally included in this category are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.
For a further discussion regarding the measurement of financial instruments see Note 11, Fair Value of Financial Instruments.
Rental revenue from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor for these expenses and assumes the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.
Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.
Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by the Company, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.
The Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full
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accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.
The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.
Certain of the Companys asset management contracts include provisions that may allow it to earn additional fees, generally described as incentive fees or profit participation interests, based on the achievement of a targeted valuation of the managed assets or the achievement of a certain internal rate of return on the managed assets. The Company recognizes incentive fees on our asset management contracts based upon the amount that would be due pursuant to the contract, if the contract were terminated at the reporting date. If the contact may be terminated at will, revenue will only be recognized to the amount that would be due pursuant to that termination. If the incentive fee is a fixed amount, only a proportionate share of revenue is recognized at the reporting date, with the remaining fees recognized on a straight-line basis over the measurement period. The values of incentive management fees are periodically evaluated by management.
The Original Management Agreement was extended through execution of an Amended and Restated Asset Management Services Agreement, or the Management Agreement, effective as of December 1, 2013, and provides for a base management fee of $7,500 per year, payable monthly, plus the reimbursement of certain administrative and property related expenses. The Management Agreement is effective through December 31, 2016 with a one-year extension option through December 31, 2017, exercisable by KBSAS, and also provides incentive fees in the form of profit participation ranging from 10% 30% of incentive profits earned on sales.
The Original Management Agreement, which was in effect through December 1, 2013, provided a base management fee of $9,000 per year, payable monthly, plus the reimbursement of all property related expenses paid, and an incentive fee, or the Threshold Value Profits Participation, in an amount equal to the greater of: (a) $3,500 or (b) 10% of the amount, if any, by which the portfolio equity value exceeds $375,000 (as adjusted for future cash contributions into, and distributions out of, KBSAS by KBS REIT). The Threshold Value Profits Participation was capped at a maximum of $12,000 and was payable 60 days after the earlier to occur of June 30, 2014 (or March 31, 2015 upon satisfaction of certain extension conditions including the payment by KBSAS of a $750 extension fee) and the date on which KBSAS, directly or indirectly sells, conveys or otherwise transfers at least 90% of the KBS portfolio.
In the second quarter of 2013, after consideration of the termination provisions of the agreement and the sales of real estate assets made to date, the Company recognized incentive fees of $5,700 related to its Original Management Agreement, with KBS Acquisition Sub, LLC, or KBSAS, a wholly-owned subsidiary of KBS Real Estate Investment Trust, Inc., or KBS REIT, pursuant to which the Company provides asset management services to KBSAS with respect to a portfolio of office and banks branches, or the KBS Portfolio. Subsequently, following the signing of the Management Agreement, KBSAS paid $12,000 to the Company in satisfaction of the Companys profit participation interest under the Original Management Agreement. For the year ended December 31, 2013, 2012 and 2011, the Company recognized incentive fees of $10,223, $1,277 and $500, respectively.
Rent expense is recognized on a straight-line basis regardless of when payments are due. Accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets as of December 31, 2013
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and 2012 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in management, general and administrative expense.
The Company has a stock-based compensation plan, described more fully in Note 12. The Company accounts for this plan using the fair value recognition provisions. The Company uses the Black-Scholes option-pricing model to estimate the fair value of a stock option award. This model requires inputs such as expected term, expected volatility, and risk-free interest rate. Further, the forfeiture rate also impacts the amount of aggregate compensation cost. These inputs are highly subjective and generally require significant analysis and judgment to develop.
Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award. The Companys policy is to grant options with an exercise price equal to the quoted closing market price of its stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation over the benefit period. For the years ended December 31, 2013, 2012 and 2011, basic EPS was determined by dividing net income allocable to common stockholders for the applicable period by the weighted-average number of shares of common stock outstanding during such period. Net income during the applicable period is also allocated to the time-based unvested restricted stock as these grants are entitled to receive dividends and are therefore considered a participating security. Time-based unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of time-based unvested restricted stock. For the year ended December 31, 2013, the Company had 678,784 weighted-average unvested restricted shares outstanding.
The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2013 and 2012.
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2013 | 2012 | |||||||
Dividend yield | 5.50 | % | 5.00 | % | ||||
Expected life of option | 5.0 years | 5.0 years | ||||||
Risk-free interest rate | 0.72 | % | 0.89 | % | ||||
Expected stock price volatility | 53.00 | % | 80.00 | % |
In the normal course of business, the Company is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and procedures including the use of derivatives. The Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative products that are considered plain vanilla derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.
The Company may from time to time use derivative instruments in connection with the private placement of equity. In October 2013, the Company entered into contingent value rights agreements, or CVR agreements,
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with the share purchasers. Pursuant to each CVR Agreement, the Company issued to each purchaser the number of contingent value rights, or CVRs, equal to the number of common stock purchased. On March 25, 2014, or the CVR Test Date, the Company will calculate the volume-weighted average price, or the VWAP, for the common stock for the 10 trading days period ending on, and including, March 25, 2014, or the CVR Period VWAP. On April 1, 2014, the Company will pay to the holder of the contingent value rights, in immediately available funds, an amount in cash, equal to (a) the number of contingent value rights held by the holder on the CVR Test Date multiplied by (b) the amount, not to exceed $0.46 equal to the difference between the per share purchase price of $4.11 and the CVR Period VWAP. These CVRs are not designated as hedge instruments. The CVRs do not qualify, nor did the Company intend for these instruments to qualify, as hedging instruments. At December 31, 2013, the CVRs have a fair value of $115 and were reported on the Consolidated Balance Sheet as a component of derivative instruments.
The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. To determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Derivative instruments that were assets or liabilities of the CDOs were classified as held-for-sale as of December 31, 2012 and then disposed of in the first quarter of 2013 in connection with the disposal of Gramercy Finance. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.
All hedges held by the Company are deemed effective based upon the hedging objectives established by the Companys corporate policy governing interest rate risk management. The effect of the Companys derivative instruments on its financial statements is discussed more fully in Note 12.
The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income, to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that the Company distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Companys net income and net cash available for distributions to stockholders. However, the Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as
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a REIT for U.S. federal income tax purposes. The Company is subject to certain state and local taxes. The Companys TRSs are subject to federal, state and local taxes.
For the years ended December 31, 2013, 2012 and 2011, the Company recorded $8,908, $3,330, and $563 of income tax expense, including $2,515, $0, and $0 within discontinued operations, respectively. Tax expense for each year is comprised of federal, state and local taxes. Income taxes, primarily related to the Companys TRSs, are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if the Company believes it is more likely than not that all or a portion of a deferred tax asset will not be realized. Any increase or decrease in a valuation allowance is included in the tax provision when such a change occurs.
The Companys policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating expense, respectively. As of December 31, 2013, 2012 and 2011, the Company did not incur any material interest or penalties.
The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, as long as their inclusion would not be anti-dilutive.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions. Prior to the disposal of Gramercy Finance in March 2013, the Company had also performed ongoing analysis of credit risk concentrations in its loan and other lending investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenants and other credit metrics.
One asset management client, KBS, accounted for 73%, 100% and 100% of the Companys management fee income for the years ended December 31, 2013, 2012 and 2011, respectively. One tenant accounted for 24% and 45% of the Companys rental revenue for the years ended December 31, 2013 and 2012, respectively. The Company did not have any rental revenue in continuing operations for the year ended December 31, 2011.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In February 2013, the FASB issued additional guidance on comprehensive income which requires the provision of information about the amounts reclassified out of accumulated other comprehensive income by component. This guidance also requires presentation on the Consolidated Statements of Operations and
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Comprehensive Income (Loss) or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, a cross-reference must be provided to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for reporting periods beginning after December 15, 2012 with early adoption permitted. The Companys adoption resulted in increased disclosures; however, it did not have a material effect on the Companys Consolidated Financial Statements.
The Company did not classify any assets as held-for-sale as of December 31, 2013. The Company classified Gramercy Finance as held-for-sale as of December 31, 2012. The following table summarizes the assets held-for-sale as of December 31, 2012.
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December 31, 2012 | ||||
Assets held for sale: |
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Real estate investments, at cost: |
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Land | $ | 20,074 | ||
Building and improvements | 17,592 | |||
Total real estate investments, at cost | 37,666 | |||
Less: accumulated depreciation | (2,965 | ) | ||
Real estate investments held for sale, net | 34,701 | |||
Restricted cash | 61,385 | |||
Loans and other lending investments, net | 784,945 | |||
Commercial mortgage-backed securities available for sale | 931,383 | |||
Investments in joint ventures | 59,244 | |||
Tenant and other receivables, net | 1,519 | |||
Derivative instruments, at fair value | 173 | |||
Accrued interest | 13,251 | |||
Acquired lease asets, net of accumulated amortization | 188 | |||
Deferred costs | 6,466 | |||
Other assets | 59,009 | |||
Total assets held for sale | $ | 1,952,264 |
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The following operating results for Gramercy Finance and the assets previously sold for the years ended December 31, 2013, 2012 and 2011 are included in discontinued operations for all periods presented:
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Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating Results: |
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Revenues | $ | 33,352 | $ | 162,059 | $ | 562,393 | ||||||
Operating expenses | (4,063 | ) | (54,747 | ) | (171,870 | ) | ||||||
Marketing, general and administrative(1) | (6,524 | ) | (18,508 | ) | (16,367 | ) | ||||||
Interest expense | (14,654 | ) | (88,159 | ) | (186,620 | ) | ||||||
Depreciation and amortization | (15 | ) | (967 | ) | (64,076 | ) | ||||||
Loans held for sale and CMBS OTTI | (7,641 | ) | (171,079 | ) | (18,423 | ) | ||||||
Provision for loan losses | | 7,838 | (48,180 | ) | ||||||||
Expense reimbursements(2) | 5,406 | | | |||||||||
Equity in net income from joint venture | (804 | ) | (5,611 | ) | (2,098 | ) | ||||||
Net income (loss) from operations | 5,057 | (169,174 | ) | 54,759 | ||||||||
Loss on sale of joint venture interests to a director related entity |
1,317 | | | |||||||||
Gain on extinguishment of debt | | | 300,909 | |||||||||
Net gains from disposals | 389,140 | 15,967 | 2,712 | |||||||||
Provision for taxes | (2,515 | ) | | | ||||||||
Net income (loss) from discontinued operations | $ | 392,999 | $ | (153,207 | ) | $ | 358,380 |
(1) | An accrual of $4,339 for the Transfer Tax Assessments on the Companys sale of a 45% joint venture interest in the leased fee of the 2 Herald Square property is included in management, general and administrative. For more information see Note 15. |
(2) | In the first quarter of 2013, the Company received reimbursements for enforcement costs of $5,406 incurred on the behalf of a pari-passu lender for one loan held by the CDOs, which the Company incurred in prior years. The Company fully reserved for these costs when incurred due to the uncertainty of recovery. |
Discontinued operations have not been segregated in the Consolidated Statements of Cash Flows.
On March 15, 2013, the Company disposed of Gramercy Finance and exited the commercial real estate finance business, as discussed more fully in Note 1. The Company reclassified the results of operations of Gramercy Finance in discontinued operations for the years ended December 31, 2013, 2012 and 2011. In 2013, the Company recognized a gain of $389,140 in discontinued operations related to the disposal. The gain was calculated based upon the difference between the proceeds received of $6,291, after expenses, the fair value of the Retained CDO Bonds of $8,492, the accrual for the reimbursement of past servicing advances paid plus accrued interest of $14,529 and the net difference of the carrying value of the liabilities and the assets of Gramercy Finance of ($421,911) as of the date of disposal, March 15, 2013.
The basis of the assets and liabilities of Gramercy Finance were derecognized as follows:
- | Loans and other lending investments were derecognized at the lower of cost or market value as of the date of disposal. The fair value of the loans was measured by an internally developed model which considered the price that a third-party would pay to assume the loans and other lending investments at the disposal date; |
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- | CMBS investments were derecognized at fair value as of the date of disposal. For CMBS investments in an unrealized loss position, the Company recognized an other-than-temporary impairment equal to the entire difference between the investments amortized cost basis and its fair value at the date of disposal which is included in net income from discontinued operations. For CMBS investments in an unrealized gain position as of the date of disposal, the Company recorded the unrealized gains as a component of accumulated other comprehensive income (loss) in stockholders equity; |
- | Derivative instruments were derecognized at fair value as of March 15, 2013. The derivatives were not terminated, but instead were transferred with the CDOs; and, |
- | The non-recourse CDOs were derecognized at carrying value, which represents the full amount of outstanding liabilities issued by the CDO trusts. |
For a further discussion regarding the measurement of financial instruments see Note 11.
The Company recognized other assets and other receivables retained in the disposal of Gramercy Finance and previously eliminated in consolidation as follows:
- | Retained CDO Bonds were recognized at the present value of cash flows expected to be collected, which is based upon managements assumptions and judgments regarding the resolution of the underlying assets; and, |
- | The accrual for reimbursement of past servicing advances is based upon actual expenses incurred by the Company plus accrued interest at the prime rate for the time from which the expenses were incurred through March 15, 2013. |
At December 31, 2012, the Company classified substantially all of its loan investments as held-for-sale and recorded an impairment of $882 to adjust the carrying value of seven loans to the lower of cost or market value. The fair value of the loans was measured by an internally developed model which considered the price that a third-party would pay to assume the loan at December 31, 2012. For a further discussion regarding the measurement of financial instruments see Note 11, Fair Value of Financial Instruments.
In connection with the disposal of Gramercy Finance, CMBS investments were classified as held-for-sale as of December 31, 2012. As of December 31, 2012, due to the expected disposal of Gramercy Finance at that reporting date, the Company recognized an other-than-temporary impairment of $128,087 for all CMBS investments in an unrealized loss position because it could no longer express the intent to hold its CMBS until maturity. On the date of disposal, March 15, 2013, the Company marked all CMBS to fair value and then recognized an other-than-temporary impairment of $84,690 for all CMBS in an unrealized loss position equal to the entire difference between the amortized cost basis and the fair value, before deconsolidating the Companys portfolio of CMBS. The Company recorded the unrealized gain portion of CMBS equal to the excess of the fair value over the amortized cost as a component of accumulated other comprehensive income (loss) in stockholders equity (deficit) before deconsolidation.
As of December 31, 2012, the Company designated real estate investments held-for-sale in connection with the disposal of Gramercy Finance and recorded impairment charges of $26,298 to adjust the carrying value to the lower of cost or market. The impairment is calculated by comparing the results of the companys marketing efforts and unsolicited purchase offers to the carrying value of the respective property. These real estate investments were disposed of in connection with the disposal of Gramercy Finance on March 15, 2013.
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As of December 31, 2012, restricted cash classified as held-for-sale in connection with the disposal of Gramercy Finance and disposed of on March 15, 2013, consisted of $61,305 on deposit with the trustee of the Companys CDOs.
As of December 31, 2012, deferred financing costs of $6,401 related to the CDOs were classified as held-for-sale in connection with the disposal of Gramercy Finance and disposed of on March 15, 2013. For a further discussion regarding deferred costs see Note 10.
As of December 31, 2012, the Company had two joint ventures that were classified as held-for-sale, the Southern California office portfolio and the Las Vegas Hotel, related to the Gramercy Finance segment. The joint ventures are further described below.
Southern California Office Portfolio In September 2012, the Company, an affiliate of SL Green and several other unrelated parties recapitalized a portfolio of office buildings located in Southern California, or the Southern California Office Portfolio, through the contribution of an existing preferred equity investment to a newly formed joint venture. As of December 31, 2012, the Companys 10.6% interest in the joint venture had a carrying value of $7,215 and was classified as held for sale in connection with the classification of Gramercy Finance as held for sale. For the year ended December 31, 2012, the Company recorded its pro rata share of net losses on the joint venture of $3,222, within discontinued operations. In January 2013, the Company sold the 10.6% interest in a joint venture of the Southern California Office Portfolio to an affiliate of SL Green for proceeds of $8,275 and recorded a gain on disposition to a director related entity of $1,317.
Las Vegas Hotel In December 2012, the Company acquired via a deed-in-lieu of foreclosure, a 30% interest through a TRS in the Las Vegas Hotel, a hotel and casino, located in Las Vegas, Nevada. As of December 31, 2012, the joint venture had a carrying value of $52,029 and was classified as held for sale in connection with the classification of Gramercy Finance as held for sale. For the year ended December 31, 2012, the Company recorded its pro rata share of net losses on the joint venture of $2,388, within discontinued operations. The Las Vegas Hotel was classified as held for sale at December 31, 2012 in connection with the disposal of Gramercy Finance and was disposed of on March 15, 2013.
During the year ended December 31, 2013, the Company did not sell any properties. During the year ended December 31, 2012, the Company sold 21 properties. The sales transactions generated net proceeds of $77,413 and resulted in gains totaling $15,967 for the years ended December 31, 2012 within discontinued operations.
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For the year ended December 31, 2012 | ||||||||||||
Number of Properties | Net Sale Proceeds | Gains | ||||||||||
Finance | 6 | $ | 71,370 | $ | 13,693 | |||||||
Realty | 15 | 6,043 | 2,274 | |||||||||
Total | 21 | $ | 77,413 | $ | 15,967 |
The Company separately classifies properties held-for-sale in the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss). In the normal course of business the Company identifies non-strategic assets for sale. Changes in the market may compel the Company to decide to classify a property held-for-sale or classify a property that was designated as held-for-sale back to
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held for investment. During the year ended December 31, 2013, the Company did not reclassify any properties previously identified as held-for-sale to held for investment. During the year ended December 31, 2012, the Company did not reclassify any properties previously identified as held-for-sale to held for investment.
In the December 2013, the Company entered into an agreement with our non-controlling interest to dissolve a legal entity related to a sold property resulting in a gain to the Company of $611.
During the year ended December 31, 2013, the Companys property acquisitions are summarized as follows:
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Property Type | Number of Properties | Number of Buildings | Square Feet |
Purchase Price | Weighted-average Remaining Lease Term |
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Industrial(1),(2) | 23 | 25 | 3,683,184 | 261,416 | 11.14 | |||||||||||||||
Office/Banking Center | 3 | 3 | 48,709 | $ | 7,120 | 8.45 | ||||||||||||||
Specialty(2) | 3 | 7 | 255,738 | 72,250 | 13.87 | |||||||||||||||
Total | 29 | 35 | 3,987,631 | $ | 340,786 | 11.28 |
(1) | The industrial properties line includes the build-to-suit property located in Hialeah Gardens, Florida, which represents a commitment to construct an approximately 118,000 square foot cold storage facility which will be 100% leased for an initial term of 25 years when completed. The facility is currently being constructed. The Company acquired the land for the property with a $4,990 zero-coupon mortgage note payable to the seller. Total costs are expected to be approximately $25,000, of which the unfunded amounts were estimated to be $16,772 at December 31, 2013. |
(2) | The Company assumed mortgages on two of its property acquisitions in 2013, one of which was on an industrial property and one of which was on a specialty asset. The gross value of the mortgages assumed at acquisition was $48,899. Refer to Note 7 for more information on the Companys debt obligations related to acquisitions. |
The Company analyzed the fair value of the leases and real estate assets of seven of its property investments acquired in 2013; and, accordingly, the purchase price allocation is finalized. The current allocation of the assets includes $57,751 of net real estate assets, $10,578 of intangible assets and $3,679 of intangible liabilities.
The Company is currently analyzing the fair value of the lease and real estate assets of its remaining twenty-two property investments acquired in 2013; and accordingly, the purchase price allocation is preliminary and subject to change. The initial recording of the assets included $248,977 of net real estate assets, $27,550 of intangible assets and $2,236 of intangible liabilities.
During the year ended December 31, 2012, the Companys property acquisitions are summarized as follows:
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Property Type | Number of Properties | Number of Buildings | Square Feet |
Purchase Price | Weighted-average Remaining Lease Term |
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Industrial | 2 | 2 | 539,429 | $ | 27,125 | 10.2 | ||||||||||||||
Total | 2 | 2 | 539,429 | $ | 27,125 | 10.2 |
The Company analyzed the fair value of the leases and real estate assets of its two property investments acquired in 2012; and, accordingly, the purchase price allocation is finalized. The final allocation of the assets includes $23,159 of net real estate assets, $4,429 of intangible assets and $462 of intangible liabilities.
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All of the Companys acquisitions are 100% leased. The Company recorded revenues and net income for the year ended December 31, 2013 of $10,724 and $1,525, respectively, related to the twenty-nine acquisitions during the year. The Company recorded revenues and net income for the year ended December 31, 2012 of $436 and $25, respectively, related to the two acquisitions during the year.
The Company classifies its properties into one of the following categories based on the characteristics of the property and the following definitions of classifications:
(1) | Office/Banking Center A commercial property utilized for professional activities. Examples include generic office properties, call centers, retail bank branches or operation centers. |
(2) | Industrial A commercial property used for general industrial activities such as production, manufacturing, assembly, warehousing, storage, distribution, and truck terminals. The Company currently owns six industrial properties that are truck terminals. |
(3) | Specialty Asset An improved land site that allows a tenant to perform functions directly related to its overall business. Specialty assets currently owned by Gramercy include an auto auction site, a rental car maintenance facility and a bus depot. |
The following table summarizes, on an unaudited pro forma basis, the Companys combined results of operations for the years ended December 31, 2013, 2012 and 2011 as though the acquisitions closed during the years ended December 31, 2013 and 2012 were completed on January 1, 2011. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Companys results of operations for future periods.
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2013 | 2012 | 2011 | ||||||||||
Pro forma revenues | $ | 75,092 | $ | 68,031 | $ | 39,244 | ||||||
Pro forma net income (loss) available to common stockholders | $ | 394,625 | $ | (169,362 | ) | $ | 339,432 | |||||
Pro forma earnings per common share basic | $ | 6.42 | $ | (3.26 | ) | $ | 6.76 | |||||
Pro forma earnings per common share diluted | $ | 6.42 | $ | (3.26 | ) | $ | 6.76 | |||||
Pro forma common shares basic | 61,500,847 | 51,976,462 | 50,229,102 | |||||||||
Pro forma common share diluted | 61,500,847 | 51,976,462 | 50,229,102 |
In August 2012, the Company and Garrison formed a joint venture and in December 2012, the Company contributed $59,061 in cash plus the issuance of 6,000,000 shares of the Companys common stock, valued at $15,000 as of the date of execution of the purchase agreement and a value of $16,500 as of the date of closing, representing a 50% interest in the joint ventures acquisition of the Bank of America Portfolio from KBS for $485,000. The acquisition was financed with a $200,000 two-year, floating rate, interest-only mortgage loan and collateralized by 67 properties of the portfolio. The mortgage note has three one-year extension options subject to satisfaction of certain terms and conditions. The remaining properties are unencumbered. The Bank of America Portfolio is an office portfolio that originally contained 115 properties. The Bank of America Portfolio totals approximately 3.2 million rentable square feet and is 95% leased to Bank of America, N.A., under a master lease with expiration dates through 2023, with total portfolio occupancy of approximately 96%. During the years ended December 31, 2013 and 2012, the Joint Venture
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sold 38 and 2 properties for net proceeds of $43,284 and $143,408, respectively. In May 2013, the Joint Venture sold a defeased mortgage and the corresponding pool of pledged treasury securities, and recorded a gain of $4,578. As of December 31, 2013 and December 31, 2012, the investment had a carrying value of $39,385 and $72,742, and the Company recorded its pro rata share of net income (loss) of the joint venture of ($5,874) and ($3,020), respectively. During the years ended December 31, 2013 and 2012, the Company received distributions of $29,215 and $0 from the Joint Venture, respectively. The joint venture analyzed the fair value of the leases and real estate assets in the Bank of America portfolio; and, accordingly, the purchase price allocation is finalized. The final allocation of the assets includes $460,012 of net real estate assets, $58,172 of intangible assets and $50,963 of intangible liabilities.
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2013 | 2012 | |||||||
Bank of America Properties | $ | (163 | ) | $ | (2,416 | ) | ||
Bank of America Defeasance | (5,711 | ) | (604 | ) | ||||
Company's equity in net loss of the Bank of America Portfolio | $ | (5,874 | ) | $ | (3,020 | ) |
The Company owns a 25% interest in the equity owner of a fee interest in 200 Franklin Square Drive, a 200,000 square foot building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics through December 2021. As of December 31, 2013 and December 31, 2012, the investment has a carrying value of $0 and $201, respectively. The Company recorded its pro rata share of net income of the joint venture of $212, $115 and $121 for the years ended December 31, 2013, 2012 and 2011, respectively. During the years ended December 31, 2013, 2012, and 2011 the Company received distributions of $413, $392, and $371 from the joint venture, respectively.
The Consolidated Balance Sheets for the Companys joint ventures at December 31, 2013 and 2012 are as follows:
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2013 | 2012 | |||||||
Assets: |
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Real estate assets, net | $ | 305,798 | $ | 452,692 | ||||
Other assets(1) | 100,560 | 219,760 | ||||||
Total assets | $ | 406,358 | $ | 672,452 | ||||
Liabilities and members' equity: |
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Mortgages payable(1) | $ | 241,000 | $ | 553,140 | ||||
Other liabilities | 84,608 | 90,255 | ||||||
Members' equity | 80,750 | 29,057 | ||||||
Liabilities and members' equity | $ | 406,358 | $ | 672,452 |
(1) | In May 2013, the Joint Venture sold a defeased mortgage and the corresponding pool of pledged treasury securities, which were acquired by the Joint Venture at acquisition of the Bank of America Portfolio. |
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The Consolidated Statements of Operations and Comprehensive Income (Loss) for the joint ventures for the three years ended December 31, 2013, 2012 and 2011 or partial period for acquisitions or dispositions which closed during these periods, are as follows:
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2013 | 2012 | 2011 | ||||||||||
Revenues | $ | 71,839 | $ | 8,431 | $ | 8,148 | ||||||
Operating expenses | 37,459 | 6,551 | 454 | |||||||||
Interest | 18,328 | 4,136 | 5,578 | |||||||||
Depreciation | 18,469 | 2,290 | 4,082 | |||||||||
Total expenses | 74,256 | 12,977 | 10,114 | |||||||||
Net loss from operations | (2,417 | ) | (4,546 | ) | (1,966 | ) | ||||||
Net gain on disposals | (9,046 | ) | | | ||||||||
Net loss | $ | (11,463 | ) | $ | (4,546 | ) | $ | (1,966 | ) | |||
Company's equity in net income (loss) within continuing operations | $ | (5,662 | ) | $ | (2,904 | ) | $ | 121 | ||||
Company's equity in net loss within discontinued operations | $ | (804 | ) | $ | (5,611 | ) | $ | (2,098 | ) |
The Company did not classify any assets as held-for-sale as of December 31, 2013. The Company classified Gramercy Finance as held-for-sale as of December 31, 2012. The following table summarizes the liabilities related to assets held-for-sale as of December 31, 2012:
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December 31, 2012 | ||||
Liabilities related to assets held-for-sale: |
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Collaterized debt obligations | $ | 2,188,597 | ||
Accounts payable and accrued expenses | 10,552 | |||
Accrued interest payable | 3,137 | |||
Deferred revenue | 2,142 | |||
Below market lease liabilities, net | 1,703 | |||
Derivative instruments, at fair value | 173,623 | |||
Other liabilities | 408 | |||
Total liabilities related to assets held-for-sale | $ | 2,380,162 |
In the fourth quarter of 2012, the Company classified its CDOs as held-for-sale in connection with the disposal of Gramercy Finance. The outstanding debt is presented as a component of the liabilities related to assets held-for-sale on the Consolidated Balance Sheets. In March 2013, following the completion of the disposal of Gramercy Finance, the Company deconsolidated the CDOs from the Companys Consolidated Financial Statements.
During 2005, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance, the CDO consisted of $810,500 of investment grade notes, $84,500 of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. The Company incurred approximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1, which were amortized on a level-yield basis over the average life of the CDO.
103
During 2006, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance, the CDO consisted of $903,750 of investment grade notes, $38,750 of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. The Company incurred approximately $11,364 of costs related to Gramercy Real Estate CDO 2006-1, which were amortized on a level-yield basis over the average life of the CDO.
In August 2007, the Company issued $1,100,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 issuer and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance, the CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. The Company incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which were amortized on a level-yield basis over the average life of the CDO.
In connection with the closing of each of the Companys CDOs, pursuant to the collateral management agreement, the Manager agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The Company retained all non-investment grade securities, the preferred shares and the ordinary shares in the Issuer of each CDO. The Issuers and Co-Issuers in each CDO held assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which served as collateral for the CDO.
Loans and other investments were owned by the Issuers and the Co-Issuers, served as collateral for the Companys CDO securities, and the income generated from these investments was used to fund interest obligations of the Companys CDO securities and the remaining income, if any, was retained by the Company. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied in order for the Company to receive cash flow on the interests retained in its CDOs and to receive the subordinate collateral management fee earned.
Derivative assets with a notional value of $200,129 and a fair value of $173 and derivative liabilities with a notional value of $1,005,087 and a fair value of $173,623 were held within the Companys CDOs and classified as held-for-sale at December 31, 2012. These derivative instruments were designated as cash flow hedges, and were derecognized at fair value when they were transferred with the CDOs liabilities in connection with the disposal of Gramercy Finance on March 15, 2013, the date of disposal. For further information on how the Company values derivative instruments see Note 12. For information regarding the Companys accounting policies for derivative instruments, see the discussion on derivative instruments in Note 2.
As of December 31, 2012, the Company had other liabilities related to assets held for sale primarily consisting of accrued expenses and accounts payable related to accrued legal fees and operating expenses of real estate and interest payable related to the outstanding CDO debt, which was disposed of in connection with the disposal of Gramercy Finance on March 15, 2013.
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Certain real estate assets are subject to mortgage liens. The following is a summary of the Companys secured financing arrangements as of December 31, 2013:
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Encumbered Properties | Balance | Interest Rate | Weighted-average Effective Interest Rate |
Weighted-average Maturity |
||||||||||||||||
Fixed-rate mortgages | 7 | $ | 104,318 | 0.00% to 6.95% | 4.83 | % | June 2014 to June 2029 |
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Variable-rate mortgages(1),(2) |
1 | 16,055 | 1 Month LIBOR + 2.10 | % | 2.27 | % | December 2020 | |||||||||||||
Secured credit facility(1) | 18 | 45,000 | 1 Month LIBOR + 1.90 | % | 2.07 | % | September 2015 | |||||||||||||
Total secured financings | 26 | $ | 165,373 | |||||||||||||||||
Above/below market interest | 1,807 | |||||||||||||||||||
Balance at December 31, 2013 | 26 | $ | 167,180 |
(1) | All of the Companys variable-rate financings are monthly LIBOR plus a fixed spread. |
(2) | This mortgage is hedged by an interest rate swap which has a maturity date of December 2020. Refer to Note 12 for further information on hedging and the Companys derivative instruments. |
On September 4, 2013, the Company entered into a Credit and Guaranty Agreement with Deutsche Bank Securities, Inc., as lead arranger and bookrunner, and Deutsche Bank AG New York Branch, as administrative agent, for a $100,000 senior secured revolving credit facility, which Credit and Guaranty Agreement was amended and restated on September 24, 2013, or the Credit Facility. The aggregate amount of the Credit Facility may be increased to a total of up to $150,000, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The Company exercised the $50,000 accordion feature in February 2014, which increased its borrowing capacity to $150,000. The maturity date of the revolving credit facility is September 2015, with one 12-month extension option exercisable by the Company, subject, among other things, to there being an absence of an event of default under the Credit Facility and to the payment of an extension fee. The Credit Facility is guaranteed by Gramercy Property Trust Inc. and certain subsidiaries and is secured by first priority mortgages on designated properties, or the Borrowing Base. Outstanding borrowings under the Credit Facility are limited to the lesser of (i) the sum of the $100,000 revolving commitment and the maximum $50,000 commitment increase available or (ii) 60.0% of the value of the Borrowing Base. Interest on advances made on the Credit Facility, will be incurred at a floating rate based upon, at the Companys option, either (i) LIBOR plus the applicable LIBOR margin, or (ii) the applicable base rate which is the greater of the Prime Rate, 0.50% above the Federal Funds Rate, or 30-day LIBOR plus 1.00%. The applicable LIBOR margin will range from 1.90% to 2.75%, depending on the ratio of the Company's outstanding consolidated indebtedness to the value of the Companys consolidated gross assets. The Credit Facility will have an initial borrowing rate of LIBOR plus 1.90%. The Credit Facility includes a series of financial and other covenants that the Company must comply with in order to borrow under the facility. The Company was in compliance with the covenants under the Credit Facility at December 31, 2013. As of December 31, 2013, there were borrowings of $45,000 outstanding under the Credit Facility and 18 properties were in the borrowing base.
On May 16, 2013, the Company entered into a $14,500 non-recourse mortgage loan at a fixed annual interest rate of 3.28%. The loan is collateralized by two industrial properties totaling 539,000 square feet acquired by the Company on November 20, 2012, which are 100% leased through 2018 and 2024. The loan matures in June 2018.
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On May 31, 2013, the Company entered into a $4,990 non-recourse, interest-free mortgage loan, collateralized by a property acquired by the Company on May 30, 2013, on which the Company is funding construction of a 118,000 industrial cold storage facility that will be 100% leased for a term of 25 years upon completion. The loan matures in June 2014.
On June 27, 2013, the Company assumed a non-recourse mortgage loan with a face value of $26,322 and a fair value of $29,385 at the acquisition of a 196,000 square foot specialty asset, which served as collateral for the loan. The property is 100% leased through July 2029 and bears interest at a fixed annual rate of 6.95%. The loan matures in June 2029.
On November 15, 2013, in connection with the acquisition of a portfolio of three industrial distribution centers totaling 675,000 square feet, the Company assumed a non-recourse mortgage loan with a face value of $22,577 and a fair value of $21,503 at acquisition on one of the properties, which is 100% leased through June 2024. The assumed loan has a fixed annual interest rate of 4.00% and matures in January 2020.
On November 21, 2013, the Company entered into a $12,600 non-recourse mortgage loan at a fixed annual interest rate of 5.15%. The loan is collateralized by a 220,000 square foot industrial property acquired by the Company on October 1, 2013, which is 100% leased through September 2033. The loan matures in December 2023.
On December 19, 2013, the Company entered into a $16,055 non-recourse mortgage loan at a floating interest rate of 1 Month LIBOR plus 2.10%. The loan is collateralized by a 303,000 square foot industrial property acquired by the Company on November 21, 2013, which is 100% leased through July 2029. The loan matures in December 2020. In connection with the financing, the Company also entered into a fixed rate swap agreement with the lender, Texas Capital Bank, N.A., which is an effective cash flow hedge against the floating rate loan and whereby the Company will pay an effective fixed rate of 4.55%.
On December 31, 2013, the Company entered into a $24,100 non-recourse mortgage loan at a fixed annual interest rate of 5.0715%. The loan is collateralized by a 480,000 square foot industrial property acquired by the Company on December 23, 2013, which is 100% leased through December 2028. The loan matures in January 2024.
During the years ended December 31, 2013 and 2012, the Company capitalized $94 and $0, respectively of interest associated with redevelopment activities.
As of December 31, 2013, eight of the Companys real estate investments were encumbered with mortgage notes with a cumulative outstanding balance of $120,373 and the Companys secured revolving line of credit had an outstanding balance of $45,000. Combined aggregate principal maturities of the Company's mortgage notes and credit facility as of December 31, 2013 are as follows:
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Credit Facility |
Mortgage Notes Payable |
Interest Payments | Total | |||||||||||||
2014 | $ | | $ | 7,576 | $ | 6,203 | $ | 13,779 | ||||||||
2015 | 45,000 | 2,763 | 5,939 | 53,702 | ||||||||||||
2016 | | 2,895 | 5,091 | 7,986 | ||||||||||||
2017 | | 3,045 | 4,935 | 7,980 | ||||||||||||
2018 | | 15,986 | 4,563 | 20,549 | ||||||||||||
Thereafter | | 88,108 | 18,137 | 106,245 | ||||||||||||
Above/Below Market Interest | | | 1,807 | 1,807 | ||||||||||||
Total | $ | 45,000 | $ | 120,373 | $ | 46,675 | $ | 212,048 |
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The Companys properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2032. These leases generally contain rent increases and renewal options.
Future minimum rental income under non-cancelable leases excluding reimbursements for operating expenses as of December 31, 2013 are as follows:
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Operating Leases | ||||
2014 | $ | 28,917 | ||
2015 | 30,398 | |||
2016 | 30,694 | |||
2017 | 31,040 | |||
2018 | 31,575 | |||
Thereafter | 284,577 | |||
Total minimum lease rental income | $ | 437,201 |
The Chief Executive Officer of SL Green Realty Corp. (NYSE: SLG), or SL Green, is one of the Companys directors.
In June 2013, the Company signed a lease agreement with 521 Fifth Fee Owner LLC, an affiliate of SL Green, for new corporate office space located at 521 Fifth Avenue, 30th Floor, New York, New York. The lease commenced in September 2013, following the completion of certain improvements to the space. The lease is for approximately 6,580 square feet and carries a term of 10 years with rents of approximately $373 per annum for year one rising to $463 per annum in year ten. There were four months of rent abated at the commencement of the lease and as such we did not pay any rent under the lease for the year ended December 31, 2013.
From May 2005 through September 2013, the Company was party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for the Companys previous corporate offices at 420 Lexington Avenue, New York, New York. In April 2013, the Company gave notice that that it was cancelling the lease for its corporate offices at 420 Lexington Avenue. The lease agreement with SLG Graybar Sublease LLC was terminated in September 2013.
Deferred costs at December 31, 2013 and 2012 consisted of the following:
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2013 | 2012 | |||||||
Deferred financing costs | $ | 3,818 | $ | 44,077 | ||||
Deferred acquisition costs | 2,630 | 146 | ||||||
Deferred leasing costs | | 245 | ||||||
6,448 | 44,468 | |||||||
Accumulated amortization | (634 | ) | (37,587 | ) | ||||
5,814 | 6,881 | |||||||
Less: Held for sale | | (6,466 | ) | |||||
$ | 5,814 | $ | 415 |
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At December 31, 2013, deferred financing costs relate to the Companys new financing arrangements entered into during the year, including its credit facility and financing assumed on property acquisitions. These costs are amortized on a straight-line basis to interest expense based on the contractual term of the related financing.
Deferred leasing costs include direct costs incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term.
Deferred acquisition costs include lease inducement fees paid to secure acquisition and are amortized over a straight-line basis over the related lease term.
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
In connection with the Companys disposal of Gramercy Finance and the subsequent exit from the commercial real estate finance business, more fully described in Note 3 Dispositions and Assets Held for Sale, for the year ended December 31, 2012, the Company recorded impairment charges of $882 on its loan investments, CMBS investments, and real estate held by the CDOs as a result of the reclassification of all loan investments and real estate held by the CDOs as held-for-sale and the inability to express the intent to hold impaired CMBS investments until amortized cost is recovered. In connection with the disposal of Gramercy Finance, the Company also recorded recurring and non-recurring fair value measurements as of the date of disposal for certain financial instruments before derecognition.
The following table presents the carrying value in the financial statements, and approximate fair value of financial instruments at December 31, 2013 and 2012:
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December 31, 2013 | December 31, 2012 | |||||||||||||||
Carrying Value | Fair Value |
Carrying Value | Fair Value |
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Financial assets: |
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Lending investments(1),(2) | $ | | $ | | $ | 784,135 | $ | 816,283 | ||||||||
CMBS(2) | $ | | $ | | $ | 932,265 | $ | 932,265 | ||||||||
Derivative instruments(2) | $ | | $ | | $ | 173 | $ | 173 | ||||||||
Retained CDO Bonds(3) | $ | 6,762 | $ | 6,762 | $ | | $ | | ||||||||
Financial liabilities: |
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Collateralized debt obligations(1),(2) | $ | | $ | | $ | 2,188,579 | $ | 1,474,236 | ||||||||
Derivative instruments(2) | $ | 187 | $ | 187 | $ | 173,623 | $ | 173,623 | ||||||||
Mortgage notes payable(1) | $ | 122,180 | $ | 123,349 | $ | | $ | | ||||||||
Contingent Value Rights(4) | $ | 115 | $ | 115 | $ | | $ | |
(1) | Lending investments, mortgage notes payable, and CDOs are classified as Level III due to significance of unobservable inputs which are based upon management assumptions. |
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(2) | In connection with the classification of Gramercy Finance as held for sale, lending investments, CMBS, derivative instruments, and collateralized debt obligations are classified as held for sale as of December 31, 2012. |
(3) | Retained CDO Bonds represent the CDOs subordinate bonds, preferred shares, and ordinary shares, which were retained subsequent to the disposal of Gramercy Finance and were previously eliminated in consolidation. |
(4) | Pursuant to the Companys private placement of equity, the Company entered into contingent value right agreements with purchasers of the Companys common stock. The contingent value rights entitle each purchaser to cash payment contingent on the Companys stock price, as follows: On April 1, 2014, the purchasers will receive cash payment of (a) the number of their contingent values rights multiplied by (b) the amount, not to exceed $0.46, equal to the difference between the share price at time of purchase, $4.11, and the volume-weighted average price for the time trading days ending on and including March 25, 2014. |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:
Cash and cash equivalents, accrued interest, and accounts payable: These balances in the Consolidated Financial Statements reasonably approximate their fair values due to the short maturities of these items.
Lending investments: These instruments are presented in the Consolidated Financial Statements at the lower of cost or market value and not at fair value. The fair values were estimated by using market floating rate and fixed rate yields (as appropriate) for loans with similar credit characteristics.
CMBS investments: These investments are presented in the Consolidated Financial Statements at fair value. The fair values were based upon valuations obtained from dealers of those securities, third-party pricing services, and internal models.
Collateralized debt obligations: These obligations are presented in the Consolidated Financial Statements on the basis of proceeds received at issuance and not at fair value. The fair value was estimated based upon the amount at which similarly placed financial instruments would be valued at December 31, 2013.
Derivative instruments: The Companys derivative instruments, which are primarily comprised of interest rate caps and interest rate swap agreements, are carried at fair value in the Consolidated Financial Statements based upon third-party valuations.
Retained CDO Bonds: Non-investment grade, subordinate CDO bonds, preferred shares and ordinary shares are presented on the Consolidated Financial Statements at fair value. The fair value is determined by an internally developed discounted cash flow model.
Mortgage notes payable: These obligations are presented in the Consolidated Financial Statements based on the actual balance outstanding and not at fair value. The fair value was estimated using discounted cash flows methodology, using discount rates that best reflect current market rates for financing with similar characteristics and credit quality.
Contingent value rights: The Companys contingent value rights are presented at fair value on the Consolidated Financial Statements based upon valuation using the Black Scholes model.
Disclosure about fair value of financial instruments is based on pertinent information available to the Company at December 31, 2013 and 2012. Although the Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued
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for the purpose of these financial statements since December 31, 2013 and 2012, and current estimates of fair value may differ significantly from the amounts presented herein.
The following discussion of fair value was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lower degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts. Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon the lowest level of significant input to the valuations.
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At December 31, 2013 | Total | Level I | Level II | Level III | ||||||||||||
Financial Assets: |
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Retained CDO Bonds: |
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Non-investment grade, subordinate CDO bonds | $ | 6,762 | $ | | $ | | $ | 6,762 | ||||||||
$ | 6,762 | $ | | $ | | $ | 6,762 | |||||||||
Financial Liabilities: |
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Derivative instruments: |
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Interest rate swaps | $ | 187 | $ | | $ | | $ | 187 | ||||||||
Contingent value rights | 115 | | | 115 | ||||||||||||
$ | 302 | $ | | $ | | $ | 302 |
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At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
Financial Assets: |
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Derivative instruments: |
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Interest rate caps | $ | 173 | $ | | $ | | $ | 173 | ||||||||
Interest rate swaps | | | | | ||||||||||||
$ | 173 | $ | | $ | | $ | 173 | |||||||||
CMBS available for sale: |
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Investment grade | $ | 281,495 | $ | | $ | | $ | 281,495 | ||||||||
Non-investment grade | 650,770 | | | 650,770 | ||||||||||||
$ | 932,265 | $ | | $ | | $ | 932,265 | |||||||||
Financial Liabilities: |
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Derivative instruments: |
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Interest rate caps | $ | 173,623 | $ | | $ | | $ | 173,623 | ||||||||
Interest rate swaps | | | | | ||||||||||||
$ | 173,623 | $ | | $ | | $ | 173,623 |
Derivative instruments: Interest rate caps and swaps were valued with the assistance of a third-party derivative specialist, who uses a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs which require significant judgment such as the credit valuation adjustments due to the risk of non-performance by both the Company and its counterparties. The fair value of derivatives classified as Level III are most sensitive to the credit valuation adjustment as all or a portion of the credit valuation
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adjustment may be reversed or otherwise adjusted in future periods in the event of changes in the credit risk of the Company or its counterparties. Fair value of our derivative instruments, such our CVR investments are valued using a Black-Scholes model.
Total losses or (gains) from derivatives for the year ended December 31, 2013 and the year ended December 31, 2012 were $9,914 and ($2,146), respectively, in Accumulated Other Comprehensive Income (Loss). Subsequently, on March 15, 2013, the date of disposal, the Company reclassified the amounts out of Accumulated Other Comprehensive Income (Loss) and derecognized the derivative instruments. During the year ended December 31, 2013, the Company entered into an interest rate swap agreement and did not enter into any new interest rate caps.
CMBS: CMBS securities are generally valued on a recurring basis by (i) obtaining assessments from third-party dealers who primarily use market-based inputs such as changes in interest rates and credit spreads, along with recent comparable trade data; and (ii) pricing services who use a combination of market-based inputs along with unobservable inputs that require significant judgment, such as assumptions on the underlying loans regarding net property operating income, capitalization rates, debt service coverage ratios and loan-to-value default thresholds, timing of workouts and recoveries, and loan loss severities. Third-party dealer marks, which are used to value the majority of the Companys CMBS securities, are indications received from dealers in the respective security, from which the Company could transact at on the valuation date. The Company uses all data points obtained, including comparable trades completed by the Company or available in the market place in determining its fair value of CMBS. Pricing service models are designed to replicate a market view of the underlying collateral, however, the models are most sensitive to the unobservable inputs such as timing of loan defaults and severity of loan losses and significant increases (decreases) in any of those inputs in isolation as well as any change in the expected timing of those inputs, would result in a significantly lower (higher) fair value measurement. Due to the inherent uncertainty in the determination of fair value, the Company has designated its CMBS securities as Level III.
Retained CDO Bonds: Retained CDO Bonds are valued on a recurring basis using an internally developed discounted cash flow model. Management estimates the timing and amount of cash flows expected to be collected and applies a discount rate equal to the yield that the Company would expect to pay for similar securities with similar risks at the valuation date. Future expected cash flows generated by management require significant assumptions and judgment regarding the expected resolution of the underlying collateral, which includes loans and other lending investments, real estate investments, and CMBS. The resolution of the underlying collateral requires further management assumptions regarding capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements, net property operating income, timing of workouts and recoveries, loan loss severities and other factors. The models are most sensitive to the unobservable inputs such as the timing of a loan default or property sale and the severity of loan losses. Significant increases (decreases) in any of those inputs in isolation as well as any change in the expected timing of those inputs would result in a significantly lower (higher) fair value measurement. Due to the inherent uncertainty in the determination of fair value, the Company has designated its Retained CDO Bonds as Level III.
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Quantitative information regarding the valuation techniques and the range of significant unobservable Level III inputs used to determine fair value measurements on a recurring basis as of December 31, 2013 are:
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At December 31, 2013 | ||||||||||||||||
Financial Asset | Fair Value | Valuation Technique | Unobservable Inputs | Range | ||||||||||||
Non-investment grade, subordinate CDO bonds | $ | 6,762 | Discounted cash flows | Discount rate | 25.00% to 40.00 | % | ||||||||||
Contingent value rights | 115 | Black-Scholes model | Implied volatility | 40.00% to 60.00 | % | |||||||||||
Interest rate swaps | 187 | Hypothetical derivative method | Credit borrowing spread | 150 to 250 basis points |
The following table reconciles the beginning and ending balances of financial assets measured at fair value on a recurring basis using Level III inputs:
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CMBS Available for sale Investment Grade | CMBS Available for Sale Non- Investment Grade | Derivative Instruments | Retained CDO Bonds |
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Balance as of December 31, 2012 | $ | 281,495 | $ | 650,770 | $ | 173 | $ | | ||||||||
Change in CMBS investment status | (1,506 | ) | 1,506 | | | |||||||||||
Amortization of discounts or premiums | 1,264 | 6,075 | | 1,491 | ||||||||||||
Proceeds from CMBS principal repayments | (10,526 | ) | | | | |||||||||||
Gramercy Finance disposal | (274,133 | ) | (670,387 | ) | (219 | ) | 8,492 | |||||||||
Adjustments to fair value: |
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Included in other comprehensive income | 3,406 | 19,677 | 46 | (1,219 | ) | |||||||||||
Other-than-temporary impairments | | (7,641 | ) | | (2,002 | ) | ||||||||||
Balance as of December 31, 2013 | $ | | $ | | $ | | $ | 6,762 |
The following roll forward table reconciles the beginning and ending balances of financial liabilities measured at fair value on a recurring basis using Level III inputs:
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Derivative Instruments | ||||
Balance as of December 31, 2012 | $ | 173,623 | ||
Gramercy Finance disposal | (163,716 | ) | ||
Issuance of contingent rights value obligation | 1,730 | |||
Adjustments to fair value: |
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Unrealized loss | (11,335 | ) | ||
Balance as of December 31, 2013 | $ | 302 |
The Company uses fair value measurements on a non-recurring basis in its assessment of fair value on loans and other lending investments that have been written down to fair value as a result of valuation allowances established for loan losses and loans and other lending investments classified as held-for-sale to adjust the carrying value to the lower of cost or fair value. As of March 15, 2013, or on the date of disposal of Gramercy Finance, the Company evaluated its loan investments for impairment before derecognizing the loan investments at the lower of cost or fair value. The Company recorded no impairments as of March 15,
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2013. This differs from the Companys determination of allowances for loan losses as the Company considered the value that a purchaser would be willing to acquire the asset at the date of disposal instead of at the ultimate resolution of the asset.
At December 31, 2013, the Company did not measure any assets at fair value on a non-recurring basis. The following table shows the fair value hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which a non-recurring change in fair value has been recorded during the year ended December 31, 2012.
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At December 31, 2012 | Total | Level I | Level II | Level III | ||||||||||||
Financial Assets: |
||||||||||||||||
Lending investments held-for-sale (allowance for loan loss): |
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Whole loans | $ | 60,335 | $ | | $ | | $ | 60,335 | ||||||||
Subordinate interests in whole loans | 9,131 | | | 9,131 | ||||||||||||
Mezzanine loans | | | | | ||||||||||||
Preferred equity | | | | | ||||||||||||
$ | 69,466 | $ | | $ | | $ | 69,466 | |||||||||
Lending investments held-for-sale (impairment for lower of cost or fair value): |
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Whole loans | $ | 174,477 | $ | | $ | | $ | 174,477 | ||||||||
Subordinate interests in whole loans | 1,649 | | | 1,649 | ||||||||||||
Mezzanine loans | 20,422 | | | 20,422 | ||||||||||||
Preferred equity | | | | | ||||||||||||
$ | 196,548 | $ | | $ | | $ | 196,548 | |||||||||
Real Estate Investments: |
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Office | $ | 3,593 | $ | | $ | | $ | 3,593 | ||||||||
Land | 24,195 | | | 24,195 | ||||||||||||
Hotel | 24,034 | | | 24,034 | ||||||||||||
Branch | 4,749 | | | 4,749 | ||||||||||||
Industrial | | | | | ||||||||||||
$ | 56,571 | $ | | $ | | $ | 56,571 |
Real estate investments: The properties identified for impairment have been classified as assets held-for-sale. The impairment on properties classified as held-for-sale is calculated by comparing the results of the Companys marketing efforts and unsolicited purchase offers to the carrying value of the respective property. The marketing valuations are based on internally developed discounted cash flow models which include assumptions that require significant management judgment regarding capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements and other factors deemed necessary by management. The impairment is calculated by comparing the Companys internally developed discounted cash flow methodology to the carrying value of the respective property.
Loans subject to impairments or reserves for loan loss: The loans identified for impairment or reserves for loan loss are collateral dependent loans. Impairment or reserves for loan loss are measured by comparing managements estimated fair value of the underlying collateral to the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding
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capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.
The valuations derived from pricing models may include adjustments to the financial instruments. These adjustments may be made when, in managements judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived from a model typically reflects managements judgment that other participants in the market for the financial instrument being measured at fair value would also consider such an adjustment in pricing that same financial instrument.
Assets and liabilities presented at fair value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements.
The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.
The following table summarizes the notional and fair value of the Companys derivative financial instruments at December 31, 2013. The notional value is an indication of the extent of the Companys involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:
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Benchmark Rate | Notional Value | Strike Rate | Effective Date | Expiration Date | Fair Value |
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Assets of Non-VIEs: |
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Interest Rate Swap | 1 mo. USD-LIBOR-BBA | $ | 16,055 | 4.55 | % | 12/19/13 | 12/19/20 | $ | (187 | ) | ||||||||||||||
Interest Rate Cap | 1 mo. USD-LIBOR-BBA | 24,000 | 5.00 | % | 07/19/11 | 08/09/14 | | |||||||||||||||||
Contingent Value Rights(1) | n/a | 11,535 | n/a | 10/01/13 | 03/25/14 | (115 | ) | |||||||||||||||||
Total derivatives | $ | 51,590 | $ | (302 | ) |
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(1) | Pursuant to each CVR Agreement, on March 25, 2014, the Company will calculate the volume-weighted average price, or the VWAP, for the common stock for the 10 trading days period ending on, and including, March 25, 2014, or the CVR Period VWAP. On April 1, 2014, the Company will pay to the holder of the contingent value rights, in immediately available funds, an amount in cash, equal to (a) the number of contingent value rights held by the holder on the CVR Test Date multiplied by (b) the amount, not to exceed $0.46 equal to the difference between the per share purchase price of $4.11 and the CVR Period VWAP. |
The Company is hedging exposure to variability in future interest payments on its debt facilities. At December 31, 2013, derivative instruments were reported at their fair value as a net liability of $302. At December 31, 2012, derivative instruments were reported at their fair value as a net liability of $173,450 within discontinued operations. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.
The Companys authorized capital stock consists of 200,000,000 shares, $0.001 par value per share, of which the Company is authorized to issue up to 100,000,000 shares of common stock, $0.001 par value per share, 25,000,000 shares of preferred stock, par value $0.001 per share and 75,000,000 shares of excess stock, $0.001 par value per share. As of December 31, 2013, 71,313,043 shares of common stock, 3,525,822 shares of preferred stock and no shares of excess stock were issued and outstanding, respectively.
In connection with Mr. Gordon F. DuGans agreement to serve as the Companys Chief Executive Officer, on June 7, 2012, Mr. DuGan also agreed to purchase 1,000,000 shares of the Companys common stock from the Company on June 29, 2012 for an aggregate purchase price of $2,520 or $2.52 per share. The per share purchase price was equal to the closing price of the Companys common stock on the New York Stock Exchange on the day prior to the date Mr. DuGan entered into the subscription agreement with the Company to purchase such shares of common stock. The issuance of such shares of common stock was a private placement exempt from the registration requirements of the Securities Act of 1933, as amended.
The Company issued to KBS Acquisition Sub-Owner 2, LLC (i) 2,000,000 shares of common stock of the Company, par value $0.001 per share; (ii) 2,000,000 shares of Class B-1 non-voting common stock of the Company, par value $0.001 per share; and (iii) 2,000,000 shares of Class B-2 non-voting common stock of the Company, par value $0.001 per share on December 6, 2012. The shares were issued as consideration for the Companys contribution to the joint venture with Garrison in connection with the acquisition of the Bank of America Portfolio on the same date and were valued at $2.75 which was the closing price of the Companys common stock on the New York Stock Exchange on the day prior. Each share of the Class B-1 common stock and Class B-2 common stock will be convertible into one share of the Companys common stock at the option of the holder at any time on or after September 5, 2013 and December 6, 2013, respectively. During 2013, all Class B-1 and Class B-2 common stock was converted into an equal amount of shares of the Companys common stock. In December, 2013, we filed an articles supplementary to our charter to reclassify 2,000,000 authorized shares of Class B-1 common stock and 2,000,000 authorized shares of Class B-2 common stock into the same number of authorized but unissued shares of our common stock. The reclassification (i) increased the number of shares of common stock from 96,000,000 shares immediately prior to the reclassification to 100,000,000 shares of common stock immediately after the reclassification; (ii) decreased the number of shares classified as Class B-1 Common Stock from 2,000,000 shares immediately prior to the reclassification to no shares immediately after the reclassification; and (iii) decreased the number of shares classified as Class B-2 Common Stock from 2,000,000 shares immediately prior to the reclassification to no shares immediately after the reclassification.
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In October 2013, the Company entered into a common stock purchase agreement and related joinder agreements, or the Purchase Agreement, for the issuance of 11,535,200 shares of common stock at a purchase price of $4.11 per share, raising gross proceeds of $47,410, to various purchasers in a private placement, or the Private Placement. Pursuant to the Purchase Agreement, each purchaser has agreed that it will not, without the prior written consent of the Company, offer, sell, contract to sell, pledge or otherwise dispose any or all of the common stock purchased until March 25, 2014, or the Lock-Up Period. During the Lock-Up Period, if the Company issues common stock or securities convertible into common stock (except for certain permitted issuances), then the purchasers will have the ability to: (1) purchase their pro rata portion of all or any part of the new issuance, and (2) elect the benefit of any different terms provided to the new investors.
Pursuant to the Purchase Agreement, the Company entered into contingent value rights agreements, or the CVR Agreements, with the Purchasers at the closing of the sale of common stock in the Private Placement which are discussed in more detail in Note 12.
The shares of common stock sold in the Private Placement were offered and sold pursuant to an exemption from the registration requirements under Rule 506 of Regulation D promulgated under the Securities Act of 1933. The purchasers were accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933. Morgan Stanley & Co. LLC acted as the placement agent in connection with the Private Placement.
In April 2007, the Company issued 4,600,000 shares of its 8.125% Series A cumulative redeemable preferred stock (including the underwriters over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share, or the Series A Preferred Stock. Holders of the Series A Preferred Stock are entitled to receive annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, the Company may at its option redeem the Series A Preferred Stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205. In November 2010, we repurchased 1,074,178 shares of the Series A Preferred Stock pursuant to a tender offer.
As of December 31, 2013 and 2012, the Company accrued Series A Preferred Stock dividends of $37,600 and $30,438, respectively. In December 2013, the Companys board of directors authorized and declared a catch-up dividend in the amount of $10.23524 per share of its 8.125% Series A Cumulative Redeemable Preferred Stock, representing all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, the Companys board of directors also authorized and declared a Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend were paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014.
As part of the Companys initial public offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code, or ISOs, (ii) the grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors fees and (iv) grants of shares of restricted and unrestricted common stock. The exercise price of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant. At December 31, 2013, 2,070,416 shares of common stock were available for issuance under the Equity Incentive Plan.
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Through December 31, 2013, 1,787,872 restricted shares had been issued under the Equity Incentive Plan, of which 91% have vested. Except for certain performance based awards, the vested and unvested shares are currently entitled to receive distributions on common stock if declared by the Company. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote such shares beginning on the date of grant. Compensation expense of $579, $958 and $301 was recorded for the years ended December 31, 2013, 2012 and 2011, respectively, related to the issuance of restricted shares. Compensation expense of $1,542 will be recorded over the course of the next 50 months representing the remaining weighted average vesting period of equity awards issued under the Equity Incentive Plan as of December 31, 2013. Certain of the Companys awards are subject to performance vesting conditions which were determined in March 2013 and are assessed on a quarterly basis.
Options granted under the Equity Incentive Plan to recipients who are employees of Gramercy are exercisable at the fair market value on the date of grant and, subject to termination of employment, expire ten years from the date of grant, are not transferable other than on death, and are exercisable in three to four annual installments commencing one year from the date of grant. The Company issues new shares upon the exercise of vested options. In some instances, options may be granted under the Equity Incentive Plan to persons who provide significant services to the Company but are not employees of the Company. Options granted to recipients that are not employees have the same terms as those issued to employees except as it relates to any performance-based provisions within the grant. To the extent there are performance provisions associated with a grant to a recipient who is not an employee, an estimated expense related to these options is recognized over the vesting period and the final expense is reconciled at the point performance has been met, or the measurement date. If no performance based provision exists, the Company recognizes compensation expense over the vesting period on a straight line basis.
A summary of the status of the Companys stock options as of December 31, 2013, 2012 and 2011 are presented below:
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December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||
Options Outstanding | Weighted Average Exercise Price | Options Outstanding | Weighted Average Exercise Price | Options Outstanding | Weighted Average Exercise Price | |||||||||||||||||||
Balance at beginning of period | 360,251 | $ | 16.14 | 565,026 | $ | 17.25 | 841,377 | $ | 11.82 | |||||||||||||||
Granted | 30,000 | 3.05 | 25,000 | 2.50 | 25,000 | 2.79 | ||||||||||||||||||
Exercised | | | | | (300,000 | ) | 0.80 | |||||||||||||||||
Lapsed or cancelled | (49,170 | ) | 22.49 | (229,775 | ) | 16.83 | (1,351 | ) | 22.50 | |||||||||||||||
Balance at end of period | 341,081 | $ | 14.70 | 360,251 | $ | 16.14 | 565,026 | $ | 17.25 |
For the year ended December 31, 2013, all options were granted with a price of $3.05. The remaining weighted average contractual life of the options was 3.9 years. Compensation expense of $51, $29 and $138 was recorded for the years ended December 31, 2013, 2012 and 2011, respectively, related to the issuance of stock options.
In March 2013, the Company granted to four senior officers of the Company pursuant to the Equity Incentive Plan a total of 115,000 time-based restricted stock awards and 345,000 performance-based restricted stock units. The time-based awards vest in five equal annual installments commencing December 15, 2013, subject to continued employment. Vesting of the performance-based units requires, in addition to continued employment over a 5-year period, achievement of absolute increases in either the Companys stock price or an adjusted funds from operations (as defined by the Companys compensation committee).
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In connection with the hiring of Gordon F. DuGan, Benjamin P. Harris, and Nicholas L. Pell, who joined the Company on July 1, 2012 as Chief Executive Officer, President and Managing Director, respectively, the Company has granted equity awards to these new executives pursuant to a newly adopted outperformance plan, or the 2012 Outperformance Plan, in the form of LTIP units. LTIP units are a class of limited partnership interests in GPT Property Trust LP, the Companys operating partnership, that are structured to quality as profits interests for federal income tax purposes and do not have full parity, on a per unit basis, with the Class A limited partnership interests in the Company or its operating partnership with respect to liquidating distributions. Pursuant to the 2012 Outperformance Plan, these executives, in the aggregate, may earn up to $20,000 of LTIP Units based on the Companys common stock price appreciation over a four-year performance period ending June 30, 2016. The amount of LTIP Units earned under the 2012 Outperformance Plan will range from $4,000 if the Companys common stock price equals a minimum hurdle of $5.00 per share (less any dividends paid during the performance period) to $20,000 if the Companys common stock price equals or exceeds $9.00 per share (less any dividends paid during the performance period) at the end of the performance period. In the event that the performance hurdles are not met on a vesting date, the award scheduled to vest on that vesting date may vest on a subsequent vesting date if the common stock price hurdle is met as of such subsequent vesting date. The executives will not earn any LTIP Units under the 2012 Outperformance Plan to the extent that the Companys common stock price is less than the minimum hurdle. Messrs. DuGan, Harris and Pell were granted awards under the 2012 Outperformance Plan pursuant to which they may earn up to $10,000, $6,000 and $4,000 of LTIP Units, respectively. During the performance period, the executives may earn up to 12%, 24% and 36% of the maximum amount under the 2012 Outperformance Plan at the end of the first, second and third years, respectively, of the performance period if the Companys common stock price has equaled or exceeded the stock price hurdles as of the end of such years. If the minimum stock price hurdle is met as of the end of any such year, the actual amount earned will range on a sliding scale from 20% of the maximum amount that may be earned as of such date (at the minimum stock price hurdle) to 100% of the maximum amount that may be earned as of such date (at the maximum stock price hurdle). Any LTIP Units earned under the 2012 Outperformance Plan will remain subject to vesting, with 50% of any LTIP Units earned vesting on June 30, 2016 and the remaining 50% vesting on June 30, 2017 based, in each case, on continued employment through the vesting date. The LTIP Units issued in July 2012 in connection with the hiring of new executives had a fair value of $1,870 on the date of grant, which was calculated in accordance with ASC 718.
In March 2013, the Company granted four senior officers equity awards pursuant to the 2012 Outperformance Plan in the form of LTIP units having an aggregate maximum value of $4,000, and a fair value of $845, which was calculated in accordance with ASC 718. The Company used a probabilistic valuation approach to estimate the inherent uncertainty that the LTIP Units may have with respect to the Companys common stock. Compensation expense of $555 and $210 was recorded for the years ended December 31, 2013 and 2012 for the 2012 Outperformance Plan. Compensation expense of $1,943 will be recorded over the course of the next 36 months, representing the remaining weighted average vesting period of the LTIP Units as of December 31, 2013.
In connection with the equity awards made to Messrs. DuGan, Harris and Pell in connection with the Companys hiring of these executives, the Company adopted the 2012 Inducement Equity Incentive Plan, or the Inducement Plan. Under the Inducement Plan, the Company may grant equity awards for up to 4,500,000 shares of common stock pursuant to the employment inducement award exemption provided by the New York Stock Exchange Listed Company Manual. The Inducement Plan permits the Company to issue a variety of equity awards, including stock options, restricted stock, phantom shares, dividend equivalent rights and other equity-based awards. All of the shares available under the Inducement Plan were issued or reserved for issuance to Messrs. DuGan, Harris and Pell in connection with the equity awards made upon the commencement of their employment with the Company. Equity awards issued under the Inducement Plan had
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a fair value of $3,830 on the date of grant which was calculated in accordance with ASC 718. Compensation expense of $766 and $383 was recorded for years ended December 31, 2013 and 2012 for the 2012 Inducement Equity Incentive Plan. Compensation expense of $2,681 will be recorded over the course of the next 30 months representing the remaining weighted average vesting period of equity awards issued under the Inducement Plan as of December 31, 2013.
The Company had previously issued LTIP unit awards to both the former Chief Executive Officer and the former President. During 2011, the Company entered into an amendment to the LTIP unit award agreement with these executives to cancel the vesting schedule of outstanding LTIP units in the Partnership (LTIP Units) and grant a new vesting schedule with respect to such LTIP Units. The new vesting schedule provided for 50% of each executive's LTIP Units to vest on June 30, 2012 subject to continued employment and an additional 50% of each Executive's LTIP Units to vest upon the satisfaction of certain vesting conditions relating to the settlement of the Company's mortgage and mezzanine loans. Compensation expense of $0, $401 and $1,433 was recorded for the years ended December 31, 2013, 2012 and 2011, respectively, related to the issuance and modification of LTIP units.
In November 2007, the Companys board of directors adopted, and the stockholders subsequently approved in June 2008, the 2008 Employee Stock Purchase Plan, or ESPP, to provide equity-based incentives to eligible employees. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and has been adopted by the board to enable the Companys eligible employees to purchase its shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 250,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. The Company filed a registration statement on Form S-8 with the Securities and Exchange Commission with respect to the ESPP. The common stock is offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering period or (2) the market value of the common stock on the last day of the offering period.
Under the Companys Independent Directors Deferral Program, which commenced April 2005, the Companys independent directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors termination of service from the board of directors or a change in control by the Company, as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of the Companys common stock on the applicable dividend record date for the respective quarter. If dividends are declared by the Company, each participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter or have dividends paid in cash.
As of December 31, 2013, there were approximately 534,038 phantom stock units outstanding, of which 528,538 units are vested.
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Earnings per share for the years ended December 31, 2013, 2012 and 2011 are computed as follows:
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For the Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Numerator Income (loss) |
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Net income (loss) from continuing operations | $ | (8,172 | ) | $ | (18,341 | ) | $ | (20,903 | ) | |||
Net income (loss) from discontinued operations | 392,999 | (153,207 | ) | 358,380 | ||||||||
Net Income (loss) | 384,827 | (171,548 | ) | 337,477 | ||||||||
Preferred stock dividends | (7,162 | ) | (7,162 | ) | (7,162 | ) | ||||||
Numerator for basic income per share Net income (loss) available to common stockholders: | 377,665 | (178,710 | ) | 330,315 | ||||||||
Effect of dilutive securities | | | | |||||||||
Diluted Earnings: |
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Net income (loss) available to common stockholders | $ | 377,665 | $ | (178,710 | ) | $ | 330,315 | |||||
Denominator Weighted Average shares: |
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Weighted average shares outstanding | 62,179,631 | 53,359,850 | 50,229,102 | |||||||||
Less: Unvested restricted shares | (678,784 | ) | (1,383,388 | ) | | |||||||
Denominator for basic income per share | 61,500,847 | 51,976,462 | 50,229,102 | |||||||||
Effect of dilutive securities |
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LTIP | | | | |||||||||
Stock based compensation plans | | | | |||||||||
Phantom stock units | | | | |||||||||
Diluted shares | 61,500,847 | 51,976,462 | 50,229,102 |
Diluted income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares if the effect is not anti-dilutive. For the year ended December 31, 2013, 51,412 share options and 534,038 phantom share units were computed using the treasury share method, which due to the net loss from continuing operations were anti-dilutive. For the year ended December 31, 2012, 16,362 share options, and 462,102 phantom share units were computed using the treasury share method, which due to the net loss from continuing operations were anti-dilutive. For the year ended December 31, 2011, 261,918 share options and 499,143 phantom share units were computed using the treasury share method, which due to the net loss from continuing operations were anti-dilutive.
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Accumulated other comprehensive income (loss) as of December 31, 2013, 2012 and 2011 is comprised of the following:
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As of December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net realized and unrealized losses on interest rate swap and cap agreements accounted for as cash flow hedges | $ | (186 | ) | $ | (179,956 | ) | $ | (182,102 | ) | |||
Net unrealized gain (loss) on available-for-sale securities | | 84,691 | (258,837 | ) | ||||||||
Net unrealized loss on debt securities | (1,219 | ) | | | ||||||||
Total accumulated other comprehensive (loss) | $ | (1,405 | ) | $ | (95,265 | ) | $ | (440,939 | ) |
The Company reclassified unrealized gains on CMBS of $107,774 for the year ended December 31, 2013 into net income as a component of the gain on disposal of Gramercy Finance on the Consolidated Statement of Operations and Comprehensive Income (Loss). The Company also reclassified the unamortized fair value of terminated swaps previously designated as cash flow hedges of $6,359 into net income as a component of the gain on disposal of Gramercy Finance on the Consolidated Statement of Operations and Comprehensive Income (Loss).
In June 2009, the Company implemented a 401(k) Savings/Retirement Plan, or the 401(k) Plan, to cover eligible employees of the Company, and any designated affiliate. The 401(k) Plan permits eligible employees to defer up to 15% of their annual compensation, subject to certain limitations imposed by the Code. The employees elective deferrals are immediately vested and non-forfeitable. The 401(k) Plan provides for discretionary matching contributions by the Company. Except for the 401(k) Plan, at December 31, 2013, the Company did not maintain a defined benefit pension plan, post-retirement health and welfare plan or other benefit plans. The expense associated with the Companys matching contribution was $156, $227 and $218 for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company is obligated under certain tenant leases, to construct the underlying leased property or fund tenant expansions. As of December 31, 2013, the Company had four outstanding commitments: (1) the construction of a 118,000 square foot cold storage facility located in Hialeah Gardens, Florida, of which the unfunded amounts were estimated to be $16,772; (2) the contribution of $1,500 towards tenant improvements on a warehouse/industrial property in Garland, Texas, of which the unfunded amounts were estimated to be $854; (3) the expansion of a property located in Olive Branch, Mississippi, whereby the tenant has a one-time option to expand the building by 250,000 square feet; and (4) the expansion of a property located in Logan Township, New Jersey, whereby the tenant has a one-time option to expand the building by 25,000 square feet. The tenants have not noticed the Company for the building expansion options and as such, no amounts are due and no unfunded amounts have been estimated.
The Company evaluates litigation contingencies based on information currently available, including the advice of counsel and the assessment of available insurance coverage. The Company will establish accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. The Company will periodically review these contingences which may be adjusted if circumstances change. The outcome of a litigation matter and the amount or range of potential losses at particular points may be difficult to ascertain. If a range of loss is estimated and an amount within such range appears to be a better estimate than any other amount within that range, then that amount is accrued.
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In December 2010, the Company sold its 45% joint venture interest in the leased fee of the 2 Herald Square property in New York, New York, for approximately $25,600 plus assumed mortgage debt of approximately $86,100 or the 2 Herald Sale Transaction. Subsequent to the closing of the transaction, the New York City Department of Finance, or the NYC DOF, and New York State Department of Taxation, or the NYS DOT, issued notices of determination assessing, in the case of the NYC DOF notice, approximately $2,924 of real property transfer tax, plus interest, and, in the case of the NYS DOT notice, approximately $446 of real property transfer tax, plus interest, collectively, the Transfer Tax Assessments, against the Company in connection with the 2 Herald Sale Transaction. The Company believes that NYC DOF and NYS DOT erred in issuing the Transfer Tax Assessments and intends to vigorously defend against same. In September 2013, the Company filed a petition challenging the NYC DOF Transfer Tax Assessment with the New York City Tax Appeal Tribunal, and intends to timely file a similar petition challenging the NYS DOF Transfer Tax Assessment.
In November 2013, NYC DOF filed an answer to the petition reiterating their position that the 2 Herald Sale Transaction was taxable by NYC DOF. In January and February 2014, the parties held a preliminary conference with the trial judge assigned the matter, agreed to discuss whether a settlement could be reached and subsequently determined that no such settlement was possible. A follow-up conference with the judge is scheduled during March 2014, at which the Company anticipates that parties will advise the judge that they wish to proceed to trial, which the Company expects to occur in mid-2014.
An initial conciliation conference for the NYS DOT Transfer Tax Assessment was held in October 2013. In November 2013, the NYS DOT provided additional information in support of its position. In February 2014, following a discussion, the Company and the NYS DOT determined that the parties could not amicably settle the dispute. The Company expects that the conciliator will issue its determination shortly, following which the Company will formally file our petition challenging the NYS DOT Transfer Tax Assessment.
The Company believes that it has strong defenses against the Transfer Tax Assessments and intends to continue to vigorously assert same. The Company evaluates contingencies based on information currently available, including the advice of counsel. The Company establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. The Company will periodically review these contingences and may adjust the amount of the accrual if circumstances change. The outcome of a contingent matter and the amount or range of potential losses at particular points may be difficult to ascertain. If a range of loss is estimated and an amount within such range appears to be a better estimate than any other amount within that range, then that amount is accrued. Considering the recent developments as discussed above, as of December 31, 2013, the Company established an accrual of approximately $4,339 for the Transfer Tax Assessments, which represents the full amount of the assessed tax plus estimated interest and penalties through December 31, 2013, within discontinued operations.
In addition, the Company and/or one or more of its subsidiaries is party to various litigation matters that are considered routine litigation incidental to its business, none of which are considered material.
The Companys corporate offices at 521 Fifth Avenue, 30th Floor, New York, New York are subject to an operating lease agreement with 521 Fifth Fee Owner, LLC, an affiliate of SL Green, effective as of September 2013. The lease is for approximately 6,580 square feet and carries a term of 10 years with rents of approximately $373 per annum for year one rising to $463 per annum in year ten.
The Companys previous corporate offices at 420 Lexington Avenue, New York, New York, were subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, effective May 1, 2005, which was subsequently amended in May and June 2009 and in June 2012. In April 2013, the Company
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gave notice that it was cancelling the lease for the corporate offices at 420 Lexington Avenue effective in September 2013 concurrently with the commencement of the lease for the new corporate offices at 521 Fifth Avenue.
The Companys regional management office located at 610 Old York Road, Jenkintown, Pennsylvania, is subject to an operating lease with an affiliate of KBS REIT. The lease is for approximately 19,000 square feet, and expires on April 30, 2014, with rents of approximately $322 per annum. The Companys regional management office located at 800 Market Street, St. Louis, Missouri is subject to an operating lease with St. Louis BOA Plaza, LLC. The lease is for approximately 2,000 square feet, expires on September 30, 2014, and is cancelable with 60 days notice. The lease is subject to rents of $32 per annum.
The Company has elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Companys net income and net cash available for distributions to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company may, however, be subject to certain state and local taxes. Our TRSs are subject to federal, state and local taxes. The Companys Asset and Property management business, Gramercy Asset Management, conducts its business through a wholly-owned TRS. In addition to the limitation on the Company's use of its net operating losses under Section 382, since the Company uses separate taxable REIT subsidiaries to conduct different aspects of its business, losses incurred by the individual TRSs are only available to offset taxable income derived by each respective TRS.
Beginning with the third quarter of 2008, the Companys board of directors elected to not pay a dividend to common stockholders. The board of directors also elected not to pay the Series A Preferred Stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividends were accrued for twenty-one quarters through December 31, 2013. In December 2013, the board of directors authorized and the Company declared a catch-up dividend in the amount of $10.23524 per share of the 8.125% Series A Cumulative Redeemable Preferred Stock, representing all accrued and unpaid dividends on the Series A Preferred Stock for the period October 1, 2008, through and including October 14, 2013. In December 2013, the board of directors also authorized and the Company declared a Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period October 15, 2013, through and including January 14, 2014. Both the accrued dividend and the quarterly dividend were paid to holders of the Series A Preferred Stock of record as of the close of business on December 31, 2013. The accrued dividend was paid on January 13, 2014, and the quarterly dividend was paid on January 15, 2014.
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The Companys provision for income taxes for the years ended December 31, 2013, 2012 and 2011 is summarized as follows:
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2013 | 2012 | 2011 | ||||||||||
Current: |
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Federal | $ | (5,902 | ) | $ | (1,990 | ) | $ | (275 | ) | |||
State and local | (2,535 | ) | (1,061 | ) | (206 | ) | ||||||
Total current | (8,437 | ) | (3,051 | ) | (481 | ) | ||||||
Deferred: |
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Federal | (348 | ) | (174 | ) | (62 | ) | ||||||
State and local | (123 | ) | (105 | ) | (20 | ) | ||||||
Total deferred | (471 | ) | (279 | ) | (82 | ) | ||||||
Total income tax expense | $ | (8,908 | ) | $ | (3,330 | ) | $ | (563 | ) |
For the years ended December 31, 2013, 2012 and 2011 the Company recorded $8,908, $3,330, and $563 of income tax expense, including $2,515, $0, and $0 within discontinued operations, respectively. Tax expense for the years ended December 31, 2013, 2012 and 2011 in continuing operations is comprised of federal, state and local taxes primarily attributable to Gramercy Asset Management. Tax expense for the year ended December 31, 2013 included in discontinued operations is comprised of federal, state and local taxes attributable to the sale of the CDO management contracts to CWCapital. As of December 31, 2013, returns for the calendar years 2010 through 2013 remain subject to examination by the Internal Revenue Service and various state and local tax jurisdictions. As of December 31, 2013, certain returns for calendar year 2009 also remain subject to examination by various state and local tax jurisdictions.
Net deferred tax assets of $635 and $0 are included in other assets on the accompanying Consolidated Balance Sheets at December 31, 2013 and 2012, respectively. These net deferred tax assets relate primarily to differences in the timing of the recognition of income (loss) between GAAP and tax. All deferred tax assets relating to net operating loss carry forwards of TRSs are fully reserved.
The income tax provision differs from the amount computed by applying the statutory federal income tax rate to pre-tax operating income, as follows:
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For the year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Income tax (expense) benefit at federal statutory rate | $ | (137,775 | ) | $ | 58,366 | $ | (118,314 | ) | ||||
Tax effect of REIT election | 138,563 | (60,230 | ) | 118,596 | ||||||||
State and local taxes, net of federal benefit | (1,088 | ) | (843 | ) | (186 | ) | ||||||
Permanent difference | (1 | ) | 1,252 | 99 | ||||||||
Valuation allowance | (8,607 | ) | (1,672 | ) | (737 | ) | ||||||
Other | | (203 | ) | (21 | ) | |||||||
Total income tax benefit (provision) | $ | (8,908 | ) | $ | (3,330 | ) | $ | (563 | ) |
As of December 31, 2013, the Company and each of its eleven subsidiaries which file corporate tax returns, had total net loss carryforwards, inclusive of net operating losses and capital losses, of approximately $560,000. Net operating loss carryforwards and capital loss carryforwards can generally be used to offset future ordinary income and capital gains of the entity originating the losses, for up to 20 years and 5 years, respectively. The amounts of net operating loss carryforwards and capital loss carryforwards as of December 31, 2013 are subject to the completion of the 2013 tax returns. In January 2011, the Company and
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two of its subsidiaries experienced an ownership change, as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership change occurs if there is a change in ownership of more than 50% of its common stock during a cumulative three year period. For this purpose, determinations of ownership changes are generally limited to shareholders deemed to own 5% or more of the Companys common stock. The provisions of Section 382 will apply an annual limit to the amount of net loss carryforwards that can be used to offset future ordinary income and capital gains, beginning with the 2011 taxable year.
In addition to the limitation on the Companys use of its net operating losses under section 382, since the company uses separate taxable REIT subsidiaries to conduct different aspects of its business, losses incurred by the individual TRSs are only available to offset taxable income derived by each respective TRS.
The Companys policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating expense, respectively. As of December 31, 2013, 2012 and 2011, the Company did not incur any material interest or penalties.
The Company believes that it is in compliance in all material respects with applicable federal, state and local ordinances and regulations regarding environmental issues. Its management is not aware of any environmental liability that it believes would have a materially adverse impact on the Companys financial position, results of operations or cash flows.
As of December 31, 2013, the Company has determined that it has two reportable operating segments: Asset Management and Investments/Corporate. On March 15, 2013, the Company disposed of its third reportable segment, Gramercy Finance, as more fully discussed in Note 1. The reportable segments are determined based upon the management approach, which looks to the Companys internal organizational structure. The Companys lines of business require different support infrastructures. In 2012, as a result of the KBS settlement and management agreements, the Company changed the composition of its business segments to separate Asset Management from Investments. The year ended December 31, 2011 has been restated to conform with this change.
The Investments/Corporate segment includes all of the Companys activities related to net lease investments in markets across the United States. The Investments/Corporate segment generates revenues from rental revenues from properties owned by the Company.
The Asset Management segment includes substantially all of the Companys activities related to asset and property management services. The Asset Management segment generates revenues from fee income related to the management agreements for properties owned by third-parties.
The Finance segment, which included the Companys activities related to origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, CMBS and other real estate related securities, and which generated revenues from interest income on loans, other lending investments and CMBS owned in the Companys CDOs, was classified as held for sale at December 31, 2012 in connection with the disposal in the first quarter of 2013.
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The Company evaluates performance based on the following financial measures for each segment:
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Finance | Asset Management | Investments/ Corporate | Total | |||||||||||||
Year Ended December 31, 2013 |
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Total revenues | $ | | $ | 40,896 | $ | 15,808 | $ | 56,704 | ||||||||
Equity in net loss from unconsolidated joint ventures | | | (5,662 | ) | (5,662 | ) | ||||||||||
Total operating and interest expense(1) | | (30,887 | ) | (28,327 | ) | (59,214 | ) | |||||||||
Net income (loss) from continuing operations(2) | $ | | $ | 10,009 | $ | (18,181 | ) | $ | (8,172 | ) |
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Finance | Asset Management | Corporate/ Other(2) | Total | |||||||||||||
Year Ended December 31, 2012 |
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Total revenues | $ | | $ | 34,667 | $ | 2,154 | $ | 36,821 | ||||||||
Equity in net loss from unconsolidated joint ventures | | | (2,904 | ) | (2,904 | ) | ||||||||||
Total operating and interest expense(1) | | (24,824 | ) | (27,434 | ) | (52,258 | ) | |||||||||
Net income (loss) from continuing operations(2) | $ | | $ | 9,843 | $ | (28,184 | ) | $ | (18,341 | ) |
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Finance | Asset Management | Corporate/ Other(2) | Total | |||||||||||||
Year Ended December 31, 2011 |
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Total revenues | $ | | $ | 7,336 | $ | 436 | $ | 7,772 | ||||||||
Equity in net income from unconsolidated joint ventures | | | 121 | 121 | ||||||||||||
Total operating and interest expense(1) | | (10,555 | ) | (18,241 | ) | (28,796 | ) | |||||||||
Net loss from continuing operations(2) | $ | | $ | (3,219 | ) | $ | (17,684 | ) | $ | (20,903 | ) | |||||
Total Assets: |
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December 31, 2013 | $ | | $ | 12,950 | $ | 478,713 | $ | 491,663 | ||||||||
December 31, 2012 | $ | 1,937,554 | $ | | $ | 231,282 | $ | 2,168,836 |
(1) | Total operating and interest expense includes operating costs on commercial property assets for the Investments segment and costs to perform required functions under the management agreement for the Asset Management segment. Depreciation and amortization of $5,675, $256 and $136 and provision for taxes of $6,393, $3,330 and $563 for the years ended December 31, 2013, 2012, and 2011, respectively, are included in the amounts presented above. |
(2) | Net income (loss) from continuing operations represents loss before discontinued operations. |
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The following table represents non-cash activities recognized in other comprehensive income for the years ended December 31, 2013, 2012 and 2011:
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2013 | 2012 | 2011 | ||||||||||
Deferred losses and other non-cash activity related to derivatives | $ | (187 | ) | $ | 2,146 | $ | (19,334 | ) | ||||
Change in net unrealized loss on securities available for sale | $ | (1,219 | ) | $ | 343,528 | $ | (260,820 | ) |
This unaudited interim financial information has been adjusted to reflect reclassifications for discontinued operations as of December 31, 2013.
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2013 Quarter Ended | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Total Revenues | $ | 17,712 | $ | 13,421 | $ | 16,304 | $ | 9,267 | ||||||||
Income (loss) before equity in net income (loss) of joint ventures, provision for taxes, non-controlling interest and discontinued operations | 2,109 | 766 | 3,325 | (2,317 | ) | |||||||||||
Equity in net income (loss) of joint ventures | (2,854 | ) | 983 | (2,603 | ) | (1,188 | ) | |||||||||
Income (loss) from continuing operations before provision for taxes and discontinued operations | (745 | ) | 1,749 | 722 | (3,505 | ) | ||||||||||
Provision for taxes | (803 | ) | (744 | ) | (4,441 | ) | (405 | ) | ||||||||
Net income (loss) continuing operations | (1,548 | ) | 1,005 | (3,719 | ) | (3,910 | ) | |||||||||
Net income (loss) from discontinued operations | (4,399 | ) | (514 | ) | (1,175 | ) | 399,087 | |||||||||
Net income (loss) attributable to Gramercy Property Trust Inc. | (5,947 | ) | 491 | (4,894 | ) | 395,177 | ||||||||||
Preferred stock dividends | (1,792 | ) | (1,790 | ) | (1,790 | ) | (1,790 | ) | ||||||||
Net income (loss) available to common stockholders | $ | (7,739 | ) | $ | (1,299 | ) | $ | (6,684 | ) | $ | 393,387 | |||||
Basic earnings per share: |
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Net loss from continuing operations and after preferred dividends | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.10 | ) | ||||
Net income (loss) from discontinued operations | (0.06 | ) | (0.01 | ) | (0.02 | ) | 6.80 | |||||||||
Net income (loss) available to common stock holders | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.11 | ) | $ | 6.70 | |||||
Diluted earnings per share: |
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Net loss from continuing operations and after preferred dividends | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.10 | ) | ||||
Net income (loss) from discontinued operations | (0.06 | ) | (0.01 | ) | (0.02 | ) | 6.80 | |||||||||
Net income (loss) available to common stock holders | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.11 | ) | $ | 6.70 | |||||
Basic weighted average common shares outstanding | 69,724,546 | 58,902,708 | 58,605,219 | 58,678,078 | ||||||||||||
Diluted weighted average common shares and common share equivalents outstanding | 69,724,546 | 58,902,708 | 58,605,219 | 58,678,078 |
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2012 Quarter Ended | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Total Revenues | $ | 9,666 | $ | 9,157 | $ | 9,644 | $ | 8,354 | ||||||||
Loss before equity in net income of joint ventures, provision for taxes and discontinued operations | (310 | ) | (4,790 | ) | (5,416 | ) | (1,591 | ) | ||||||||
Equity in net income (loss) of joint ventures | (2,992 | ) | 31 | 29 | 28 | |||||||||||
Loss from continuing operations before provision for taxes and discontinued operations | (3,302 | ) | (4,759 | ) | (5,387 | ) | (1,563 | ) | ||||||||
Provision for taxes | 48 | 40 | (2,106 | ) | (1,312 | ) | ||||||||||
Net loss from continuing operations | (3,254 | ) | (4,719 | ) | (7,493 | ) | (2,875 | ) | ||||||||
Net income (loss) from discontinued operations | (145,334 | ) | 1,829 | (12,218 | ) | 2,516 | ||||||||||
Net loss attributable to Gramercy Property Trust Inc. | (148,588 | ) | (2,890 | ) | (19,711 | ) | (359 | ) | ||||||||
Preferred stock dividends | (1,792 | ) | (1,790 | ) | (1,790 | ) | (1,790 | ) | ||||||||
Net loss to common stockholders | $ | (150,380 | ) | $ | (4,680 | ) | $ | (21,501 | ) | $ | (2,149 | ) | ||||
Basic earnings per share: |
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Net loss from continuing operations, net of non-controlling interest and after preferred dividends | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.09 | ) | ||||
Net income (loss) from discontinued operations | (2.69 | ) | 0.03 | (0.24 | ) | 0.05 | ||||||||||
Net loss to common stockholders | $ | (2.78 | ) | $ | (0.09 | ) | $ | (0.42 | ) | $ | (0.04 | ) | ||||
Diluted earnings per share: |
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Net loss from continuing operations, net of non-controlling interest and after preferred dividends | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.09 | ) | ||||
Net income (loss) from discontinued operations | (2.69 | ) | 0.03 | (0.24 | ) | 0.05 | ||||||||||
Net loss available to common stockholders | $ | (2.78 | ) | $ | (0.09 | ) | $ | (0.42 | ) | $ | (0.04 | ) | ||||
Basic weighted average common shares outstanding |
54,120,499 | 52,308,653 | 50,759,306 | 51,261,325 | ||||||||||||
Diluted weighted average common shares and common share equivalents outstanding | 54,120,499 | 52,308,653 | 50,759,306 | 51,261,325 |
In February 2014, the Company closed on the acquisition of a 115,472 square foot, industrial property located in Des Plaines, Illinois for a purchase price of approximately $6,300. The property is 100% leased to one tenant through October 2025. The Company is currently analyzing the fair value of the leases and real estate assets and accordingly, the purchase price allocation is preliminary and subject to change. In connection with the acquisition, the Company assumed the existing mortgage note on the property. The assumed loan was for $2,664, with an annual fixed interest rate of 5.25% and a maturity date of October 31, 2020.
In March 2014, the Companys board of directors declared a quarterly dividend of $0.035 per common share for the first quarter of 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014. The Companys board of directors also declared the Series A Preferred Stock quarterly dividend payment in the amount of $0.50781 per share, for the period January 15, 2014, through and including April 14, 2014, payable on April 15, 2014 to holders of record as of the close of business on March 31, 2014.
In February 2014, the Company exercised the $50,000 accordion feature of its senior secured credit facility which increased the Companys borrowing capacity from $100,000 to $150,000. All other terms of the credit facility remained the same.
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City | State | Acquisition Date | Encumbrances at December 31, 2013(1) |
Initial Costs | Net Improvements (Retirements) Since Acquisition | Gross Amount at Which Carried December 31, 2013 | Accumulated Depreciation December 31, 2013 | Average Depreciable Life | ||||||||||||||||||||||||||||||||||||
Land | Building and Improvements | Land | Building and Improvements | Total(3) | ||||||||||||||||||||||||||||||||||||||||
Industrial: |
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Greenwood | IN | 11/20/2012 | $ | 7,940 | $ | 1,200 | $ | 12,002 | $ | | $ | 1,200 | $ | 12,002 | $ | 13,202 | $ | (378 | ) | 38 | ||||||||||||||||||||||||
Greenfield | IN | 11/20/2012 | 6,417 | 600 | 9,357 | | 600 | 9,357 | 9,957 | (279 | ) | 39 | ||||||||||||||||||||||||||||||||
Olive Branch | MS | 3/11/2013 | (2) | 2,250 | 18,891 | 35 | 2,250 | 18,926 | 21,176 | (424 | ) | 39 | ||||||||||||||||||||||||||||||||
Garland | TX | 3/19/2013 | (2) | 2,200 | 6,081 | 645 | 2,200 | 6,726 | 8,926 | (260 | ) | 19 | ||||||||||||||||||||||||||||||||
East Brunswick | NJ | 3/28/2013 | (2) | 5,700 | 4,970 | 38 | 5,700 | 5,008 | 10,708 | (165 | ) | 27 | ||||||||||||||||||||||||||||||||
Atlanta | GA | 5/6/2013 | (2) | 1,700 | 4,949 | | 1,700 | 4,949 | 6,649 | (389 | ) | 20 | ||||||||||||||||||||||||||||||||
Bellmawr | NJ | 5/30/2013 | (2) | 540 | 2,992 | | 540 | 2,992 | 3,532 | (66 | ) | 34 | ||||||||||||||||||||||||||||||||
Hialeah Gardens | FL | 5/30/2013 | 4,990 | 4,839 | 1,437 | 6,971 | 4,839 | 8,408 | 13,247 | | | |||||||||||||||||||||||||||||||||
Deer Park | NY | 6/18/2013 | | 1,700 | 2,200 | | 1,700 | 2,200 | 3,900 | (66 | ) | 18 | ||||||||||||||||||||||||||||||||
Elkridge | MD | 6/19/2013 | (2) | 3,300 | 2,600 | | 3,300 | 2,600 | 5,900 | (47 | ) | 28 | ||||||||||||||||||||||||||||||||
Orlando | FL | 6/26/2013 | (2) | 2,000 | 3,036 | | 2,000 | 3,036 | 5,036 | (148 | ) | 16 | ||||||||||||||||||||||||||||||||
Houston | TX | 6/26/2013 | (2) | 2,630 | 4,151 | 135 | 2,630 | 4,286 | 6,916 | (166 | ) | 14 | ||||||||||||||||||||||||||||||||
Logan | NJ | 6/28/2013 | (2) | 750 | 10,975 | | 750 | 10,975 | 11,725 | (154 | ) | 38 | ||||||||||||||||||||||||||||||||
Atlanta | GA | 8/22/2013 | (2) | 230 | 3,770 | | 230 | 3,770 | 4,000 | (57 | ) | 24 | ||||||||||||||||||||||||||||||||
Manassas | VA | 9/5/2013 | (2) | 720 | 3,512 | | 720 | 3,512 | 4,232 | (35 | ) | 33 | ||||||||||||||||||||||||||||||||
Manassas | VA | 9/5/2013 | (2) | 780 | 3,782 | | 780 | 3,782 | 4,562 | (38 | ) | 33 | ||||||||||||||||||||||||||||||||
Yuma | AZ | 10/1/2013 | 12,600 | 1,900 | 16,273 | | 1,900 | 16,273 | 18,173 | (116 | ) | 35 | ||||||||||||||||||||||||||||||||
Austin | TX | 10/22/2013 | (2) | 970 | 5,648 | | 970 | 5,648 | 6,618 | (41 | ) | 23 | ||||||||||||||||||||||||||||||||
Galesburg | IL | 11/15/2013 | (2) | 300 | 903 | | 300 | 903 | 1,203 | (7 | ) | 27 | ||||||||||||||||||||||||||||||||
Peru | IL | 11/15/2013 | (2) | 460 | 3,024 | | 460 | 3,024 | 3,484 | (14 | ) | 39 | ||||||||||||||||||||||||||||||||
Indianapolis | IN | 11/15/2013 | 22,483 | 2,300 | 26,512 | | 2,300 | 26,512 | 28,812 | (110 | ) | 40 | ||||||||||||||||||||||||||||||||
Waco | TX | 11/21/2013 | 16,055 | 1,780 | 16,442 | | 1,780 | 16,442 | 18,222 | (39 | ) | 36 | ||||||||||||||||||||||||||||||||
Upper Macungie | PA | 12/23/2013 | 24,100 | 4,800 | 25,553 | | 4,800 | 25,553 | 30,353 | | 33 | |||||||||||||||||||||||||||||||||
Vernon | CA | 12/30/2013 | | 3,757 | 4,431 | | 3,757 | 4,431 | 8,188 | | 38 | |||||||||||||||||||||||||||||||||
Vernon | CA | 12/30/2013 | | 3,043 | 3,588 | | 3,043 | 3,588 | 6,631 | | 38 | |||||||||||||||||||||||||||||||||
Office/Banking Center: |
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Emmaus | PA | 6/6/2013 | | 720 | 890 | | 720 | 890 | 1,610 | (13 | ) | 40 | ||||||||||||||||||||||||||||||||
Calabash | SC | 6/6/2013 | | 402 | 208 | | 402 | 208 | 610 | (3 | ) | 40 | ||||||||||||||||||||||||||||||||
Morristown | NJ | 8/1/2013 | (2) | 1,960 | 2,940 | | 1,960 | 2,940 | 4,900 | (49 | ) | 25 | ||||||||||||||||||||||||||||||||
Specialty: |
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Hutchins | TX | 6/27/2013 | 25,788 | 9,600 | 52,038 | | 9,600 | 52,038 | 61,638 | (1,148 | ) | 8 | ||||||||||||||||||||||||||||||||
Franklin Park | IL | 11/21/2013 | (2) | 6,300 | 1,577 | | 6,300 | 1,577 | 7,877 | (16 | ) | 9 | ||||||||||||||||||||||||||||||||
Chicago | IL | 11/22/2013 | (2) | 3,700 | 2,025 | | 3,700 | 2,025 | 5,725 | (19 | ) | 29 | ||||||||||||||||||||||||||||||||
$ | 120,373 | $ | 73,131 | $ | 256,757 | $ | 7,824 | $ | 73,131 | $ | 264,581 | $ | 337,712 | $ | (4,247 | ) |
(1) | Encumbrances represent balances at 12/31/2013 of mortgage notes payable that are collateralized by the property for which they are noted. |
(2) | These properties collateralize the Companys credit facility which had an outstanding balance of $45,000 at 12/31/2013. |
(3) | The aggregate cost basis of land, building and improvements, before depreciation, for Federal income tax purposes at December 31, 2013 was $350,621. |
129
Set forth below is a rollforward of the carrying values for our real estate investments classified as held-for-investment:
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Years Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Investment in real estate: |
||||||||||||
Balance at beginning of year | $ | 23,159 | $ | 68,690 | $ | 2,471,923 | ||||||
Improvements | 7,824 | 1,203 | 8,494 | |||||||||
Business acquisitions | 306,729 | 39,202 | 61,626 | |||||||||
Change in held for sale | 37,667 | (7,519 | ) | (3,393 | ) | |||||||
Impairments | | (22,637 | ) | (348 | ) | |||||||
Property sales | (37,667 | ) | (55,780 | ) | (20,547 | ) | ||||||
Transfer of foreclosed assets | | | (2,449,065 | ) | ||||||||
Balance at end of year | $ | 337,712 | $ | 23,159 | $ | 68,690 | ||||||
Accumulated depreciation: |
||||||||||||
Balance at beginning of year | $ | 50 | $ | 2,983 | $ | 168,541 | ||||||
Depreciation expense | 4,197 | 1,022 | 39,707 | |||||||||
Change in held for sale | 2,966 | (2,468 | ) | (296 | ) | |||||||
Property sales | (2,966 | ) | (1,487 | ) | (412 | ) | ||||||
Transfer of foreclosed assets | | | (204,557 | ) | ||||||||
Balance at end of year | $ | 4,247 | $ | 50 | $ | 2,983 |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time frame specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure based closely on the definition of disclosure controls and procedures in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). 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 as of December 31, 2013 based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2013.
Our internal control over financial reporting during the year ended December 31, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, appearing on page 73, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2013.
As part of the repositioning of the Company as an equity REIT focused on acquiring and managing income producing net leased real estate, we have implemented a new and more efficient accounting systems during the year ended December 31, 2013. This implementation did not require any material changes in our internal control over financial reporting during the year ended December 31, 2013, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
None.
131
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2014 Annual Meeting of Stockholders, expected to be filed pursuant to Regulation 14A under the Exchange Act within 120 days after December 31, 2013 or the 2014 Proxy Statement, and is incorporated herein by reference.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information regarding principal accounting fees and services and the audit committees pre-approval policies and procedures required by this Item 14 is incorporated herein by reference to the 2014 Proxy Statement.
132
ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES |
(a)(1) Consolidated Financial Statements
Schedules other than those listed are omitted as they are not applicable or the required or equivalent information has been included in the financial statements or notes thereto.
(a)(3) Exhibits
See Index to Exhibits on following page
133
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Exhibit No. | Description | |
3.1 | Articles of Incorporation of the Company, incorporated by reference to the Companys Registration Statement on Form S-11 (No. 333-114673), filed with the SEC on July 26, 2004. | |
3.2 | Amended and Restated Bylaws of the Company, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on May 9, 2013. | |
3.3 | Articles Supplementary designating the 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share, dated April 18, 2007, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 18, 2007. | |
3.4 | Articles Supplementary designating the Class B-1 non-voting common stock of Gramercy Property Trust Inc., par value $0.001 per share, and Class B-2 non-voting common stock of Gramercy Property Trust Inc., par value $0.001 per share, incorporated by reference to the Companys Quarterly Report on Form 10-Q, filed with the SEC on November 8, 2013. | |
3.5 | Articles of Amendment to the Articles of Amendment and Restatement of the Company, dated as of April 12, 2013, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 18, 2013. | |
3.6 | Articles Supplementary Reclassifying 2,000,000 shares of Class B-1 non-voting common stock and 2,000,000 shares of Class B-2 non-voting common stock into shares of common stock, dated December 10, 2013, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on December 13, 2013. | |
4.1 | Form of specimen stock certificate representing the common stock of the Company, par value $.001 per share, filed herewith. | |
4.2 | Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 18, 2007. | |
10.1 | Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated April 19, 2006, filed herewith. | |
10.2 | First Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated as of April 18, 2007, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 18, 2007. | |
10.3 | Second Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated as of October 27, 2008, incorporated by reference to the Companys Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008. | |
10.4 | Third Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated as of August 7, 2013, incorporated by reference to the Companys Quarterly Report on Form 10-Q, filed with the SEC on August 8, 2013. | |
10.5 | Amended and Restated Credit and Guaranty Agreement, dated as of September 24, 2013, by and among GPT Property Trust LP, as borrower, Gramercy Property Trust Inc. and certain of its subsidiaries, as guarantors, the lenders party thereto from time to time, Deutsche Bank AG New York Branch as administrative agent, Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith as joint lead arrangers, Deutsche Bank Securities Inc. as sole bookrunner, and Bank of America, N.A. and RBC Capital Markets as co-syndication agents, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on September 30, 2013. |
134
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Exhibit No. | Description | |
10.6 | First Amendment to the Amended and Restated Credit and Gauranty Agreement, dated as of February 28, 2014, by and among GPT Property Trust LP, as borrower, Gramercy Property Trust Inc. and certain of its subsidiaries, as guarantors, the lenders party thereto from time to time, Deutsche Bank AG New York Branch as administrative agent and each of the other agents party thereto, filed herewith. | |
10.7 | Collateral Management Agreement, by and between Gramercy Real Estate CDO 2005 1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005. | |
10.8 | Collateral Management Agreement, dated as of August 24, 2006, by and between Gramercy Real Estate CDO 2006-1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006. | |
10.9 | Collateral Management Agreement, dated as of August 8, 2007, by and between Gramercy Real Estate CDO 2007-1, Ltd. And GKK Manager LLC, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007. | |
10.10 | Indenture, by and among Gramercy Real Estate CDO 2005-1, Ltd., as issuer, Gramercy Real Estate CDO 2005-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent, notes registrar, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005. | |
10.11 | Indenture, dated as of August 24, 2006, by and among Gramercy Real Estate CDO 2006-1, Ltd., as issuer, Gramercy Real Estate CDO 2006-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent, and Wells Fargo Bank, National Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent and notes registrar, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006. | |
10.12 | Indenture, dated as of August 8, 2007, by and among Gramercy Real Estate CDO 2007-1, Ltd., Gramercy Real Estate CDO 2007-1, LLC, GKK Liquidity LLC and Wells Fargo Bank, National Association, incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007. | |
10.13 | Second Amended and Restated Registration Rights Agreement by and between the Company and SL Green Operating Partnership, L.P., incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 20, 2006. | |
10.14 | Registration Rights Agreement, by and between various holders of the Companys common stock and the Company, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on December 9, 2004. | |
10.15 | Master Lease Agreement, dated of January 1, 2005, by and between First States Investors 5000A, LLC and Bank of America, N.A., incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on March 17, 2010. | |
10.16 | Letter Agreement, dated March 13, 2011, by and among the Company, as guarantor, GKK Stars Junior Mezz I, LLC, as guarantor, the Borrowers, the Mortgage Lenders, the Mezzanine Lenders, KBS GKK Participation Holdings I, LLC and KBS GKK Participation Holdings II, LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on March 14, 2011. |
135
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Exhibit No. | Description | |
10.17 | Letter Agreement, dated April 15, 2011, by and among the Company, as guarantor, GKK Stars Junior Mezz I, LLC, as guarantor, the Borrowers, the Mortgage Lenders, the Mezzanine Lenders, KBS GKK Participation Holdings I, LLC and KBS GKK Participation Holdings II, LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 19, 2011. | |
10.18 | Collateral Transfer and Settlement Agreement, dated as of September 1, 2011, by and among GKK Stars Acquisition LLC, KBS Acquisition Sub, LLC, KBS Debt Holdings Mezz Holder, LLC, KBS GKK Participation Holdings I, LLC, KBS GKK Participation Holdings II, LLC and KBS Acquisition Holdings, LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on September 8, 2011. | |
10.19 | Agreement For Sale of Membership Interests, dated August 17, 2012, by and between KBS Acquisition Sub-Owner 2, LLC and BBD1 Holdings LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on August 22, 2012. | |
10.20 | Loan Agreement, dated August 17, 2012, between KBS REIT Properties, LLC; KBS Acquisition Sub-Owner 5, LLC; KBS Acquisition Sub-Owner 6, LLC; KBS Acquisition Sub-Owner 7, LLC; KBS Acquisition Sub-Owner 8, LLC, as borrowers, Gramercy Investment Trust and Garrison Commercial Funding XI LLC, as lenders, and Gramercy Loan Services LLC, as agent for lenders, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on August 22, 2012. | |
10.21 | Loan Agreement, dated December 6, 2012, by and between GPT GIG BOA Portfolio Owner LLC and JPMorgan Chase Bank, National Association, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on December 12, 2012. | |
10.22 | Stockholder Agreement, dated December 6, 2012, by and between Gramercy Property Trust Inc. and KBS Acquisition Sub-Owner 2, LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on December 12, 2012. | |
10.23 | Sale and Purchase Agreement, dated January 30, 2013, by and among Gramercy Investment Trust, Gramercy Investment Trust II, GKK Manager LLC, Gramercy Loan Services LLC, GKK Liquidity LLC, Gramercy Property Trust Inc., CWCapital Investments LLC and CW Financial Services LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on February 5, 2013. | |
10.24 | Common Stock Purchase Agreement, dated as of October 4, 2013, among the Company, BHR Master Fund, Ltd. and BHR OC Master Fund, Ltd., incorporated by reference to the Companys Current Report on Form 8-K/A, filed with the SEC on October 7, 2013. | |
10.25 | Form of Joinder Agreement pursuant to the Common Stock Purchase Agreement, dated as of October 4, 2013, among the Company, BHR Master Fund, Ltd. and BHR OC Master Fund, Ltd. (attached thereto is information with respect to the number of common shares and aggregate purchase price for each additional purchaser), incorporated by reference to the Companys Current Report on Form 8-K/A, filed with the SEC on October 7, 2013. | |
10.26 | Form of Contingent Value Rights Agreement pursuant to the Common Stock Purchase Agreement, dated as of October 4, 2013, among the Company, BHR Master Fund, Ltd. and BHR OC Master Fund, Ltd. (attached thereto is information with respect to the number of contingent value rights for each purchaser), incorporated by reference to the Companys Current Report on Form 8-K/A, filed with the SEC on October 7, 2013. | |
10.27 | Amended and Restated Asset Management Services Agreement, dated as of December 1, 2013, by and between KBS Acquisition Sub, LLC, and GKK Realty Advisors LLC, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on December 20, 2013. |
136
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Exhibit No. | Description | |
10.28 | Amended and Restated 2004 Equity Incentive Plan, dated as of October 27, 2008, incorporated by reference to the Companys Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008.* | |
10.29 | First Amendment to Amended and Restated 2004 Equity Incentive Plan, dated as of October 27, 2008, incorporated by reference to the Companys Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008.* | |
10.30 | 2008 Employee Stock Purchase Plan, incorporated by referenced to the Companys Registration Statement on Form S-8 (333-149838), filed with the SEC on March 20, 2008.* | |
10.31 | 2012 Inducement Equity Incentive Plan, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* | |
10.32 | Gramercy Property Trust Inc. Directors Deferral Program, incorporated by reference to the Companys Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2005.* | |
10.33 | Form of Restricted Stock Award Agreement, incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the SEC on March 17, 2008.* | |
10.34 | Form of Option Award Agreement, incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the SEC on March 17, 2008.* | |
10.35 | Form of Phantom Share Award Agreement, incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the SEC on March 17, 2008.* | |
10.36 | Form of 2012 Long-Term Outperformance Plan Award Agreement, incorporated by reference to the Companys Current Report on Form 8-K, dated June 7, 2012, filed with the SEC on June 13, 2012.* | |
10.37 | Employment and Noncompetition Agreement, dated as of April 27, 2009, by and between Gramercy Property Trust Inc. and Jon W. Clark, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on April 28, 2009.* | |
10.38 | Restricted Stock Award, dated as of January 5, 2012, by the Company to Roger M. Cozzi, incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 15, 2012.* | |
10.39 | Amendment, dated as of January 1, 2012, by and between GKK Capital LP and Jon W. Clark, incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 15, 2012.* | |
10.40 | Employment and Noncompetition Agreement, dated as of June 7, 2012, by and between Gramercy Property Trust Inc. and Gordon DuGan, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* | |
10.41 | Employment and Noncompetition Agreement, dated as of June 12, 2012, by and between Gramercy Property Trust Inc. and Benjamin P. Harris, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* | |
10.42 | Separation and Release Agreement, dated as of June 12, 2012, by and among Gramercy Property Trust Inc., GKK Capital LP and Roger M. Cozzi, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* | |
10.43 | Transition and Release Agreement, dated as of June 12, 2012, by and among Gramercy Property Trust Inc., GKK Capital LP and Timothy J. OConnor, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* | |
10.44 | Amendment to Retention Agreement, dated as of June 12, 2012, by and between Gramercy Property Trust Inc. and Michael G. Kavourias, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on June 13, 2012.* |
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Exhibit No. | Description | |
10.45 | Amendment, dated as of July 28, 2011, by and among the Company, GKK Capital LP and Roger M. Cozzi, incorporated by reference to the Companys Current Report on Form 8-K, dated July 28, 2011, filed with the SEC on August 3, 2011.* | |
10.46 | Amendment to LTIP Unit Award Agreement, dated as of July 28, 2011, by and among the Company, GKK Capital LP and Roger M. Cozzi, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on August 3, 2011.* | |
10.47 | Amendment, dated as of July 28, 2011, by and among the Company, GKK Capital LP and Timothy J. OConnor, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on August 3, 2011.* | |
10.48 | Amendment to LTIP Unit Award Agreement, dated as of July 28, 2011, by and among the Company, GKK Capital LP and Timothy J. OConnor, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on August 3, 2011.* | |
10.49 | First Amendment, dated April 30, 2013, to the Employment and Noncompetition Agreement, dated July 1, 2012, as amended, by and between Gramercy Property Trust Inc. and Gordon F. DuGan, incorporated by reference to the Companys Current Report on Form 8-K, filed with the SEC on May 6, 2013.* | |
21.1 | Subsidiaries of the Registrant, filed herewith. | |
23.1 | Consent of Independent Registered Accounting Firm, filed herewith. | |
31.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
31.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. | |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. | |
101.INS | XBRL Instance Document, filed herewith. | |
101.SCH | XBRL Taxonomy Extension Schema, filed herewith. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase, filed herewith. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase, filed herewith. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase, filed herewith. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase, filed herewith. |
* | This exhibit is a management contract or a compensatory plan or arrangement. |
138
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GRAMERCY PROPERTY TRUST INC. | ||
Dated: March 14, 2014 | By: /s/ Jon W. Clark |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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Signatures | Title | Date | ||
/s/ Gordon F. DuGan ![]() |
Chief Executive Officer, (Principal Executive Officer) |
March 14, 2014 | ||
/s/ Jon W. Clark ![]() |
Chief Financial Officer, (Principal Financial and Accounting Officer) |
March 14, 2014 | ||
/s/ Allan J. Baum ![]() |
Chairman of the Board | March 14, 2014 | ||
/s/ Marc Holliday ![]() |
Director | March 14, 2014 | ||
/s/ Gregory F. Hughes ![]() |
Director | March 14, 2014 | ||
/s/ Jeffrey E. Kelter ![]() |
Director | March 14, 2014 | ||
/s/ Charles S. Laven ![]() |
Director | March 14, 2014 | ||
/s/ William H. Lenehan ![]() |
Director | March 14, 2014 |
139
Exhibit 10.1
THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
GKK CAPITAL LP
Dated as of April 19, 2006
TABLE OF CONTENTS
Page | ||||
ARTICLE I | DEFINED TERMS | 1 | ||
ARTICLE II | ORGANIZATIONAL MATTERS | 11 | ||
Section 2.01. | Organization | 11 | ||
Section 2.02. | Name | 11 | ||
Section 2.03. | Registered Office and Agent; Principal Office | 12 | ||
Section 2.04. | Term | 12 | ||
ARTICLE III | PURPOSE | 12 | ||
Section 3.01. | Purpose and Business | 12 | ||
Section 3.02. | Powers | 12 | ||
Section 3.03. | Partnership Only for Purposes Specified | 13 | ||
ARTICLE IV | CAPITAL CONTRIBUTIONS AND ISSUANCES OF PARTNERSHIP INTERESTS | 13 | ||
Section 4.01. | Capital Contributions of the Partners | 13 | ||
Section 4.02. | Issuances of Partnership Interests | 13 | ||
Section 4.03. | No Preemptive Rights | 15 | ||
Section 4.04. | Other Contribution Provisions | 15 | ||
Section 4.05. | No Interest on Capital | 15 | ||
ARTICLE V | DISTRIBUTIONS | 15 | ||
Section 5.01. | Requirement and Characterization of Distributions | 15 | ||
Section 5.02. | Amounts Withheld | 17 | ||
Section 5.03. | Distributions Upon Liquidation | 17 | ||
Section 5.04. | Revisions to Reflect Issuance of Additional Partnership Interests | 17 | ||
ARTICLE VI | ALLOCATIONS | 17 | ||
Section 6.01. | Allocations For Capital Account Purposes | 17 | ||
Section 6.02. | Revisions to Allocations to Reflect Issuance of Additional Partnership Interests | 19 | ||
ARTICLE VII | MANAGEMENT AND OPERATIONS OF BUSINESS | 19 | ||
Section 7.01. | Management | 19 | ||
Section 7.02. | Certificate of Limited Partnership | 22 | ||
Section 7.03. | Title to Partnership Assets | 22 | ||
Section 7.04. | Reimbursement of the General Partner | 23 | ||
Section 7.05. | Outside Activities of the General Partner | 24 |
i |
Page | ||||
Section 7.06. | Transactions with Affiliates | 25 | ||
Section 7.07. | Indemnification | 25 | ||
Section 7.08. | Liability of the General Partner | 27 | ||
Section 7.09. | Other Matters Concerning the General Partner | 28 | ||
Section 7.10. | Reliance by Third Parties | 29 | ||
Section 7.11. | Restrictions on General Partner’s Authority | 29 | ||
Section 7.12. | Loans by Third Parties | 30 | ||
ARTICLE VIII | RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS | 30 | ||
Section 8.01. | Limitation of Liability | 30 | ||
Section 8.02. | Management of Business | 30 | ||
Section 8.03. | Outside Activities of Limited Partners | 30 | ||
Section 8.04. | Return of Capital | 30 | ||
Section 8.05. | Rights of Limited Partners Relating to the Partnership | 31 | ||
Section 8.06. | Class A Redemption Right | 32 | ||
Section 8.07. | Redemption of Class B Units | 34 | ||
ARTICLE IX | BOOKS, RECORDS, ACCOUNTING AND REPORTS | 34 | ||
Section 9.01. | Records and Accounting | 34 | ||
Section 9.02. | Fiscal Year | 34 | ||
Section 9.03. | Reports | 34 | ||
ARTICLE X | TAX MATTERS | 35 | ||
Section 10.01. | Preparation of Tax Returns | 35 | ||
Section 10.02. | Tax Elections | 35 | ||
Section 10.03. | Tax Matters Partner | 35 | ||
Section 10.04. | Organizational Expenses | 37 | ||
Section 10.05. | Withholding | 37 | ||
ARTICLE XI | TRANSFERS AND WITHDRAWALS | 37 | ||
Section 11.01. | Transfer | 37 | ||
Section 11.02. | Transfers of Partnership Interests of General Partner | 38 | ||
Section 11.03. | Limited Partners’ Rights to Transfer | 38 | ||
Section 11.04. | Substituted Limited Partners | 39 | ||
Section 11.05. | Assignees | 40 |
ii |
Page | ||||
Section 11.06. | General Provisions | 40 | ||
ARTICLE XII | ADMISSION OF PARTNERS | 42 | ||
Section 12.01. | Admission of Successor General Partner | 42 | ||
Section 12.02. | Admission of Additional Limited Partners | 42 | ||
Section 12.03. | Amendment of Agreement and Certificate of Limited Partnership | 43 | ||
ARTICLE XIII | DISSOLUTION AND LIQUIDATION | 43 | ||
Section 13.01. | Dissolution | 43 | ||
Section 13.02. | Winding Up | 43 | ||
Section 13.03. | Compliance with Timing Requirements of Regulations | 44 | ||
Section 13.04. | Deemed Distribution and Recontribution | 45 | ||
Section 13.05. | Rights of Limited Partners | 45 | ||
Section 13.06. | Notice of Dissolution | 45 | ||
Section 13.07. | Cancellation of Certificate of Limited Partnership | 45 | ||
Section 13.08. | Reasonable Time for Winding Up | 45 | ||
Section 13.09. | Waiver of Partition | 46 | ||
Section 13.10. | Liability of Liquidator | 46 | ||
ARTICLE XIV | AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS | 46 | ||
Section 14.01. | Amendments | 46 | ||
Section 14.02. | Meetings of the Partners | 47 | ||
ARTICLE XV | GENERAL PROVISIONS | 48 | ||
Section 15.01. | Addresses and Notice | 48 | ||
Section 15.02. | Titles and Captions | 48 | ||
Section 15.03. | Pronouns and Plurals | 48 | ||
Section 15.04. | Further Action | 48 | ||
Section 15.05. | Binding Effect | 49 | ||
Section 15.06. | Creditors | 49 | ||
Section 15.07. | Waiver | 49 | ||
Section 15.08. | Counterparts | 49 | ||
Section 15.09. | Applicable Law | 49 | ||
Section 15.10. | Invalidity of Provisions | 49 | ||
Section 15.11. | Power of Attorney | 49 |
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Section 15.12. | Entire Agreement | 50 | ||
Section 15.13. | No Rights as Stockholders | 50 | ||
Section 15.14. | Limitation to Preserve REIT Status | 51 |
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THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
GKK CAPITAL LP
THIS THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of April 19, 2006 is made by Gramercy Capital Corp., a Maryland corporation, as the General Partner of and a Limited Partner in the Partnership and each of the other persons listed on the signature pages hereto, for the purpose of amending and restating the Second Amended and Restated Agreement of Limited Partnership of the Partnership dated as of December 14, 2005 by and among the General Partner, SL Green Operating Partnership, L.P., GKK Manager LLC, and certain other Persons (as defined below) (the “First Amended and Restated Partnership Agreement”).
WHEREAS, the Partnership desires to modify the distribution and redemption provisions of the Second Amended and Restated Partnership Agreement applicable to the Class B Units.
WHEREAS, pursuant to Section 14.01.B the General Partner is hereby amending and restating the Second Amended and Restated Partnership Agreement to reflect the modification in distribution and redemption provisions applicable to the Class B Units.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend and restate the Second Amended and Restated Partnership Agreement as follows:
ARTICLE I
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.
“Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101, et seq., as it may be amended from time to time, and any successor to such statute.
“Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.02 hereof and who is shown as such on the books and records of the Partnership.
“Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each Partnership Year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections1.704-l(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-l(b)(2)(ii) (d)(6).The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-l(b)(2)(ii)(d) and shall be interpreted consistently therewith.
“Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Adjusted Capital Account as of the end of the relevant Partnership Year.
“Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Exhibit B hereto.
“Adjustment Date” has the meaning set forth in Section 4.02.B hereof.
“Affiliate” means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person, (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests or (iv) any officer, director, general partner or trustee of such Person or any Person referred to in clauses (i), (ii), and (iii) above. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Agreed Value” means (i) in the case of any Contributed Property, the 704(c) Value of such property as of the time of its contribution to the Partnership, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed; and (ii) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder.
“Agreement” means this Third Amended and Restated Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time.
“Articles of Incorporation” means the Articles of Incorporation or other organizational document governing the General Partner, as amended or restated from time to time.
“Assignee” means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.05 hereof.
“Book-Tax Disparities” means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Exhibit B hereto and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained, with respect to each such Contributed Property or Adjusted Property, strictly in accordance with federal income tax accounting principles.
“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.
“Capital Account” means the Capital Account maintained for a Partner pursuant to Exhibit B hereto.
“Capital Contribution” means, with respect to any Partner, any cash, cash equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Section 4.01 or 4.02 hereof.
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“Carrying Value” means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property reduced (but not below zero) by all Depreciation with respect to such Contributed Property or Adjusted Property, as the case may be, charged to the Partners’ Capital Accounts and (ii)with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereto, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.
“Cash Amount” means an amount of cash equal to the Value on the Valuation Date of the Shares Amount.
“Certificate” means the Certificate of Limited Partnership relating to the Partnership filed in the office of the Delaware Secretary of State on April 21, 2004, as amended from time to time in accordance with the terms hereof and the Act.
“Class A Unit” means Class A Units of the Partnership.
“Class A Unit Economic Balance” has the meaning set forth in Section 6.01.D.
“Class B Distribution Percentage” means, as of a particular date, with respect to SL Green, the SLG Class B Distribution Percentage and, with respect to all other Persons, the Standard Class B Distribution Percentage.
“Class B Unit” means a profits interest issued pursuant to Section 4.02.D.
“Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable Regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.
“Consent” means the consent or approval of a proposed action by a Partner given in accordance with Section 14.02 hereof.
“Contributed Property” means each property or other asset contributed to the Partnership, in such form as may be permitted by the Act, but excluding cash contributed or deemed contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit B hereto, such property shall no longer constitute a Contributed Property for purposes of Exhibit B hereto, but shall be deemed an Adjusted Property for such purposes.
“Conversion Factor” means 1.0; provided that in the event that the General Partner Entity (i) declares or pays a dividend on its outstanding Shares in Shares or makes a distribution to all holders of its outstanding Shares in Shares, (ii) subdivides its outstanding Shares or (iii) combines its outstanding Shares into a smaller number of Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time) and the denominator of which shall be the actual number of Shares(determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, subdivision or combination; and provided, further that in the event that an entity shall cease to be the General Partner Entity (the “Predecessor Entity”) and another entity shall become the General Partner Entity (the “Successor Entity”), the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a
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fraction, the numerator of which is the Value of one share of the Predecessor Entity, determined as of the time immediately prior to when the Successor Entity becomes the General Partner Entity, and the denominator of which is the Value of one Share of the Successor Entity determined as of that same date. For purposes of the second proviso in the preceding sentence, in the event that any stockholders of the Predecessor Entity will receive consideration in connection with the transaction in which the Successor Entity becomes the General Partner Entity, the numerator in the fraction described above for determining the adjustment to the Conversion Factor(that is, the Value of one Share of the Predecessor Entity) shall be the sum of the greatest amount of cash and the fair market value of any securities and other consideration that the holder of one Share in the Predecessor Entity could have received in such transaction (determined without regard to any provisions governing fractional shares). Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for the event giving rise thereto; it being intended that (x) adjustments to the Conversion Factor are to be made in order to avoid unintended dilution or anti-dilution as a result of transactions in which Shares are issued, redeemed or exchanged without a corresponding issuance, redemption or exchange of Partnership Units and (y) if a Specified Redemption Date shall fall between the record date and the effective date of any event of the type described above, that the Conversion Factor applicable to such redemption shall be adjusted to take into account such event.
“Debt” means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person, (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof, and (iv) obligations of such Person incurred in connection with entering into a lease which, in accordance with generally accepted accounting principles, should be capitalized.
“Depreciation” means, for each fiscal year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner.
“Economic Capital Account Balance” has the meaning set forth in Section 6.01.D.
“Effective Date” means the date of the closing of the General Partner’s initial public offering.
“Equity Award Agreement” means an equity award agreement entered into between SL Green and/or SL Green Realty Corp. and a director, officer or employee of the General Partner, the Manager, SL Green or SL Green Realty Corp. or other Person pursuant to the SL Green Realty Corp. 2005 Stock Option and Incentive Plan pursuant to which SL Green or SL Green Realty Corp. transfers Class B Units to such Person subject to forfeiture to, or repurchase at less than fair market value by, SL Green or any other Person upon the occurrence of certain events.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
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“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Funding Debt” means the incurrence of any Debt by or on behalf of the General Partner for the purpose of providing funds to the Partnership.
“Funds From Operations” means net income available to holders of Partnership Units (other than Class B Units and preferred Partnership Units, if any, issued subsequent to the date hereof) computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures.
“General Partner” means Gramercy Capital Corp., a Maryland corporation, or its successors as general partner of the Partnership.
“General Partner Entity” means the General Partner; provided, however, that if (i) the shares of common stock (or other comparable equity interests) of the General Partner are at any time not Publicly Traded and (ii) the shares of common stock (or other comparable equity interests) of an entity that owns, directly or indirectly, fifty percent (50%) or more of the shares of common stock (or other comparable equity interests) of the General Partner are Publicly Traded, the term “General Partner Entity” shall refer to such entity whose shares of common stock (or other comparable equity securities) are Publicly Traded. If both requirements set forth in clauses (i) and (ii) above are not satisfied, then the term “General Partner Entity” shall mean the General Partner.
“General Partner Payment” has the meaning set forth in Section 15.14 hereof.
“General Partnership Interest” means a Partnership Interest held by the General Partner that is a general partnership interest. A General Partnership Interest may be expressed as a number of Partnership Units.
“IRS” means the Internal Revenue Service, which administers the internal revenue laws of the United States.
“Immediate Family” means, with respect to any natural Person, such natural Person’s spouse, parents, descendants, nephews, nieces, brothers, and sisters.
“Incapacity” or “Incapacitated” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating such Partner incompetent to manage his or her Person or estate,(ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter, (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership, (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership, (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee) or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a
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trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties, (f) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment or (h) an appointment referred to in clause (g) is not vacated within ninety (90) days after the expiration of any such stay.
“Indemnitee” means (i) any Person made a party to a proceeding or threatened with being made a party to a proceeding by reason of its status as (A) the General Partner, (B) a Limited Partner or (C) a director or officer of the Partnership or the General Partner and (ii) such other Persons (including Affiliates of the General Partner, a Limited Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.
“Limited Partner” means any Person named as a Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended and restated from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Limited Partner in the Partnership.
“Limited Partner Interest” means a Partner Interest of a Limited Partner in the Partner representing a fractional part of the Partner Interests of all Limited Partners and includes any and all benefits to which the holder of such a Partner Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units.
“Liquidating Event” has the meaning set forth in Section 13.01 hereof.
“Liquidator” has the meaning set forth in Section 13.02.A hereof.
“LTIP Units” means the Partnership Units designated as such having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit E hereto.
“Manager” means GKK Manager LLC, a Delaware limited liability company.
“Management Agreement” means the agreement entered into by and between Gramercy Capital Corp., a Maryland corporation, GKK Capital LP, a Maryland limited partnership (the “Operating Partnership”), and GKK Manager LLC, a Delaware limited liability company.
“Net Income” means, for any taxable period, the excess, if any, of the Partnership’s items of income and gain for such taxable period over the Partnership’s items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Exhibit B hereto. If an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to the special allocation rules in Exhibit C hereto, Net Income or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item.
“Net Loss” means, for any taxable period, the excess, if any, of the Partnership’s items of loss and deduction for such taxable period over the Partnership’s items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Exhibit B. If an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to the special allocation rules in Exhibit C hereto, Net Loss or the resulting Net Income, whichever the case may be, shall be recomputed without regard to such item.
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“New Securities” means (i) any rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase shares of capital stock (or other comparable equity interest) of the General Partner, excluding grants under any Stock Option Plan, or (ii) any Debt issued by the General Partner that provides any of the rights described in clause (i).
“Nonrecourse Built-in Gain” means, with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C hereto if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.
“Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).
“Nonrecourse Liability” has the meaning set forth in Regulations Section1.752-1(a)(2).
“Notice of Redemption” means a Notice of Redemption substantially in the form of Exhibit B attached hereto.
“Partner” means the General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners.
“Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).
“Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).
“Partner Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined in accordance with the rules of Regulations Section1.704-2(i)(2).
“Partnership” means the limited partnership formed under the Act and continued upon the terms and conditions set forth in this Agreement, and any successor thereto.
“Partnership Interest” means a Limited Partner Interest or the General Partnership Interest and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units.
“Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section1.704-2(d).
“Partnership Record Date” means the record date established by the General Partner either (i) for distributions pursuant to Section 5.01 hereof, which record date shall be the same as the record date established by the General Partner Entity for a distribution to its stockholders of some or all of its portion of such distribution received by the General Partner if the shares of common stock (or comparable equity interests) of the General Partner Entity are Publicly Traded, or (ii) if applicable, for determining the
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Partners entitled to vote on or consent to any proposed action for which the consent or approval of the Partners is sought pursuant to Section14.02 hereof.
“Partnership Unit” means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.01 and 4.02 hereof, and includes Class A Units, Class B Units, LTIP Units and any other classes or series of Partnership Units established after the date hereof. The number of Partnership Units outstanding and the Percentage Interests represented by such Partnership Units are set forth in Exhibit A hereto, as such Exhibit may be amended and restated from time to time. The ownership of Partnership Units may be evidenced by a certificate in a form approved by the General Partner.
“Partnership Year” means the fiscal year of the Partnership, which shall be the calendar year.
“Percentage Interest” means, as to a Partner holding a class of Partnership Interests, its interest in such class, determined by dividing the Partnership Units of such class owned by such Partner by the total number of Partnership Units of such class then outstanding as specified in Exhibit A attached hereto, as such exhibit may be amended and restated from time to time, multiplied by the aggregate Percentage Interest allocable to such class of Partnership Interests.
“Person” means a natural person, partnership (whether general or limited), trust, estate, association, corporation, limited liability company, unincorporated organization, custodian, nominee or any other individual or entity in its own or any representative capacity.
“Publicly Traded” means listed or admitted to trading on the New York Stock Exchange, the American Stock Exchange or another national securities exchange or designated for quotation on the NASDAQ National Market, or any successor to any of the foregoing.
“Qualified REIT Subsidiary” means any Subsidiary of the General Partner that is a “qualified REIT subsidiary” within the meaning Section 856(i) of the Code.
“Recapture Income” means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.
“Redeeming Partner” has the meaning set forth in Section 8.06.A hereof.
“Redemption Amount” means either the Cash Amount or the Shares Amount, as determined by the General Partner in its sole and absolute discretion; provided that in the event that the Shares are not Publicly Traded at the time a Redeeming Partner exercises its Redemption Right the Redemption Amount shall be paid only in the form of the Cash Amount unless the Redeeming Partner, in its sole and absolute discretion, consents to payment of the Redemption Amount in the form of the Shares Amount. A Redeeming Partner shall have no right, without the General Partner’s consent, in its sole and absolute discretion, to receive the Redemption Amount in the form of the Shares Amount.
“Redemption Right” has the meaning set forth in Section 8.06.A hereof.
“Regulations” means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
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“REIT” means a real estate investment trust under Section 856 of the Code.
“REIT Requirements” has the meaning set forth in Section 5.01.A hereof.
“Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C hereto to eliminate Book-Tax Disparities.
“Safe Harbor” has the meaning set forth in Section 11.06.F hereof.
“Securities Act” means the Securities Act of 1933, as amended.
“704(c) Value” of any Contributed Property means the fair market value of such property at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt. Subject to Exhibit B hereto, the General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of Contributed Properties in a single or integrated transaction among each separate property on a basis proportional to their fair market values.
“Share” means a share of capital stock (or other comparable equity interest) of the General Partner Entity. Shares may be issued in one or more classes or series in accordance with the terms of the Articles of Incorporation (or, if the General Partner is not the General Partner Entity, the organizational documents of the General Partner Entity). In the event that there is more than one class or series of Shares, the term “Shares” shall, as the context requires, be deemed to refer to the class or series of Shares that correspond to the class or series of Partnership Interests for which the reference to Shares is made. When used with reference to Class A Units, the term “Shares” refers to shares of common stock (or other comparable equity interest) of the General Partner Entity.
“Shares Amount” means a number of Shares equal to the product of the number of Partnership Units offered for redemption by a Redeeming Partner times the Conversion Factor; provided that, in the event the General Partner Entity issues to all holders of Shares rights, options, warrants or convertible or exchangeable securities entitling such holders to subscribe for or purchase Shares or any other securities or property (collectively, the “rights”), then the Shares Amount for any Partnership Units outstanding prior to the issuance of such rights shall also include such rights that a holder of that number of Shares would be entitled to receive.
“SL Green” means SL Green Operating Partnership, L.P., a Delaware limited partnership.
“SLG Class B Distribution Percentage” means, as of a particular date, the percentage obtained by dividing (i) 81.58 minus the number of Class B Units transferred by SL Green to other Persons after December 14, 2005 and on or before such date (other than Unvested Award Class B Units) and the number of Vested Award Class B Units plus the number of Class B Units acquired by SL Green from other Persons after December 14, 2005 and on or before such date (other than Unvested Award Class B Units forfeited to, or repurchased at less than fair market value by, SL Green pursuant to an Equity Award Agreement) by (ii) the aggregate number of Class B Units outstanding as of such date.
“Specially Distributed Assets” has the meaning set forth in Section 7.05.A hereof.
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“Specified Redemption Date” means the tenth Business Day after receipt by the General Partner of a Notice of Redemption; provided that, if the Shares are not Publicly Traded, the Specified Redemption Date means the thirtieth Business Day after receipt by the General Partner of a Notice of Redemption.
“Standard Class B Distribution Percentage” means, with respect to a Person as of a particular date, the percentage obtained by dividing the number of Class B Units held by such Person (other than Unvested Award Class B Units) by the aggregate number of Class B Units outstanding as of such date.
“Stock Option Plan” means any stock incentive plan of the General Partner, the Partnership or any Affiliate of the Partnership or the General Partner.
“Stockholders Equity” means the aggregate gross proceeds from all sales of Partnership Units (other than Class B Units and preferred Partnership Units, if any, issued subsequent to the date hereof).
“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership or joint venture, or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person.
“Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.04 hereof.
“Successor Entity” has the meaning set forth in the definition of “Conversion Factor” herein.
“Terminating Capital Transaction” means any sale or other disposition of all or substantially all of the assets of the Partnership for cash or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership for cash.
“Termination Transaction” has the meaning set forth in Section 11.02.B hereof.
“Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereto) as of such date, over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereto) as of such date.
“Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereto) as of such date, over (ii) the fair market value of such property (as determined under Exhibit B hereto) as of such date.
“Unvested Award Class B Unit” means any Class B Unit that has been transferred by SL Green or SL Green Realty Corp. to another Person pursuant to an Equity Award Agreement and remains subject to forfeiture to, or repurchase at less than fair market value by, SL Green or any other Person pursuant to such Equity Award Agreement.
“Valuation Date” means the date of receipt by the General Partner of a Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter.
“Value” means, with respect to any outstanding Shares of the General Partner Entity that are Publicly Traded, the average of the daily market price for the ten (10) consecutive trading days immediately preceding the date with respect to which value must be determined or, if such date is not a Business Day, the immediately preceding Business Day. The market price for each such trading day shall
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be the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day. In the event that the outstanding Shares of the General Partner Entity are Publicly Traded and the Shares Amount includes rights that a holder of Shares would be entitled to receive, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event that the Shares of the General Partner Entity are not Publicly Traded, the Value of the Shares Amount per Partnership Unit offered for redemption (which will be the Cash Amount per Partnership Unit offered for redemption payable pursuant to Sections 8.06 and 8.07 hereof) means the amount that a holder of one Partnership Unit would receive if each of the assets of the Partnership were to be sold for its fair market value on the Specified Redemption Date, the Partnership were to pay all of its outstanding liabilities, and the remaining proceeds were to be distributed to the Partners in accordance with the terms of this Agreement. Such Value shall be determined by the General Partner, acting in good faith and based upon a commercially reasonable estimate of the amount that would be realized by the Partnership if each asset of the Partnership (and each asset of each Partnership, limited liability company, joint venture or other entity in which the Partnership owns a direct or indirect interest) were sold to an unrelated purchaser in an arms’ length transaction where neither the purchaser nor the seller were under economic compulsion to enter into the transaction (without regard to any discount in value as a result of the Partnership’s minority interest in any property or any illiquidity of the Partnership’s interest in any property). In connection with determining the value of the Partnership Interest for purposes of determining the number of additional Partnership Units issuable upon a Capital Contribution funded by an underwritten public offering of shares of capital stock (or other comparable equity interest) of the General Partner, the Value of such shares shall be the public offering price per share of such class of the capital stock (or other comparable equity interest) sold.
“Vested Award Class B Unit” means any Class B Unit that has been transferred by SL Green or SL Green Realty Corp. to another Person pursuant to an Equity Award Agreement and is no longer subject to forfeiture to, or repurchase at less than fair market value by, SL Green or any other Person pursuant to such Equity Award Agreement (except for a Class B Unit that was forfeited to, or repurchased at less than fair market value by, SL Green or another Person pursuant to an Equity Award Agreement).
ARTICLE II
ORGANIZATIONAL MATTERS
Section 2.01. Organization
The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth in the Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.
Section 2.02. Name
The name of the Partnership is GKK Capital LP. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership,” “L.P.,” “Ltd.” Or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.
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Section 2.03. Registered Office and Agent; Principal Office
The address of the registered office of the Partnership in the State of Delaware shall be located at 9 East Loockerman Street, Suite #1B in the City of Dover, County of Kent, Delaware 19901 and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be National Registered Agents, Inc. The principal office of the Partnership shall be 420 Lexington Avenue, New York, New York, 10170 or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.
Section 2.04. Term
The term of the Partnership commenced on April 21, 2004, the date on which the Certificate was filed in the office of the Secretary of State of the State of Delaware in accordance with the Act, and shall continue until December 31, 2103, unless it is dissolved sooner pursuant to the provisions of Article XIII hereof or as otherwise provided by law.
ARTICLE III
PURPOSE
Section 3.01. Purpose and Business
The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner Entity at all times to be classified as a REIT, unless the General Partner ceases to qualify or is not qualified as a REIT for any reason or reasons not related to the business conducted by the Partnership; (ii) to enter into any partnership, joint venture, limited liability company or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged, directly or indirectly, in any of the foregoing; and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, the Partners acknowledge that the status of the General Partner Entity as a REIT inures to the benefit of all the Partners and not solely the General Partner or its Affiliates.
Section 3.02. Powers
The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness whether or not secured by mortgage, deed of trust, pledge or other lien, acquire, own, manage, improve and develop real property, and lease, sell, transfer and dispose of real property; provided, however, that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the General Partner Entity to continue to qualify as a REIT, (ii) could subject the General Partner Entity to any additional taxes under Section 857 or Section 4981 of the Code or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the General Partner Entity or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing.
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Section 3.03. Partnership Only for Purposes Specified
The Partnership shall be a partnership only for the purposes specified in Section 3.01 above, and this Agreement shall not be deemed to create a partnership among the Partners with respect to any activities whatsoever other than the activities within the purposes of the Partnership as specified in Section 3.01 above.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ISSUANCES
OF PARTNERSHIP INTERESTS
Section 4.01. Capital Contributions of the Partners
A. Capital Contributions. Prior to the date hereof, certain Partners made Capital Contributions to the Partnership. Exhibit A hereto reflects the Capital Contributions made by each Partner, the Partnership Units assigned to each Partner and the Percentage Interest in the Partnership represented by such Partnership Units. The Capital Accounts of the Partners and the Carrying Values of the Partnership’s Assets have been and will continue to be determined pursuant to Section I.D of Exhibit B hereto to reflect the Capital Contributions made.
B. General Partnership Interest. A number of Partnership Units held by the General Partner equal to one percent (1%) of all outstanding Partnership Units shall be deemed to be the General Partnership Interest. All other Partnership Units held by the General Partner shall be deemed to be Limited Partner Interests and shall be held by the General Partner in its capacity as a Limited Partner in the Partnership.
C. Capital Contributions By Merger. To the extent the Partnership acquires any property by the merger of any other Person into the Partnership, Persons who receive Partnership Interests in exchange for their interests in the Person merging into the Partnership shall become Partners and shall be deemed to have made Capital Contributions as provided in the applicable merger agreement and as set forth in Exhibit A hereto.
D. No Obligation to Make Additional Capital Contributions. Except as provided in Sections 7.05 and 10.05 hereof, the Partners shall have no obligation to make any additional Capital Contributions or provide any additional funding to the Partnership (whether in the form of loans, repayments of loans or otherwise). No Partner shall have any obligation to restore any deficit that may exist in its Capital Account, either upon a liquidation of the Partnership or otherwise.
Section 4.02. Issuances of Partnership Interests
A. General. The General Partner is hereby authorized to cause the Partnership from time to time to issue to Partners (including the General Partner and its Affiliates) or other Persons (including, without limitation, in connection with the contribution of property to the Partnership) Partnership Units or other Partnership Interests in one or more classes, or in one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partner Interests, all as shall be determined, subject to applicable Delaware law, by the General Partner in its sole and absolute discretion, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests, (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions and (iii)the rights of each such class or series of Partnership Interests
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upon dissolution and liquidation of the Partnership; provided, that no such Partnership Units or other Partnership Interests shall be issued to the General Partner unless either (a) the Partnership Interests are issued in connection with the grant, award or issuance of Shares or other equity interests in the General Partner having designations, preferences and other rights such that the economic interests attributable to such Shares or other equity interests are substantially similar to the designations, preferences and other rights (except voting rights) of the additional Partnership Interests issued to the General Partner in accordance with this Section 4.02.A or (b) the Partnership Interests are issued to all Partners holding Partnership Interests in the same class in proportion to their respective Percentage Interests in such class. In the event that the Partnership issues Partnership Interests pursuant to this Section 4.02.A, the General Partner shall make such revisions to this Agreement (including but not limited to the revisions described in Section 5.04, Section 6.02 and Section 8.06 hereof) as it deems necessary to reflect the issuance of such additional Partnership Interests.
B. Percentage Interest Adjustments in the Case of Capital Contributions for Class A Units. Upon the acceptance of additional Capital Contributions in exchange for Class A Units, the Percentage Interest related thereto shall be equal to a fraction, the numerator of which is equal to the amount of cash, if any, plus the Agreed Value of Contributed Property, if any, contributed with respect to such additional Partnership Units and the denominator of which is equal to the sum of (i) value of the Partnership Interests for all outstanding Class A Units (computed as of the Business Day immediately preceding the date on which the additional Capital Contributions are made (an “Adjustment Date”)) plus (ii) the aggregate amount of additional Capital Contributions contributed to the Partnership on such Adjustment Date in respect of such additional Class A Units. The Percentage Interest of each other Partner holding Class A Units not making a full pro rata Capital Contribution shall be adjusted to a fraction the numerator of which is equal to the sum of (i) the value of such Limited Partner (computed as of the Business Day immediately preceding the Adjustment Date) plus (ii) the amount of additional Capital Contributions (such amount being equal to the amount of cash, if any, plus the Agreed Value of Contributed Property, if any, so contributed), if any, made by such Partner to the Partnership in respect of such Class A Units as of such Adjustment Date and the denominator of which is equal to the sum of (i) the value of the outstanding Class A Units (computed as of the Business Day immediately preceding such Adjustment Date) plus (ii) the aggregate amount of the additional Capital Contributions contributed to the Partnership on such Adjustment Date in respect of such additional Class A Units. For purposes of calculating a Partner’s Percentage Interest of Class A Units pursuant to this Section 4.02.B, cash Capital Contributions by the General Partner will be deemed to equal the cash contributed by the General Partner plus (a) in the case of cash contributions funded by an offering of any equity interests in or other securities of the General Partner, the offering costs attributable to the cash contributed to the Partnership, and (b) in the case of Class A Units issued pursuant to Section 7.05.E hereof, an amount equal to the difference between the Value of the Shares sold pursuant to any Stock Option Plan and the net proceeds of such sale.
C. Classes of Partnership Units. From and after the Effective Date, subject to Section 4.02.A above, the Partnership shall have two classes of Partnership Units, entitled “Class A Units” and “Class B Units.” From and after December 14, 2005, the Partnership shall have an additional class of Partnership Units, entitled “LTIP Units.” Class A Units may be issued to newly admitted Partners in exchange for the contribution by such Partners of cash, real estate partnership interests, stock, notes or other assets or consideration.
D. Issuance of Class B Units. On the Effective Date, the General Partner issued 100 Class B Units to the Manager. The Manager immediately assigned 85 of such Units to SL Green, which assignment was reflected on Exhibit A. There was no obligation to contribute any capital in connection until issuance of the Class B Units. The initial Capital Accounts of the Holders of the Class B Units in respect of such Units was zero. All Class B Units issued under this Agreement are intended to qualify as “profits interests” under Revenue Procedure 93-27, 1993-2 C.B. 343 (June 9, 1993) and Revenue
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Procedure 2001-43, 2001-2 C.B. 191 (August 3, 2001), and this Section 4.02.D shall be interpreted and applied consistently therewith. The General Partner at its discretion may amend this Section 4.02.D to ensure that any Class B Units granted after the date of this Agreement will qualify as “profits interests” under Revenue Procedure 93-27, 1993-2 C.B. 343 (June 9, 1993) and Revenue Procedure 2001-43, 2001-2 C.B. 191 (August 3, 2001) (and any other similar rulings or regulations that may be in effect at such time).
E. Issuance of LTIP Units. From time to time the General Partner may issue LTIP Units to Persons providing services to or for the benefit of the Partnership. LTIP Units shall have the rights, powers, privileges, restrictions, qualifications and limitations specified in Exhibit E hereto. LTIP Units are intended to qualify as profits interests in the Partnership and for the avoidance of doubt, the provisions of Section 4.04 shall not apply to the issuance of LTIP Units.
Section 4.03. No Preemptive Rights
Except to the extent expressly granted by the Partnership pursuant to another agreement, no Person shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership or (ii) issuance or sale of any Partnership Units or other Partnership Interests.
Section 4.04. Other Contribution Provisions
In the event that any Partner is admitted to the Partnership and is given a Capital Account in exchange for services rendered to the Partnership, such transaction shall be treated by the Partnership and the affected Partner as if the Partnership had compensated such Partner in cash, and the Partner had contributed such cash to the capital of the Partnership.
Section 4.05. No Interest on Capital
No Partner shall be entitled to interest on its Capital Contributions or its Capital Account.
ARTICLE V
DISTRIBUTIONS
Section 5.01. Requirement and Characterization of Distributions
A. General. Except as otherwise provided herein, the General Partner shall make distributions at such times and in such amounts as it may determine. Such distributions shall be made to the Partners who are Partners on the Partnership Record Date for such distribution. Notwithstanding anything to the contrary contained herein, in no event may a Partner receive a distribution with respect to a Partnership Unit for a quarter or shorter period if such Partner is entitled to receive a distribution relating to such period with respect to a Share for which such Partnership Unit has been redeemed or exchanged. Unless otherwise expressly provided for herein or in an agreement at the time a new class of Partnership Interests is created in accordance with Article IV hereof, no Partnership Interest shall be entitled to a distribution in preference to any other Partnership Interest. The General Partner shall make such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with the qualification of the General Partner Entity as a REIT, to make distributions (a) to Limited Partners so as to preclude any such distribution or portion thereof from being treated as part of a sale of property by a Limited Partner under Section 707 Code or the Regulations thereunder; provided that, the General Partner and the Partnership
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shall not have liability to a Limited Partner under any circumstances as a result of any distribution to a Limited Partner being so treated, and (b) to the General Partner in an amount sufficient to enable the General Partner Entity to pay stockholder dividends that will (1) satisfy the requirements for qualification as a REIT under the Code and the Regulations (the “REIT Requirements”) and (2) avoid any federal income or excise tax liability for the General Partner Entity.
B. Method. Distributions shall be made (i) first, to the holders of Class B Units as provided in Section 5.01.C hereof, and to each other holder of a Partnership Interest that is entitled to any preference in distribution, in accordance with the rights of any such class of Partnership Interests, and (ii) thereafter, to the holders of Class A Units and each other class of Partnership Interests ranking in parity to the Class A Units (including, without limitation, the LTIP Units if and to the extent they are then entitled to participate in such distributions pursuant to Section 2 of Exhibit E hereto), in proportion to the relative Percentage Interests of each such class of Partnership Interests. All distributions within a class of Partnership Units shall be pro rata in proportion to the respective Percentage Interests on the applicable Partnership Record Date.
C. Distributions When Class B Units Are Outstanding. Holders of Class B Units shall receive quarterly distributions for each calendar quarter (or portion thereof) in an aggregate amount equal to 25% of the amount, if any, by which (i) the sum of Funds From Operations plus any gains (or losses) from debt restructuring or property sales exceeds (ii) the product of the Partnership’s weighted average Stockholders Equity multiplied by 2.375% (such percentage to be prorated for any partial quarter). These distributions shall be paid to Holders of Class B Units within 45 days after the end of each quarter. These distributions shall be recalculated at the end of each calendar year beginning with 2004, as 25% of the amount by which (A) annual Funds From Operations plus any gains (or losses) from debt restructuring and gains (or losses) or property sales for such calendar year (or part thereof) exceeds (B) the Partnership’s weighted average Stockholders Equity for such year multiplied by 9.5% (such percentage to be prorated for any partial year). To the extent quarterly distributions exceed the annual recalculated amount, the Holders of Class B Units shall refund the excess to the Partnership, and to the extent the annual recalculated amount exceeds the quarterly distributions made for such year, such excess shall be paid by the Partnership to such Holders within 90 days after the end of such calendar year. Distributions (and any refunds of distributions) made pursuant to this Section 5.01.C shall be apportioned, subject to Section 5.01.D, among the holders of Class B Units pro rata in accordance with their Class B Distribution Percentages, determined as of the date of such distribution (or, in the case of any refund, as of the date of the distribution(s) with respect to which such refund is attributable).
D. Class B Units Intended to Qualify as Profits Interests. Distributions made pursuant to this Section 5.01 shall be adjusted as necessary to ensure that the amount apportioned to each Class B Unit does not exceed the amount attributable to items of Partnership income or gain realized after the date such Class B Unit was issued by the Partnership. The intent of this Section 5.01.D is to ensure that any Class B Units issued after the date of this Agreement qualify as “profits interests” under Revenue Procedure 93-27, 1993-2 C.B. 343 (June 9, 1993) and Revenue Procedure 2001-43, 2001-2 C.B. 191 (August 3, 2001), and Section 5.01 shall be interpreted and applied consistently therewith. The General Partner at its discretion may amend this Section 5.01.D to ensure that any Class B Units granted after the date of this Agreement will qualify as “profits interests” under Revenue Procedure 93-27, 1993-2 C.B. 343 (June 9, 1993) and Revenue Procedure 2001-43, 2001-2 C.B. 191 (August 3, 2001) (and any other similar rulings or regulations that may be in effect at such time).
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Section 5.02. Amounts Withheld
All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.05 hereof with respect to any allocation, payment or distribution to the General Partner, the Limited Partners or Assignees shall be treated as amounts distributed to the General Partner, Limited Partners or Assignees pursuant to Section 5.01 above for all purposes under this Agreement.
Section 5.03. Distributions Upon Liquidation
Proceeds from a Terminating Capital Transaction shall be distributed to the Partners in accordance with Section 13.02 hereof.
Section 5.04. Revisions to Reflect Issuance of Additional Partnership Interests
In the event that the Partnership issues additional Partnership Interests to the General Partner or any Additional Limited Partner pursuant to Article IV hereof, the General Partner shall make such revisions to this Article V as it deems necessary to reflect the issuance of such additional Partnership Interests. Such revisions shall not require the consent or approval of any other Partner.
ARTICLE VI
ALLOCATIONS
Section 6.01. Allocations For Capital Account Purposes
For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership’s items of income, gain, loss and deduction (computed in accordance with Exhibit B hereto) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below.
A. Net Income. After giving effect to the special allocations set forth in Section 1 of Exhibit C hereto, Net Income shall be allocated (i) first, to the General Partner to the extent that Net Losses previously allocated to the General Partner, on a cumulative basis, pursuant to the last sentence of Section 6.01.B below exceed Net Income previously allocated to the General Partner, on a cumulative basis, pursuant to this clause (i) of Section 6.01.A, (ii) second, to Holders of Class B Units and to the holders of any other Partnership Interests that are entitled to any preference in distribution in accordance with the rights of any such class of Partnership Interests until each such Partnership Interest has been allocated, on a cumulative basis pursuant to this clause (ii), Net Income equal to the sum of the amount of distributions theretofore received (or to be received with respect to the fiscal year of the Partnership in which such Net Income accrues) with respect to such Partnership Interests pursuant to clause (i) of Section 5.01.B hereof and the amount of any prior allocations of Net Losses to such class of Partnership Interests pursuant to Section 6.01.B.(i) below (and, within such class, pro rata in proportion to the respective interests in such class as of the last day of the period for which such allocation is being made) and (iii) third, with respect to Partnership Interests that are not entitled to any preference in the allocation of Net Income, pro rata to each such class in accordance with the terms of such class (and, within such class, pro rata in proportion to the respective interests in such class as of the last day of the period for which such allocation is being made).
B. Net Losses. After giving effect to the special allocations set forth in Section 1 of Exhibit C hereto, Net Losses shall be allocated (i) first, to the Holders of Class B Units and to holders of any other Partnership Interests that are entitled to any preference in distribution in accordance with the rights of any
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such class of Partnership Interests to the extent that any prior allocations of Net Income to such class of Partnership Interests pursuant to Section 6.01.A (1)(ii) above exceed, on a cumulative basis, distributions theretofore received (or to be received with respect to the fiscal year of the Partnership in which such Net Income accrues) with respect to such Partnership Interests pursuant to clause (i) of Section 5.01.B hereof (and, within such class, pro rata in proportion to the respective interests in such class as of the last day of the period for which such allocation is being made) and (ii) second, with respect to classes of Partnership Interests that are not entitled to any preference in distribution, pro rata to each such class in accordance with the terms of such class (and, within such class, pro rata in proportion to the respective interests in such class as of the last day of the period for which such allocation is being made); provided that, Net Losses shall not be allocated to any Limited Partner pursuant to this Section 6.01.B to the extent that such allocation would cause such Limited Partner to have an Adjusted Capital Account Deficit (or increase any existing Adjusted Capital Account Deficit) at the end of such taxable year (or portion thereof). All Net Losses in excess of the limitations set forth in this Section 6.01.B shall be allocated to the General Partner.
C. Recapture Income. Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible after taking into account other required allocations of gain pursuant to Exhibit C hereto, be characterized as Recapture Income in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.
D. Special Allocations. With Respect to LTIP Units. After giving effect to the special allocations set forth in Section 1 of Exhibit C hereto, and notwithstanding the provisions of Sections 6.01.A and 6.01.B above, but subject to the prior allocation of income and gain under clauses 6.01.A (i) and (ii) above, any Liquidating Gains shall first be allocated to the holders of LTIP Units until the Economic Capital Account Balances of such holders, to the extent attributable to their ownership of LTIP Units, are equal to (i) the Class A Unit Economic Balance, multiplied by (ii) the number of their LTIP Units; provided that no such Liquidating Gains will be allocated with respect to any particular LTIP Unit unless and to the extent that such Liquidating Gains, when aggregated with other Liquidating Gains realized since the issuance of such LTIP Unit, exceed Liquidating Losses realized since the issuance of such LTIP Unit. After giving effect to the special allocations set forth in Section 1 of Exhibit C hereto, and notwithstanding the provisions of Sections 6.01.A and 6.01.B above, in the event that, due to distributions with respect to Class A Units in which the LTIP Units do not participate or otherwise, the Economic Capital Account Balance of any present or former holder of LTIP Units, to the extent attributable to the holder’s ownership of LTIP Units, exceeds the target balance specified above, then Liquidating Losses shall be allocated to such holder to the extent necessary to reduce or eliminate the disparity. In the event that Liquidating Gains or Liquidating Losses are allocated under this Section 6.01.D, Net Income allocable under clause 6.01.A (iii) and any Net Losses shall be recomputed without regard to the Liquidating Gains or Liquidating Losses so allocated. For this purpose, “Liquidating Gains” means any net capital gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership, including but not limited to net capital gain realized in connection with an adjustment to the Carrying Value of Partnership assets under Section 1.D of Exhibit B to this Agreement. Similarly, “Liquidating Losses” means any net capital loss realized in connection with any such event. The “Economic Capital Account Balances” of the holders of LTIP Units will be equal to their Capital Account balances, plus the amount of their shares of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to their ownership of LTIP Units. Similarly, the “Class A Unit Economic Balance” shall mean (i) the Capital Account balance of the General Partner, plus the amount of the General Partner’s share of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to the General Partner’s ownership of Class A Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under this Section 6.01.D, divided by (ii) the number of the General
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Partner’s Class A Units. Any such allocations shall be made among the holders of LTIP Units in proportion to the amounts required to be allocated to each under this Section 6.01.D. The parties agree that the intent of this Section 6.01.D is to make the Capital Account balance associated with each LTIP Unit economically equivalent to the Capital Account balance associated with the General Partner’s Class A Units (on a per-unit basis), but only if the Partnership has recognized cumulative net gains with respect to its assets since the issuance of the relevant LTIP Unit.
Section 6.02. Revisions to Allocations to Reflect Issuance of Additional Partnership Interests
In the event that the Partnership issues additional Partnership Interests to the General Partner or any Additional Limited Partner pursuant to Article IV hereof, the General Partner shall make such revisions to this Article VI and Exhibit A as it deems necessary to reflect the terms of the issuance of such additional Partnership Interests, including making preferential allocations to classes of Partnership Interests that are entitled thereto. Such revisions shall not require the consent or approval of any other Partner.
ARTICLE VII
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.01. Management
A. Powers of General Partner. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause; provided, however, that if the Shares (or comparable equity securities) of the General Partner Entity are not Publicly Traded, the General Partner maybe removed with cause with the Consent of the Limited Partners. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Sections 7.06 and 7.11 below, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.02 hereof and to effectuate the purposes set forth in Section 3.01 hereof, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money or will permit the General Partner Entity (as long as the General Partner Entity qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its stockholders sufficient to permit the General Partner Entity to maintain REIT status, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by mortgage, deed of trust or other lien or encumbrance on the Partnership’s assets) and the incurring of any obligations the General Partner deems necessary for the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;
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(3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership (including the exercise or grant of any conversion, option, privilege or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity, on such terms as the General Partner deems proper;
(4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the Partnership or any of the Partnership’s Subsidiaries, the lending of funds to other Persons (including, without limitation, the Partnership’s Subsidiaries) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which the Partnership has an equity investment and the making of capital contributions to its Subsidiaries;
(5) the negotiation, execution, delivery and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership’s operations or the implementation of the General Partner’s powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors, and other agents and the payment of their expenses and compensation out of the Partnership’s assets;
(6) the mortgage, pledge, encumbrance or hypothecation of any assets of the Partnership, and the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct or the operations of the General Partners or the Partnership, the lending of funds to other Persons (including, without limitation, any Subsidiaries of the Partnership) and the repayment of obligations of the Partnership, any of its Subsidiaries and any other Person in which it has an equity investment;
(7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement;
(8) the holding, managing, investing and reinvesting of cash and other assets of the Partnership;
(9) the collection and receipt of revenues and income of the Partnership;
(10) the selection, designation of powers, authority and duties and dismissal of employees of the Partnership (including, without limitation, employees having titles such as “president,” “vice president,” “secretary” and “treasurer”) and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring;
(11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate;
(12) the formation of, or acquisition of an interest (including non-voting interests in entities controlled by Affiliates of the Partnership or third parties) in, and the contribution of property to, any further limited or general partnerships, joint ventures, limited liability companies or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of funds or property, or the making of loans, to its Subsidiaries
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and any other Person in which it has an equity investment from time to time or the incurrence of indebtedness on behalf of such Persons or the guarantee of obligations of such Persons); provided that, as long as the General Partner has determined to qualify as a REIT, the Partnership may not engage in any such formation, acquisition or contribution that would cause the General Partner to fail to qualify as a REIT);
(13) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution or abandonment of any claim, cause of action, liability, debt or damages due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;
(14) the determination of the fair market value of any Partnership property distributed in kind, using such reasonable method of valuation as the General Partner may adopt;
(15) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any assets or investment held by the Partnership;
(16) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, individually or jointly with any such Subsidiary or other Person;
(17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have any interest pursuant to contractual or other arrangements with such Person;
(18) the making, executing and delivering of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or other legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner under this Agreement;
(19) the distribution of cash to acquire Partnership Units held by a Limited Partner in connection with a Limited Partner’s exercise of its Redemption Right under Section 8.06 hereof; and
(20) the amendment and restatement of Exhibit A hereto to reflect accurately at all times the Capital Contributions and Percentage Interests of the Partners as the same are adjusted from time to time to the extent necessary to reflect redemptions, Capital Contributions, the issuance of Partnership Units, the admission of any Additional Limited Partner or any Substituted Limited Partner or otherwise, which amendment and restatement, notwithstanding anything in this Agreement to the contrary, shall not be deemed an amendment of this Agreement, as long as the matter or event being reflected in Exhibit A hereto otherwise is authorized by this Agreement.
B. No Approval by Limited Partners. Except as provided in Section 7.11 below, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned
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agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the full extent permitted under the Act or other applicable law. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.
C. Insurance. At all times from and after the date hereof, the General Partner may cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the properties of the Partnership, (ii) liability insurance for the Indemnitees hereunder and (iii) such other insurance as the General Partner, in its sole and absolute discretion, determines to be necessary.
D. Working Capital and Other Reserves. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain working capital reserves in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time, including upon liquidation of the Partnership pursuant to Section 13.02 hereof.
E. No Obligations to Consider Tax Consequences of Limited Partners.
In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner (including the General Partner) of any action taken (or not taken) by it. The General Partner and the Partnership shall not have liability to a Limited Partner for monetary damages or otherwise for losses sustained, liabilities incurred or benefits not derived by such Limited Partner in connection with such decisions, provided that the General Partner has acted in good faith and pursuant to its authority under this Agreement.
Section 7.02. Certificate of Limited Partnership
The General Partner has previously filed the Certificate with the Secretary of State of Delaware. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, the District of Columbia or other jurisdiction in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.05.A (4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, the District of Columbia or other jurisdiction in which the Partnership may elect to do business or own property.
Section 7.03. Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partners, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name
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of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.
Section 7.04. Reimbursement of the General Partner
A. No Compensation. Except as provided in this Section 7.04 and elsewhere in this Agreement (including the provisions of Articles V and VI hereof regarding distributions, payments and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.
B. Responsibility for Partnership Expenses. The Partnership shall be responsible for and shall pay all expenses relating to the Partnership’s organization, the ownership of its assets and its operations. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Partnership (including, without limitation, expenses related to the management and administration of any Subsidiaries of the General Partner or the Partnership or Affiliates of the Partnership such as auditing expenses and filing fees); provided that, the amount of any such reimbursement shall be reduced by (i) any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it as permitted in Section 7.05.A below and (ii) any amount derived by the General Partner from any investments permitted in Section 7.05.A below; and, provided further, that the General Partner shall not be reimbursed for (i) income tax liabilities or (ii) filing or similar fees in connection with maintaining the General Partner’s continued corporate existence that are incurred by the General Partner. The General Partner shall determine in good faith the amount of expenses incurred by it related to the ownership and operation of, or for the benefit of, the Partnership. In the event that certain expenses are incurred for the benefit of the Partnership and other entities (including the General Partner), such expenses will be allocated to the Partnership and such other entities in such a manner as the General Partner in its sole and absolute discretion deems fair and reasonable. Such reimbursements shall be in addition to any reimbursement to the General Partner pursuant to Section 10.03.C hereof and as a result of indemnification pursuant to Section 7.07 below. All payments and reimbursements hereunder shall be characterized for federal income tax purposes as expenses of the Partnership incurred on its behalf, and not as expenses of the General Partner.
C. Partnership and Other Interests Issuance and Repurchase Expenses. The General Partner shall also be reimbursed for all expenses it incurs relating to any issuance or repurchase of additional Partnership Interests, Shares, Debt of the Partnership or the General Partner or rights, options, warrants or convertible or exchangeable securities pursuant to Article IV hereof (including, without limitation, all costs, expenses, damages and other payments resulting from or arising in connection with litigation related to any of the foregoing), all of which expenses are considered by the Partners to constitute expenses of, and for the benefit of, the Partnership.
D. Reimbursement not a Distribution. If and to the extent any reimbursement made pursuant to this Section 7.04 is determined for federal income tax purposes not to constitute a payment of expenses of the Partnership, the amount so determined shall be treated as a distribution to the General Partner and there shall be a corresponding special allocation of gross income to the General Partner, for purposes of computing the Partners’ Capital Accounts.
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Section 7.05. Outside Activities of the General Partner
A. General. Notwithstanding anything in this Agreement to the contrary, it is expressly understood and agreed that the General Partner may, if it determines such action to be in the best interests of the REIT or the Partnership, elect to cause some or all of the assets of the Partnership (including cash expected to be utilized to purchase assets that will be so held) to be distributed to and held directly by the General Partner (the “Specially Distributed Assets”). Concurrently with any such distribution, the General Partner shall (i) amend Section 5.01 of this Agreement so as to provide that, from and after the date of such distribution, each Partner other than the General Partner will receive the same distributions that it would have received had the Specially Distributed Assets been held by the Partnership rather than directly by the General Partner (and a corresponding adjustment shall be made to the distributions to be made to the General Partner); and (ii) make such further amendments to this Agreement (including, without limitation, to the income and loss allocation provisions of Section 6.01 hereof) as may be necessary or appropriate to effect the intention of the parties that the Partners be placed, as nearly as possible, in the same position they would have been in had such Specially Distributed Assets been held by the Partnership rather than directly by the General Partner; provided, however, that the General Partner shall in no event be required to make contributions to the Partnership to fund distributions to the other Partners.
B. Repurchase of Shares. In the event the General Partner exercises its rights under the Articles of Incorporation to purchase Shares or otherwise elects to purchase from its stockholders Shares in connection with a stock repurchase or similar program or for the purpose of delivering such shares to satisfy an obligation under any dividend reinvestment or stock purchase program adopted by the General Partner, any employee stock purchase plan adopted by the General Partner or any similar obligation or arrangement undertaken by the General Partner in the future, then the General Partner shall cause the Partnership to purchase from the General Partner that number of Partnership Units of the appropriate class equal to the product obtained by multiplying the number of Shares purchased by the General Partner times a fraction, the numerator of which is one and the denominator of which is the Conversion Factor, on the same terms and for the same aggregate price that the General Partner purchased such Shares.
C. Forfeiture of Shares. In the event the Partnership or the General Partner acquires Shares as a result of the forfeiture of such Shares under a restricted or similar share plan, then the General Partner shall cause the Partnership to cancel that number of Partnership Units of the appropriate class equal to the number of Shares so acquired divided by the Conversion Factor, and, if the Partnership acquired such Shares, it shall transfer such Shares to the General Partner for cancellation.
D. Issuances of Shares. After the Effective Date, the General Partner shall not grant, award, or issue any additional Shares (other than Shares issued pursuant to Section 8.06 hereof or pursuant to a dividend or distribution (including any stock split) of Shares to all of its stockholders), other equity securities of the General Partner or New Securities unless (i) the General Partner shall cause, pursuant to Section 4.02.A hereof, the Partnership to issue to the General Partner Partnership Interests or rights, options, warrants or securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially the same as those of such additional Shares, other equity securities or New Securities, as the case may be, and (ii) the General Partner transfers to the Partnership, as an additional Capital Contribution, the proceeds from the grant, award, or issuance of such additional Shares, other equity securities or New Securities, as the case may be, or from the exercise of rights contained in such additional Shares, other equity securities or New Securities, as the case may be. Without limiting the foregoing, the General Partner is expressly authorized to issue additional Shares, other equity securities or New Securities, as the case maybe, for less than fair market value, and the General Partner is expressly authorized, pursuant to Section 4.02.A hereof, to cause the Partnership to issue to the General Partner corresponding Partnership Interests, as long as (a) the General Partner
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concludes in good faith that such issuance is in the interests of the General Partner and the Partnership (for example, and not by way of limitation, the issuance of Shares and corresponding Partnership Units pursuant to a stock purchase plan providing for purchases of Shares, either by employees or stockholders, at a discount from fair market value or pursuant to employee stock options that have an exercise price that is less than the fair market value of the Shares, either at the time of issuance or at the time of exercise) and (b) the General Partner transfers all proceeds from any such issuance or exercise to the Partnership as an additional Capital Contribution.
E. Stock Option Plan. If at any time or from time to time, the General Partner sells Shares pursuant to any Stock Option Plan, the General Partner shall transfer the net proceeds of the sale of such Shares to the Partnership as an additional Capital Contribution in exchange for an amount of additional Partnership Units equal to the number of Shares so sold divided by the Conversion Factor.
F. Funding Debt. The General Partner may incur a Funding Debt, including, without limitation, a Funding Debt that is convertible into Shares or otherwise constitutes a class of New Securities, subject to the condition that the General Partner lends to the Partnership the net proceeds of such Funding Debt; provided, that the General Partner shall not be obligated to lend the net proceeds of any Funding Debt to the Partnership in a manner that would be inconsistent with the General Partner’s ability to remain qualified as a REIT. If the General Partner enters into any Funding Debt, the loan to the Partnership shall be on comparable terms and conditions, including interest rate, repayment schedule and costs and expenses, as are applicable with respect to or incurred in connection with such Funding Debt.
Section 7.06. Transactions with Affiliates
A. Transactions with Certain Affiliates. Except (i) as expressly permitted by this Agreement (other than Section 7.01.A hereof which shall not be considered authority for a transaction that otherwise would be prohibited by this Section 7.06.A) and (ii) all transactions with SL Green or its Affiliates contemplated by the General Partner’s initial public offering, the Partnership shall not, directly or indirectly, sell, transfer or convey any property to, or purchase any property from, or borrow funds from, or lend funds to, any Partner or any Affiliate of the Partnership or the General Partner or the General Partner Entity that is not also a Subsidiary of the Partnership, except pursuant to transactions that are on terms that are fair and reasonable and no less favorable to the Partnership than would be obtained from an unaffiliated third party.
B. Benefit Plans. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership, SL Green, the Manager or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any of the Partnership’s Subsidiaries.
C. Conflict Avoidance. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of SL Green, the Manager, the Partnership and General Partner on such terms as the General Partner, in its sole and absolute discretion, believes are advisable.
Section 7.07. Indemnification
A. General. The Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from or in
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connection with any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative incurred by the Indemnitee and relating to the Partnership or the General Partner or the formation or operations of, or the ownership of property by, either of them as set forth in this Agreement in which any such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established by a final determination of a court of competent jurisdiction that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the Indemnitee actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guarantee, contractual obligations for any indebtedness or other obligations or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.07 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.07.A. The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in a manner contrary to that specified in this Section 7.07.A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.07 shall be made only out of the assets of the Partnership, and any insurance proceeds from the liability policy covering the General Partner and any Indemnitees, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 7.07.
B. Advancement of Expenses. Reasonable expenses expected to be incurred by an Indemnitee shall be paid or reimbursed by the Partnership in advance of the final disposition of any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative made or threatened against an Indemnitee upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 7.07.B has been met and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met.
C. No Limitation of Rights. The indemnification provided by this Section 7.07 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitee is indemnified.
D. Insurance. The Partnership may purchase and maintain insurance on behalf of the Indemnitees and such other Persons as the General Partner shall determine against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.
E. Benefit Plan Fiduciary. For purposes of this Section 7.07, (i) the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services
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by, it to the plan or participants or beneficiaries of the plan, (ii) excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.07 and (iii) actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be i n the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.
F. No Personal Liability for Limited Partners. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.
G. Interested Transactions. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.07 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
H. Benefit. The provisions of this Section 7.07 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.07, or any provision hereof, shall be prospective only and shall not in any way affect the limitation on the Partnership’s liability to any Indemnitee under this Section 7.07 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or related to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.
I. Indemnification Payments Not Distributions. If and to the extent any payments to the General Partner pursuant to this Section 7.07 constitute gross income to the General Partner (as opposed to the repayment of advances made on behalf of the Partnership), such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Partnership and all Partners, and shall not be treated as distributions for purposes of computing the Partners’ Capital Accounts.
Section 7.08. Liability of the General Partner
A. General. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its directors and officers shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission if the General Partner or its directors and officers acted in good faith.
B. No Obligation to Consider Separate Interests of Limited Partners or Stockholders. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner’s stockholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or Assignees or to such stockholders) in deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the stockholders of the General Partner Entity on one hand and the Limited Partners on the other, the General Partner shall endeavor in good faith to resolve the conflict in manner not adverse to either the stockholders of the General Partner Entity or the Limited Partners; provided, however, that for so long as the General Partner Entity, directly, or the General Partner, owns a controlling interest in the Partnership, any such conflict that cannot be resolved in a manner not adverse to either the stockholders of the General Partner Entity or the Limited Partners shall be resolved in favor of the stockholders. The General Partner shall not be liable for monetary damages or otherwise for losses sustained, liabilities incurred or benefits not derived
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by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith.
C. Actions of Agents. Subject to its obligations and duties as General Partner set forth in Section 7.01.A above, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its employees or agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such employee or agent appointed by the General Partner in good faith.
D. Effect of Amendment. Any amendment, modification or repeal of this Section 7.08 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner’s liability to the Partnership and the Limited Partners under this Section 7.08 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.
E. Certain Definitions. Whenever in this Agreement the General Partner is permitted or required to make a decision (i) in its “sole discretion “or “discretion,” or under a similar grant of authority or latitude, the General Partner shall be entitled to consider such interests and factors as it desires and may consider its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership or the Limited Partners, or (ii) in its “good faith” or under another express standard, the General Partner shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement or by law or any other agreement contemplated herein.
Section 7.09. Other Matters Concerning the General Partner
A. Reliance on Documents. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.
B. Reliance on Advisors. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.
C. Action Through Agents. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder.
D. Actions to Maintain REIT Status or Avoid Taxation of the General Partner Entity. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the General Partner Entity to continue to qualify as a REIT or (ii) to allow the General Partner Entity to avoid incurring any liability for taxes under Section 857 or 4981 of the
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Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.
Section 7.10. Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership, to enter into any contracts on behalf of the Partnership and to take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership, and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.
Section 7.11. Restrictions on General Partner’s Authority
A. Consent Required. The General Partner may not take any action in contravention of an express prohibition or limitation of this Agreement without the written Consent of (i) all Partners adversely affected or (ii) such lower percentage of the Limited Partner Interests as may be specifically provided for under a provision of this Agreement or the Act.
B. Sale of All Assets of the Partnership. Except as provided in Article XIII hereof, the General Partner may not, directly or indirectly, cause the Partnership to sell, exchange, transfer or otherwise dispose of all or substantially all of the Partnership’s assets in a single transaction or a series of related transactions (including by way of merger (including a triangular merger), consolidation or other combination with any other Persons) (i) if such merger, sale or other transaction is in connection with a Termination Transaction permitted under Section 11.02.B hereof, without the Consent of the Partners holding a majority of Percentage Interests (including the effect of any Partnership Units held by the General Partner) or (ii) otherwise, without the Consent of the Limited Partners.
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Section 7.12. Loans by Third Parties
The Partnership may incur Debt, or enter into similar credit, guarantee, financing or refinancing arrangements for any purpose (including, without limitation, in connection with any acquisition of property or other assets) with any Person that is not the General Partner upon such terms as the General Partner determines appropriate; provided that, the Partnership shall not incur any Debt that is recourse to the General Partner, except to the extent otherwise agreed to by the General Partner in its sole discretion.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.01. Limitation of Liability
The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.05 hereof, or under the Act.
Section 8.02. Management of Business
No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.
Section 8.03. Outside Activities of Limited Partners
Subject to Section 7.05 hereof, and subject to any agreements entered into pursuant to Section 7.06.C hereof and to any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or a Subsidiary, any Limited Partner (other than the General Partner) and any officer, director, employee, agent, trustee, Affiliate or stockholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct or indirect competition with the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners (other than the General Partner) nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person (other than the General Partner to the extent expressly provided herein), and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.
Section 8.04. Return of Capital
Except pursuant to the right of redemption set forth in Section 8.06 below, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein.
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No Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions (except as permitted by Section 4.02.A hereof) or, except to the extent provided by Exhibit C hereto or as permitted by Sections 4.02.A, 5.01.B, 6.01.A (ii) and 6.01.B (i) hereof or otherwise expressly provided in this Agreement, as to profits, losses, distributions or credits.
Section 8.05. Rights of Limited Partners Relating to the Partnership
A. General. In addition to other rights provided by this Agreement or by the Act, and except as limited by 8.05.D below, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’s own expense:
(1) to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the General Partner Entity pursuant to the Exchange Act;
(2) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business, residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and
(5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.
B. Notice of Conversion Factor. The Partnership shall notify each Limited Partner upon request of the then current Conversion Factor and any changes that have been made thereto.
C. Notice of Extraordinary Transaction of the General Partner Entity. The General Partner Entity shall not make any extraordinary distributions of cash or property to its stockholders or effect a merger (including without limitation, a triangular merger), a sale of all or substantially all of its assets or any other similar extraordinary transaction without notifying the Limited Partners of its intention to make such distribution or effect such merger, sale or other extraordinary transaction at least twenty (20) Business Days prior to the record date to determine stockholders eligible to receive such distribution or to vote upon the approval of such merger, sale or other extraordinary transaction (or, if no such record date is applicable, at least twenty (20) Business Days before consummation of such merger, sale or other extraordinary transaction). This provision for such notice shall not be deemed (i) to permit any transaction that otherwise is prohibited by this Agreement or requires a Consent of the Partners or (ii) to require a Consent of the Limited Partners to a transaction that does not otherwise require Consent under this Agreement. Each Limited Partner agrees, as a condition to the receipt of the notice pursuant hereto, to keep confidential the information set forth therein until such time as the General Partner Entity has made public disclosure thereof and to use such information during such period of confidentiality solely for purposes of determining whether or not to exercise the Redemption Right; provided, however, that a Limited Partner may disclose such information to its attorney, accountant and/or financial advisor for purposes of obtaining advice with respect to such exercise so long as such attorney, accountant and/or financial advisor agrees to receive and hold such information subject to this confidentiality requirement.
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D. Confidentiality. Notwithstanding any other provision of this Section 8.05, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or (ii) the Partnership is required by law or by agreements with unaffiliated third parties to keep confidential.
Section 8.06. Class A Redemption Right
A. General. (i) Subject to Section 8.06.C below, on or after the date two (2) years after the issuance of a Class A Unit to a Limited Partner pursuant to Article IV hereof, the holder of a Class A Unit (if other than the General Partner or the General Partner Entity) shall have the right (the “Redemption Right”) to require the Partnership to redeem such Class A Unit on a Specified Redemption Date and at a redemption price equal to and in the form of the Cash Amount to be paid by the Partnership. Any such Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the Limited Partner who is exercising the Redemption Right (the “Redeeming Partner”). A Limited Partner may not exercise the Redemption Right for less than one thousand (1,000) Class A Units or, if such Redeeming Partner holds less than one thousand (1,000) Class A Units, for less than all of the Class A Units held by such Redeeming Partner.
(ii) The Redeeming Partner shall have no right with respect to any Class A Units so redeemed to receive any distributions paid after the Specified Redemption Date.
(iii) The Assignee of any Limited Partner may exercise the rights of such Limited Partner pursuant to this Section 8.06 and such Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Limited Partner’s Assignee. In connection with any exercise of the such rights by such Assignee on behalf of such Limited Partner, the Cash Amount shall be paid by the Partnership directly to such Assignee and not to such Limited Partner.
(iv) Notwithstanding the foregoing, the Redemption Right shall not be exercisable with respect to any Class A Unit issued upon conversion of an LTIP Unit until on or after the date that is two years after the date on which the LTIP Unit was issued, provided however, that the foregoing restriction shall not apply if the Redemption Right is exercised by a LTIP Unit holder in connection with a transaction that falls within the definition of a “change of control” under the agreement or agreements pursuant to which the LTIP Units were issued to him or her and provided further that the two (2) year requirement set forth in the first sentence of Section 8.06.A(i) shall not apply with respect to Class A Units issued upon conversion of LTIP Units.
B. General Partner Assumption of Right. (i) If a Limited Partner has delivered a Notice of Redemption, the General Partner may, in its sole and absolute discretion (subject to any limitations on ownership and transfer of Shares set forth in the Articles of Incorporation), elect to assume directly and satisfy a Redemption Right by paying to the Redeeming Partner either the Cash Amount or the Shares Amount, as the General Partner determines in its sole and absolute discretion (provided that payment of the Redemption Amount in the form of Shares shall be in Shares registered under Section 12 of the Exchange Act and listed for trading on the exchange or national market on which the Shares are Publicly Traded, and provided, further that, in the event that the Shares are not Publicly Traded at the time a Redeeming Partner exercises its Redemption Right, the Redemption Amount shall be paid only in the form of the Cash Amount unless the Redeeming Partner, in its sole and absolute discretion, consents to payment of the Redemption Amount in the form of the Shares Amount), on the Specified Redemption Date, whereupon the General Partner shall acquire the Class A Units offered for redemption by the
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Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. Unless the General Partner, in its sole and absolute discretion, shall exercise its right to assume directly and satisfy the Redemption Right, the General Partner shall not have any obligation to the Redeeming Partner or to the Partnership with respect to the Redeeming Partner’s exercise of the Redemption Right. In the event the General Partner shall exercise its right to satisfy the Redemption Right in the manner described in the first sentence of this Section 8.06.B and shall fully perform its obligations in connection therewith, the Partnership shall have no right or obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner’s exercise of the Redemption Right, and each of the Redeeming Partner, the Partnership and the General Partner shall, for federal income tax purposes, treat the transaction between the General Partner and the Redeeming Partner as a sale of the Redeeming Partner’s Partnership Units to the General Partner. Nothing contained in this Section 8.06.B shall imply any right of the General Partner to require any Limited Partner to exercise the Redemption Right afforded to such Limited Partner pursuant to Section 8.06.A above.
(ii) In the event that the General Partner determines to pay the Redeeming Partner the Redemption Amount in the form of Shares, the total number of Shares to be paid to the Redeeming Partner in exchange for the Redeeming Partner’s Partnership Units shall be the applicable Shares Amount. In the event this amount is not a whole number of Shares, the Redeeming Partner shall be paid (i) that number of Shares which equals the nearest whole number less than such amount plus (ii) an amount of cash which the General Partner determines, in its reasonable discretion, to represent the fair value of the remaining fractional Share which would otherwise be payable to the Redeeming Partner.
(iii) Each Redeeming Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of Shares upon exercise of the Redemption Right.
C. Exceptions to Exercise of Redemption Right. Notwithstanding the provisions of Sections 8.06.A and 8.06.B above, a Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.06.A above if (but only as long as) the delivery of Shares to such Partner on the Specified Redemption Date (i) would be prohibited under the Articles of Incorporation or (ii) as long as the Shares are Publicly Traded, would be prohibited under applicable federal or state securities laws or regulations (in each case regardless of whether the General Partner would in fact assume and satisfy the Redemption Right).
D. No Liens on Partnership Units Delivered for Redemption. Each Limited Partner covenants and agrees with the General Partner that all Partnership Units delivered for redemption (including Partnership Units redeemed under Section 8.07) shall be delivered to the Partnership or the General Partner, as the case may be, free and clear of all liens, and, notwithstanding anything contained herein to the contrary, neither the General Partner nor the Partnership shall be under any obligation to acquire Partnership Units which are or may be subject to any liens. Each Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Partnership Units to the Partnership or the General Partner, such Limited Partner shall assume and pay such transfer tax.
E. Additional Partnership Interests. In the event that the Partnership issues Partnership Interests to any Additional Limited Partner pursuant to Article IV hereof, the General Partner shall make such amendments to this Section 8.06 as it determines are necessary to reflect the issuance of such Partnership Interests (including setting forth any restrictions on the exercise of the Redemption Right with respect to such Partnership Interests).
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Section 8.07. Redemption of Class B Units
The Class B Units shall be subject to mandatory redemption if the Management Agreement is terminated or not renewed. The General Partner shall send notice of Class B Unit redemption or non-renewal within ten days after the General Partner sends or receives notice of termination or non-renewal of the Management Agreement. The redemption date shall be the date on which termination or non-renewal of the Management Agreement is effective. If the Management Agreement is terminated pursuant to Section 13(d) of the Management Agreement or not renewed by the General Partner pursuant to Section 13(b) of the Management Agreement, the redemption amount, to be paid in cash or by wire transfer on the redemption date, shall be equal to two times of the higher of the annual distributions on a Class B Unit relating to either of the two most recently completed calendar years; provided that if immediately following such termination or non-renewal the General Partner becomes self-managed in connection with an internalization of the Manager pursuant to a separate agreement 13(the “Internalization Agreement”) between the Manager and the General Partner and/or a subsidiary of the General Partner, the redemption amount shall be $100.14 In such event, the consideration to be paid for such internalization shall be as set forth in the Internalization Agreement. If the Management Agreement is terminated by the General Partner pursuant to Section 13(c) of the Management Agreement or not renewed by the Manager pursuant to Section 13(b) of the Management Agreement, the aggregate redemption amount shall be $100. Upon any such redemption, the Class B Units will also be entitled to receive any distributions payable with respect to periods through the redemption date. If such distribution amounts cannot be calculated on or by the redemption date, they shall be calculated and paid as promptly as possible thereafter, but in no event later than 30 days after the redemption date.
ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.01. Records and Accounting
The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.03 below. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles.
Section 9.02. Fiscal Year
The fiscal year of the Partnership shall be the calendar year.
Section 9.03. Reports
A. Annual Reports. As soon as practicable, but in no event later than the date on which the General Partner Entity mails its annual report to its stockholders, the General Partner shall cause to be mailed to each Limited Partner an annual report, as of the close of the most recently ended Partnership Year, containing financial statements of the Partnership, or of the General Partner Entity if such statements are prepared solely on a consolidated basis with the Partnership, for such Partnership Year,
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presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner Entity.
B. Quarterly Reports. If and to the extent that the General Partner Entity mails quarterly reports to its stockholders, as soon as practicable, but in no event later than the date on which such reports are mailed, the General Partner shall cause to be mailed to each Limited Partner a report containing unaudited financial statements, as of the last day of such calendar quarter, of the Partnership, or of the General Partner Entity if such statements are prepared solely on a consolidated basis with the Partnership, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate.
ARTICLE X
TAX MATTERS
Section 10.01. Preparation of Tax Returns
The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes.
Section 10.02. Tax Elections
A. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code. The General Partner shall have the right to seek to revoke any such election (including, without limitation, an election under Section 754 of the Code) upon the General Partner’s determination in its sole and absolute discretion that such revocation is in the best interests of the Partners.
B. To the extent provided for in Treasury Regulations, revenue rulings, revenue procedures and/or other IRS guidance issued after the date hereof, the Partnership is hereby authorized to, and at the direction of the General Partner shall, elect a safe harbor under which the fair market value of any Partnership Interests issued after the effective date of such Treasury Regulations (or other guidance) will be treated as equal to the liquidation value of such Partnership Interests (i.e., a value equal to the total amount that would be distributed with respect to such interests if the Partnership sold all of its assets for their fair market value immediately after the issuance of such Partnership Interests, satisfied its liabilities (excluding any non-recourse liabilities to the extent the balance of such liabilities exceeds the fair market value of the assets that secure them) and distributed the net proceeds to the Partners under the terms of this Agreement). In the event that the Partnership makes a safe harbor election as described in the preceding sentence, each Partner hereby agrees to comply with all safe harbor requirements with respect to transfers of such Partnership Interests while the safe harbor election remains effective.
Section 10.03. Tax Matters Partner
A. General. The General Partner shall be the “tax matters partner” of the Partnership for federal income tax purposes. Pursuant to Section 6223(c)(3) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number and profit interest of each of the
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Limited Partners and any Assignees; provided, however, that such information is provided to the Partnership by the Limited Partners.
B. Powers. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a “notice partner” (as defined in Section 6231(a)(8) of the Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a “final adjustment”) is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership’s principal place of business is located;
(3) to intervene in any action brought by any other Partner for judicial review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;
(5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and
(6) to take any other action on behalf of the Partners of the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.07 hereof shall be fully applicable to the tax matters partner in its capacity as such.
C. Reimbursement. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm or a law firm to assist the tax matters partner in discharging its duties hereunder.
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Section 10.04. Organizational Expenses
The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code.
Section 10.05. Withholding
Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Section 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a recourse loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner’s Partnership Interest to secure such Limited Partner’s obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.05. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.05 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner (including, without limitation, the right to receive distributions). Any amounts payable by a Limited Partner hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder.
ARTICLE XI
TRANSFERS AND WITHDRAWALS
Section 11.01. Transfer
A. Definition. The term “transfer,” when used in this Article XI with respect to a Partnership Interest or a Partnership Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partnership Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term “transfer” when used in this Article XI does not include any redemption or repurchase of Partnership Units by the Partnership from a Partner (including the General Partner), acquisition of Partnership Units from a Limited Partner by the General Partner pursuant to Section 8.06 hereof or otherwise or any conversion of LTIP Units into Class A Units. No part of the interest of a Limited Partner shall be subject to the claims of any creditor, any spouse for alimony or
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support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered except as may be specifically provided for in this Agreement.
B. General. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article XI. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article XI shall be null and void.
Section 11.02. Transfers of Partnership Interests of General Partner
A. Except for transfers of Partnership Units to the Partnership as provided in Section 7.05 or Section 8.06 hereof, the General Partner may not transfer any of its Partnership Interest except (i) in connection with a transaction described in Section 11.02.B below (ii) to a wholly-owned Subsidiary or (iii) as otherwise expressly permitted under this Agreement, nor shall the General Partner withdraw as General Partner except in connection with a transaction described in Section11.02.B below.
B. The General Partner shall not engage in any merger (including a triangular merger), consolidation or other combination with or into another person, sale of all or substantially all of its assets or any reclassification, recapitalization or change of outstanding Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination as described in the definition of “Conversion Factor”) (“Termination Transaction”), unless the Termination Transaction has been approved by the Consent of the Partners holding a majority or more of the then outstanding Percentage Interests (including the effect of any Partnership Units held by the General Partner) and in connection with which all Limited Partners either will receive, or will have the right to elect to receive, for each Partnership Unit an amount of cash, securities, or other property equal to the product of the Conversion Factor and the greatest amount of cash, securities or other property paid to a holder of Shares, if any, corresponding to such Partnership Unit that was issued pursuant to Section 4.02.A hereof in consideration of one such Share at any time during the period from and after the date on which the Termination Transaction is consummated; provided that, if, in connection with the Termination Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than fifty percent (50%) of the outstanding Shares, each holder of Partnership Units shall receive, or shall have the right to elect to receive, the greatest amount of cash, securities, or other property which such holder would have received had it exercised the Redemption Right and received Shares in exchange for its Partnership Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer.
Section 11.03. Limited Partners’ Rights to Transfer
A. General. A Limited Partner may not transfer any of such Limited Partner’s rights as a Limited Partner without the consent of the General Partner, which consent the General Partner may withhold in its sole discretion; provided, however, that no consent shall be required for a transfer or assignment by the Manager or SL Green or its Affiliate of its Class B Units or the rights to receive distributions pursuant to Class B Units to an officer, director or employee of the General Partner, the Manager or SL Green.
B. Incapacitated Limited Partners. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.
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C. No Transfers Violating Securities Laws. The General Partner may prohibit any transfer of Partnership Units by a Limited Partner if, in the opinion of legal counsel to the Partnership, such transfer would require filing of a registration statement under the Securities Act or would otherwise violate any federal, or state securities laws or regulations applicable to the Partnership or the Partnership Unit.
D. No Transfers Affecting Tax Status of Partnership. No transfer of Partnership Units by a Limited Partner (including a redemption or exchange pursuant to Section 8.06 hereof) may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes or would result in a termination of the Partnership for federal income tax purposes (except as a result of the redemption or exchange for Shares of all Partnership Units held by all Limited Partners other than the General Partner or the General Partner Entity or any Subsidiary of either the General Partner or the General Partner Entity or pursuant to a transaction expressly permitted under Section 7.11.B or Section 11.02 hereof), (ii) in the opinion of legal counsel for the Partnership, it would adversely affect the ability of the General Partner Entity to continue to qualify as a REIT or would subject the General Partner Entity to any additional taxes under Section 857 or Section 4981 of the Code or (iii) such transfer is effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code.
E. No Transfers to Holders of Nonrecourse Liabilities. No pledge or transfer of any Partnership Units may be made to a lender to the Partnership, or to any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership, whose loan constitutes a Nonrecourse Liability without the consent of the General Partner, in its sole and absolute discretion; provided that, as a condition to such consent the lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the Redemption Amount any Partnership Units transferred or in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code.
F. Transfer Register. The General Partner shall keep a register for the Partnership on which the transfer, pledge or release of Partnership Units shall be shown and pursuant to which entries shall be made to effect all transfers, pledges or releases as required by Sections 8-207,8-313(1) and 8-321 of the Uniform Commercial Code, as amended, in effect in the States of New York and Delaware; provided, however, that if there is any conflict between such requirements, the provisions of the Delaware Uniform Commercial Code shall govern. The General Partner shall (i) place proper entries in such register clearly showing each transfer and each pledge and grant of security interest and the transfer and assignment pursuant thereto, such entries to be endorsed by the General Partner and (ii) maintain the register and make the register available for inspection by all of the Partners and their pledgees at all times during the term of this Agreement. Nothing herein shall be deemed a consent to any pledge or transfer otherwise prohibited under this Agreement.
Section 11.04. Substituted Limited Partners
A. Consent of General Partner. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in its place without the consent of the General Partner to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.04 as a Substituted Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner’s failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner; provided that a transfer which does not require consent of the General Partner under Section 11.03A shall not require the General Partner’s consent under this section.
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B. Rights of Substituted Limited Partner. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article XI shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. The admission of any transferee as a Substituted Limited Partner shall be conditioned upon the transferee executing and delivering to the Partnership an acceptance of all the terms and conditions of this Agreement (including, without limitation, the provisions of Section 15.11 hereof and such other documents or instruments as may be required to effect the admission).
C. Amendment and Restatement of Exhibit A. Upon the admission of a Substituted Limited Partner, the General Partner shall amend and restate Exhibit A hereto to reflect the name, address, Capital Account, number of Partnership Units, and Percentage Interest of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address, Capital Account and Percentage Interest of the predecessor of such Substituted Limited Partner.
Section 11.05. Assignees
If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.03 above as a Substituted Limited Partner, as described in Section 11.04 above, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partner interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses, gain, loss and Recapture Income attributable to the Partnership Units assigned to such transferee, and shall have the rights granted to the Limited Partners under Section 8.06 hereof but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matter in the same proportion as all other Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article XI to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units.
Section 11.06. General Provisions
A. Withdrawal of Limited Partner. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner’s Partnership Units in accordance with this Article XI or pursuant to redemption of all of its Partnership Units under Section 8.06 hereof.
B. Termination of Status as Limited Partner. Any Limited Partner who shall transfer all of its Partnership Units in a transfer permitted pursuant to this Article XI or pursuant to redemption of all of its Partnership Units under Section 8.06 hereof shall cease to be a Limited Partner.
C. Timing of Transfers. Transfers pursuant to this Article XI may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees.
D. Allocations. If any Partnership Interest is transferred during any quarterly segment of the Partnership’s fiscal year in compliance with the provisions of this Article XI or redeemed or transferred pursuant to Section 8.06 hereof, Net Income, Net Losses, each item thereof and all other items attributable to such interest for such fiscal year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the fiscal year in accordance with Section 706(d) of the Code, using the interim closing of the books method (unless the General Partner, in
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its sole and absolute discretion, elects to adopt a daily, weekly, or a monthly proration period, in which event Net Income, Net Losses, each item thereof and all other items attributable to such interest for such fiscal year shall be prorated based upon the applicable method selected by the General Partner). Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or redemption occurs shall be allocated to the Person who is a Partner as of midnight on the last day of said month. All distributions attributable to any Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment or redemption shall be made to the transferor Partner or the Redeeming Partner, as the case may be, and, in the case of a transfer or assignment other than a redemption, all distributions thereafter attributable to such Partnership Unit shall be made to the transferee Partner.
E. Additional Restrictions. In addition to any other restrictions on transfer herein contained, including without limitation the provisions of this Article XI, in no event may any transfer or assignment of a Partnership Interest by any Partner (including pursuant to Section 8.06 hereof) be made without the express consent of the General Partner, in its sole and absolute discretion, (i) to any person or entity who lacks the legal right, power or capacity to own a Partnership Interest; (ii) in violation of applicable law; (iii) of any component portion of a Partnership Interest, such as the Capital Account, or rights to distributions, separate and apart from all other components of a Partnership Interest except as permitted by Section 11.03A; (iv) if in the opinion of legal counsel to the Partnership such transfer would cause a termination of the Partnership for federal or state income tax purposes (except as a result of the redemption or exchange for Shares of all Partnership Units held by all Limited Partners or pursuant to a transaction expressly permitted under Section 7.11.B or Section 11.02 hereof); (v) if in the opinion of counsel to the Partnership, such transfer would cause the Partnership to cease to be classified as a partnership for federal income tax purposes (except as a result of the redemption or exchange for Shares of all Partnership Units held by all Limited Partners or pursuant to a transaction expressly permitted under Section 7.11.B or Section 11.02 hereof); (vi) if such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (vii) without the consent of the General Partner, to any “benefit plan investor” within the meaning of Department of Labor Regulations Section 2510.3-101(f); (viii) if such transfer would, in the opinion of counsel to the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2570.3-101; (ix) if such transfer requires the registration of such Partnership Interest pursuant to any applicable federal or state securities laws; (x) if such transfer is effectuated through an “established securities market” or a “secondary market” (or the substantial equivalent thereof) within the meaning of Section 7704 of the Code or such transfer causes the Partnership to become a “publicly traded partnership,” as such term is defined in Section 469(k)(2) or Section 7704(b) of the Code; (xi) if such transfer subjects the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (xii) if such transfer could adversely affect the ability of the General Partner Entity to remain qualified as a REIT; or (xiii) if in the opinion of legal counsel for the Partnership, such transfer would adversely affect the ability of the General Partner Entity to continue to qualify as a REIT or subject the General Partner Entity to any additional taxes under Section 857 or Section 4981 of the Code.
F. Avoidance of “Publicly Traded Partnership” Status. The General Partner shall monitor the transfers of interests in the Partnership to determine (i) if such interests are being traded on an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code and (ii) whether additional transfers of interests would result in the Partnership being unable to qualify for at least one of the “safe harbors” set forth in Regulations Section 1.7704-1 (or such other guidance subsequently published by the IRS setting forth safe harbors under which interests will not be treated as “readily tradable” on a secondary market (or the substantial
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equivalent thereof) within the meaning of Section 7704 of the Code (the “Safe Harbors”). The General Partner shall take all steps reasonably necessary or appropriate to prevent any trading of interests or any recognition by the Partnership of transfers made on such markets and, except as otherwise provided herein, to insure that at least one of the Safe Harbors is met.
ARTICLE XII
ADMISSION OF PARTNERS
Section 12.01. Admission of Successor General Partner
A successor to all of the General Partner’s General Partnership Interest pursuant to Section 11.02 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner’s executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission.
Section 12.02. Admission of Additional Limited Partners
A. General. No Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent shall be given or withheld in the General Partner’s sole and absolute discretion. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement, including, without limitation, pursuant to Section 4.01.C hereof, or who exercises an option to receive Partnership Units shall be admitted to the Partnership as an Additional Limited Partner only with the consent of the General Partner and only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 15.11 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission.
B. Allocations to Additional Limited Partners. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method (unless the General Partner, in its sole and absolute discretion, elects to adopt a daily, weekly or monthly proration method, in which event Net Income, Net Losses, and each item thereof would be prorated based upon the applicable period selected by the General Partner).Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner. All distributions with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner, and all distributions thereafter shall be made to all the Partners and Assignees including such Additional Limited Partner.
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Section 12.03. Amendment of Agreement and Certificate of Limited Partnership
For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership (including an amendment and restatement of Exhibit A hereto) and, if necessary, to prepare as soon as practical an amendment of this Agreement and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 15.11 hereof.
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
Section 13.01. Dissolution
The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following (“Liquidating Events”):
(i) the expiration of its term as provided in Section 2.04 hereof;
(ii) an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within ninety (90) days after the withdrawal a “majority in interest” (as defined below) of the remaining Partners Consent in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a substitute General Partner;
(iii) an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion, on or after January 1, 2054;
(iv) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; or
(v) a final and nonappealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and nonappealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to or within ninety days after of the entry of such order or judgment a “majority in interest” (as defined below) of the remaining Partners Consent in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner.
As used herein, a “majority in interest” shall refer to Partners (excluding the General Partner) who hold more than fifty percent (50%) of the outstanding Percentage Interests not held by the General Partner.
Section 13.02. Winding Up
A. General. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is in consistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General
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Partner (or, in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the “Liquidator”)) shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include equity or other securities of the General Partner or any other entity) shall be applied and distributed in the following order:
(1) First, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership’s debts and liabilities to the Partners; and
(3) The balance, if any, to the Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods.
The General Partner shall not receive any additional compensation for any services performed pursuant to this Article XIII.
B. Deferred Liquidation. Notwithstanding the provisions of Section 13.02.A above which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.02.A above, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.
Section 13.03. Compliance with Timing Requirements of Regulations
Subject to Section 13.04 below, in the event the Partnership is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article XIII to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. In the discretion of the General Partner, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article XIII may be: (A) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the Partnership (in which case the assets of any such trust shall be distributed to the General Partner and
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Limited Partners from time to time, in the reasonable discretion of the General Partner, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement); or (B) withheld to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld amounts shall be distributed to the General Partner and Limited Partners as soon as practicable.
Section 13.04. Deemed Distribution and Recontribution
Notwithstanding any other provision of this Article XIII, in the event the Partnership is deemed liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership’s property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged and the Partnership’s affairs shall not be wound up. Instead, for federal income tax purposes and for purposes of maintaining Capital Accounts pursuant to Exhibit B hereto, the Partnership shall be deemed to have distributed its assets in kind to the General Partner and Limited Partners, who shall be deemed to have assumed and taken such assets subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the General Partner and Limited Partners shall be deemed to have recontributed the Partnership assets in kind to the Partnership, which shall be deemed to have assumed and taken such assets subject to all such liabilities.
Section 13.05. Rights of Limited Partners
Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise expressly provided in this Agreement, no Limited Partner shall have priority over any other Limited Partner as to the return of its Capital Contributions, distributions, or allocations.
Section 13.06. Notice of Dissolution
In the event a Liquidating Event occurs or an event occurs that would, but for provisions of an election or objection by one or more Partners pursuant to Section 13.01 above, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners and to all other parties with whom the Partnership regularly conducts business (as determined in the discretion of the General Partner) and shall publish notice thereof in a newspaper of general circulation in each place in which the Partnership regularly conducts business(as determined in the discretion of the General Partner).
Section 13.07. Cancellation of Certificate of Limited Partnership
Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.02 above, the Partnership shall be terminated and the Certificate and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.
Section 13.08. Reasonable Time for Winding Up
A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.02 above, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.
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Section 13.09. Waiver of Partition
Each Partner hereby waives any right to partition of the Partnership property.
Section 13.10. Liability of Liquidator
The Liquidator shall be indemnified and held harmless by the Partnership in the same manner and to the same degree as an Indemnitee may be indemnified pursuant to Section 7.11 hereof.
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14.01. Amendments
A. General. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners holding twenty-five percent (25%) or more of the Partnership Interests. Following such proposal (except an amendment pursuant to Section 14.01.B below), the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner’s recommendation with respect to the proposal. Except as provided in Section 14.01.B, 14.01.C or 14.01.D below, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the General Partner).
B. Amendments Not Requiring Limited Partner Approval. Notwithstanding Section 14.01.A or Section 14.01.C hereof, the General Partner shall have the power, without the Consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination or withdrawal of any Partner in accordance with this Agreement;
(3) to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Article IV hereof;
(4) to reflect a change that does not adversely affect any of the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement or as may be expressly provided by any other provisions of this Agreement;
(5) to adjust the terms hereof to reflect any Specially Distributed Property, as contemplated in Section 7.05.A hereof; and
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(6) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal, state or local agency or contained in federal, state or local law.
The General Partner shall notify the Limited Partners when any action under this Section 14.01.B is taken in the next regular communication to the Limited Partners.
C. Amendments Requiring Limited Partner Approval (Excluding General Partner). Notwithstanding Section 14.01.A above, without the Consent of the Limited Partners (not including Limited Partner Interests held by the General Partner), the General Partner shall not amend Section 4.02.A, Section 7.01.A (second sentence only), Section 7.05, Section 7.06, Section 7.08, Section 11.02, Section 13.01, this Section 14.01.C or Section 14.02.
D. Other Amendments Requiring Certain Limited Partner Approval. Notwithstanding anything in this Section 14.01 to the contrary, this Agreement shall not be amended with respect to any Partner adversely affected without the Consent of such Partner adversely affected if such amendment would (i) convert a Limited Partner’s interest in the Partnership into a general partner’s interest, (ii) modify the limited liability of a Limited Partner, (iii) amend Section 7.11.A, (iv) amend Article V, Article VI, or Section13.02.A(3) (except as permitted pursuant to Sections 4.02, 5.01.D, 5.04, 6.02 and 14.01(B)(3)), (v) amend Section 8.06 or any defined terms set forth in Article I that relate to the Redemption Right (except as permitted in Section 8.06.E), or (vi) amend this Section 14.01.D. Moreover, this Agreement may be amended by the General Partner to provide that certain Limited Partners have the obligation, upon liquidation of their interests in the Partnership (within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g)), to restore to the Partnership the amounts of their negative Capital Account balances, if any, for the benefit of creditors of the Partnership or Partners with positive Capital Account balances or both, together with any necessary corresponding amendments (including corresponding amendments to Sections 6.01.A, 6.01.B and Exhibit C), with the consent of only such Limited Partners and of any other Limited Partners already subject to such a restoration obligation whose restoration obligation may be affected by such amendment.
E. Amendment and Restatement of Exhibit A Not An Amendment. Notwithstanding anything in this Article XIV or elsewhere in this Agreement to the contrary, any amendment and restatement of Exhibit A hereto by the General Partner to reflect events or changes otherwise authorized or permitted by this Agreement, whether pursuant to Section 7.01.A (20) hereof or otherwise, shall not be deemed an amendment of this Agreement and may be done at any time and from time to time, as necessary by the General Partner without the Consent of the Limited Partners.
Section 14.02. Meetings of the Partners
A. General. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners holding twenty-five percent (25%) or more of the Partnership Interests. The notice of meeting shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 14.01.A above. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests held by Limited Partners (including Limited Partner Interests held by the General Partner) shall control.
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B. Actions Without a Meeting. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.
C. Proxy. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or its attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it. Such revocation to be effective upon the Partnership’s receipt of notice thereof in writing.
D. Conduct of Meeting. Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate.
ARTICLE XV
GENERAL PROVISIONS
Section 15.01. Addresses and Notice
Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address set forth in Exhibit A hereto or such other address as the Partners shall notify the General Partner in writing.
Section 15.02. Titles and Captions
All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.
Section 15.03. Pronouns and Plurals
Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 15.04. Further Action
The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.
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Section 15.05. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
Section 15.06. Creditors
Other than as expressly set forth herein with regard to any Indemnitee, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.
Section 15.07. Waiver
No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
Section 15.08. Counterparts
This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto (other than the existing Partners who will become bound by this Agreement upon its execution by the General Partner).
Section 15.09. Applicable Law
This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.
Section 15.10. Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
Section 15.11. Power of Attorney
A. General. Each Limited Partner and each Assignee who accepts Partnership Units (or any rights, benefits or privileges associated therewith) is deemed to irrevocably constitute and appoint the General Partner, any Liquidator and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or any Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property, (b) all instruments that the General Partner or any Liquidator deems appropriate or necessary to reflect any amendment, change,
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modification or restatement of this Agreement in accordance with its terms, (c) all conveyances and other instruments or documents that the General Partner or any Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation, (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article XI, XII or XIII hereof or the Capital Contribution of any Partner and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement.
Nothing contained in this Section 15.11 shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article XIV hereof or as may be otherwise expressly provided for in this Agreement.
B. Irrevocable Nature. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner or any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Units and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.
Section 15.12. Entire Agreement
This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any prior written oral understandings or agreements among them with respect thereto.
Section 15.13. No Rights as Stockholders
Nothing contained in this Agreement shall be construed as conferring upon the holders of the Partnership Units any rights whatsoever as stockholders of the General Partner Entity, including, without limitation, any right to receive dividends or other distributions made to stockholders of the General Partner Entity or to vote or to consent or receive notice as stockholders in respect to any meeting of stockholders for the election of directors of the General Partner Entity or any other matter.
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Section 15.14. Limitation to Preserve REIT Status
To the extent that any amount paid or credited to the General Partner or its officers, directors, employees or agents pursuant to Section 7.04 or Section 7.07 hereof would constitute gross income to the General Partner Entity for purposes of Section 856(c)(2) or 856(c)(3) of the Code (a “General Partner Payment”) then, notwithstanding any other provision of this Agreement, the amount of such General Partner Payments for any fiscal year shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of (a) 4.20% of the General Partner Entity’s total gross income (but not including the amount of any General Partner Payments) for the fiscal year which is described in subsections (A) though (H) of Section 856(c)(2) of the Code over (b) the amount of gross income (within the meaning of Section 856(c)(2) of the Code) derived by the General Partner Entity from sources other than those described in subsections (A) through (H) of Section 856(c)(2) of the Code (but not including the amount of any General Partner Payments); or
(ii) an amount equal to the excess, if any of (a) 25% of the General Partner Entity’s total gross income (but not including the amount of any General Partner Payments) for the fiscal year which is described in subsections (A) through (I) of Section 856(c)(3) of the Code over (b) the amount of gross income (within the meaning of Section 856(c)(3) of the Code) derived by the General Partner Entity from sources other than those described in subsections (A) through (I) of Section 856(c)(3) of the Code (but not including the amount of any General Partner Payments);
provided, however, that General Partner Payments in excess of the amounts set forth in subparagraphs (i) and (ii) above may be made if the General Partner Entity, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts would not adversely affect the General Partner Entity’s ability to qualify as a REIT. To the extent General Partner Payments may not be made in a year due to the foregoing limitations, such General Partner Payments shall carry over and be treated as arising in the following year, provided, however, that such amounts shall not carry over for more than five years, and if not paid within such five year period, shall expire; provided, further, that (i) as General Partner Payments are made, such payments shall be applied first to carryover amounts outstanding, if any, and (ii) with respect to carryover amounts for more than one Partnership Year, such payments shall be applied to the earliest Partnership Year first.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
GENERAL PARTNER: | |||
GRAMERCY CAPITAL CORP. | |||
By: | /s/ Marc Holliday | ||
Name: Marc Holliday | |||
Title: President and Chief Executive Officer | |||
LIMITED PARTNERS: | |||
SL GREEN OPERATING PARTNERSHIP, L.P. | |||
By: SL Green Realty Corp., its general partner | |||
By: | /s/ Andrew S. Levine | ||
Name: Andrew S. Levine | |||
Title: Executive Vice President | |||
GKK MANAGER LLC | |||
By: | /s/ Andrew S. Levine | ||
Name: Andrew S. Levine | |||
Title: Executive Vice President |
CLASS B UNITHOLDER SIGNATURE PAGE
The undersigned holder of Class B Units in GKK Capital LP hereby consents to and enters into this Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP.
Signature Line for Class B Unitholder:
Name: | ||
Date: March [ ], 2006 |
THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
GPT PROPERTY TRUST LP (F/K/A GKK CAPITAL LP)
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
Revised as of 5/3/13
Class A Units | |
Percentage Interests | |
Limited Partner Interest Holder Gramercy Property Trust Inc. (f/k/a Gramercy Capital Corp.) |
99% |
General Partner Interest Holder Gramercy Property Trust Inc. (f/k/a Gramercy Capital Corp.) |
1% |
Class B Units | |
None | N/A |
LTIP Units | |
None | N/A* |
*Note: LTIP Units with a maximum aggregate value equal to $24,000,000 have been reserved for certain executive officers of Gramercy Property Trust Inc. (“GPT”) pursuant to GPT’s 2012 Long-Term Outperformance Plan, subject to the achievement of performance-based vesting hurdles as set forth in the plan. As 5/3/13, no LTIP Units had been earned, vested or deemed issued under the plan.
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EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners
A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-l(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.01 of the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.01 of the Agreement and Exhibit C hereof.
B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners’ Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:
(1) Except as otherwise provided in Regulations Section 1.704-l(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership, provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners’ Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-l(b)(2)(iv)(m)(4).
(2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes.
(3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.
(4) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year.
(5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset.
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(6) Any items specially allocated under Section 2 of Exhibit C hereof shall not be taken into account.
C. Generally, a transferee (including any Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor, including where the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, in which case the Capital Account of the transferee and the Capital Accounts of the other holders of Partnership Units in the terminated Partnership shall carry over to the new Partnership that is formed, for federal income tax purposes, as a result of the termination. In such event, the Carrying Values of the Partnership properties in the reconstituted Partnership shall remain the same as they were in the terminated Partnership and the Capital Accounts of such reconstituted Partnership shall be maintained in accordance with the principles of this Exhibit B.
D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Values of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.01 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the acquisition of a more than de minimis additional interest in the Partnership by any new or existing Partner as consideration for the provision of services to or for the benefit of the Partnership in a partner capacity or in anticipation of becoming a partner; (c) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (d) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) (except for a liquidation resulting from the termination of the Partnership under Section 708(b)(1)(B) of the Code), provided however that adjustments pursuant to clauses (a), (b) and (c) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership.
(3) In accordance with Regulations Section 1.704- l(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind (other than in connection with the termination of the Partnership under Section 708(b)(1)(B) of the Code) shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article XIII of the Agreement, shall be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate fair market value among the assets of the Partnership in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties.
E. The provisions of the Agreement (including this Exhibit B and the other Exhibits to the Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations
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Section 1.704-l(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed in order to comply with such Regulations, the General Partner may make such modification without regard to Article XIV of the Agreement, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article XIII of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).
2. No Interest
No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners’ Capital Accounts.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of its Capital Contribution or Capital Account or to receive any distribution from the Partnership, except as provided in Articles IV, V, VII and XIII of the Agreement.
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EXHIBIT C
SPECIAL ALLOCATION RULES
1. Special Allocation Rules.
Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.01 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership Year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and, for purposes of this Section 1.A only, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.01 of this Agreement with respect to such Partnership Year and without regard to any decrease in Partner Minimum Gain during such Partnership Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.01 of this Agreement or any other provisions of this Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section1.704-2(i) (5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section1.704-2(i) (5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i) (4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.01 of the Agreement or this Exhibit with respect to such Partnership Year, other than allocations pursuant to Section 1.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-l(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5), or1.704-l(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof with respect to such Partnership Year, such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership Year) shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. This Section 1.C is intended to constitute a “qualified income offset” under Regulations Section 1.704-l(b)(2)(ii)(d) and shall be interpreted consistently therewith.
D. Gross Income Allocation. In the event that any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Year (after taking into account allocations to be made under the preceding paragraphs hereof with respect to such Partnership Year), each such Partner shall be specially
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allocated items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership Year) in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit.
E. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership Year shall be allocated to the holders of Class A Units in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership’s Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio for such Partnership Year to the numerically closest ratio which would satisfy such requirements.
F. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership Year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Sections 1.704-2(b)(4) and 1.704-2(i).
G. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section1.704-l(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.
H. Forfeiture Allocations. Upon a forfeiture of any unvested Partnership Interest by any Partner, gross items of income, gain, loss or deduction shall be allocated to such Partner if and to the extent required by final Treasury Regulations promulgated after the Effective Date to ensure that allocations made with respect to all unvested Partnership Interests are recognized under Code Section 704(b).
2. Allocations for Tax Purposes
A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.01 of the Agreement and Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows:
(a) (1) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners consistent with the principles of Section 704(c) of the Code to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution (taking into account Section 2.C of this Exhibit C); and
(b) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.01 of the Agreement and Section 1 of this Exhibit C.
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(c) (2) In the case of an Adjusted Property, such items shall
(i) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Exhibit B;
(ii) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit C; and
(d) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner its correlative item of “book” gain or loss is allocated pursuant to Section 6.01 of the Agreement and Section 1 of this Exhibit C.
C. To the extent Regulations promulgated pursuant to Section 704(c) of the Code permit a Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners.
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EXHIBIT D
NOTICE OF REDEMPTION
The undersigned hereby irrevocably (i) tenders for redemption Partnership Units in GKK Capital LP in accordance with the terms of the Agreement of Limited Partnership of GKK Capital LP, as amended, and the Redemption Right referred to therein, (ii) surrenders such Partnership Units and all right, title and interest therein and (iii) directs that the Cash Amount or Shares Amount (as determined by the General Partner) deliverable upon exercise of the Redemption Right be delivered to the address specified below, and if Shares are to be delivered, such Shares be registered or placed in the name(s) and at the address(es) specified below. The undersigned hereby represents, warrants, and certifies that the undersigned (a) has marketable and unencumbered title to such Partnership Units, free and clear of the rights of or interests of any other person or entity, (b) has the full right, power and authority to redeem and surrender such Partnership Units as provided herein and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consult or approve such redemption and surrender.
Dated: Name of Limited Partner: |
(Signature of Limited Partner) |
(Street Address) |
If Shares are to be issued, issue to: |
Name: |
Please insert social security or identifying number: |
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EXHIBIT E
GKK CAPITAL LP
DESIGNATION OF THE RIGHTS, POWERS, PRIVILEGES,
RESTRICTIONS, QUALIFICATIONS AND LIMITATIONS
OF THE LTIP UNITS
The following are the terms of the LTIP Units:
1. Vesting.
A. Vesting, Generally. LTIP Units may, in the sole discretion of the General Partner, be issued subject to vesting, forfeiture and additional restrictions on transfer pursuant to the terms of an award, vesting or other similar agreement (a “Vesting Agreement”). The terms of any Vesting Agreement may be modified by the General Partner from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the terms of any plan pursuant to which the LTIP Units are issued, if applicable. LTIP Units that have vested and are no longer subject to forfeiture under the terms of a Vesting Agreement are referred to as “Vested LTIP Units”; all other LTIP Units are referred to as “Unvested LTIP Units.” Subject to the terms of any Vesting Agreement, a holder of LTIP Units shall be entitled to transfer his or her LTIP Units to the same extent, and subject to the same restrictions as holders of Class A Units are entitled to transfer their Class A Units pursuant to Article XI of the Agreement.
B. Forfeiture or Transfer of Unvested LTIP Units. Unless otherwise specified in the relevant Vesting Agreement, upon the occurrence of any event specified in a Vesting Agreement as resulting in either the forfeiture of any LTIP Units, or the right of the Partnership or the General Partner to repurchase LTIP Units at a specified purchase price, then upon the occurrence of the circumstances resulting in such forfeiture or if the Partnership or the General Partner exercises such right to repurchase, then the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled or transferred to the General Partner, as applicable, and no longer outstanding for any purpose. Unless otherwise specified in the Vesting Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have been forfeited, other than any distributions declared with a record date prior to the effective date of the forfeiture. In connection with any forfeiture or repurchase of LTIP Units, the balance of the portion of the Capital Account of the holder that is attributable to all of his or her LTIP Units shall be reduced by the amount, if any, by which it exceeds the target balance contemplated by Section 6.01.D of the Agreement, calculated with respect to the holder’s remaining LTIP Units, if any.
C. Legend. Any certificate evidencing an LTIP Unit shall bear an appropriate legend indicating that additional terms, conditions and restrictions on transfer, including without limitation any Vesting Agreement, apply to the LTIP Unit.
2. Distributions.
A. LTIP Distribution Amount. Commencing from the Distribution Participation Date (as defined below) established for any LTIP Units, for any quarterly or other period holders of such LTIP Units shall be entitled to receive, if, when and as authorized by the General Partner out of funds legally available for the payment of distributions, regular cash distributions in an amount per unit equal to the distribution payable on each Class A Unit for the corresponding
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quarterly or other period (or, if applicable, for that portion of the quarterly or other period that begins on the Distribution Participation Date) (the “LTIP Distribution Amount”). In addition, from and after the Distribution Participation Date, LTIP Units shall be entitled to receive, if, when and as authorized by the General Partner out of funds or other property legally available for the payment of distributions, non-liquidating special, extraordinary or other distributions in an amount per unit equal to the amount of any non-liquidating special, extraordinary or other distributions payable on the Class A Units which may be made from time to time. LTIP Units shall also be entitled to receive, if, when and as authorized by the General Partner out of funds or other property legally available for the payment of distributions, distributions representing proceeds of a sale or other disposition of all or substantially all of the assets of the Partnership in an amount per unit equal to the amount of any such distributions payable on the Class A Units, whether made prior to, on or after the Distribution Participation Date, provided that the amount of such distributions shall not exceed the positive balances of the Capital Accounts of the holders of such LTIP Units to the extent attributable to the ownership of such LTIP Units. Distributions on the LTIP Units, if authorized, shall be payable on such dates and in such manner as may be authorized by the General Partner (any such date, a “Distribution Payment Date”); provided that the Distribution Payment Date and the record date for determining which holders of LTIP Units are entitled to receive a distribution shall be the same as the corresponding dates relating to the corresponding distribution on the Class A Units.
B. Distribution Participation Date. The “Distribution Participation Date” for each LTIP Units will be either (i) with respect to LTIP Units granted pursuant to the General Partner’s 2005 Long-Term Outperformance Program (the “2005 Outperformance Program”), the applicable Valuation Date (as defined in the Vesting Agreement of each Person granted LTIP Units under the 2005 Outperformance Program) or (ii) with respect to other LTIP Units, such date as may be specified in the Vesting Agreement or other documentation pursuant to which such LTIP Units are issued.
3. Allocations.
Commencing with the portion of the taxable year of the Partnership that begins on the Distribution Participation Date established for any LTIP Units, such LTIP Units shall be allocated Net Income and Net Loss in amounts per LTIP Unit equal to the amounts allocated per Class A Unit. The allocations provided by the preceding sentence shall be subject to the proviso to the first sentence of Section 6.01.B of the Agreement. The General Partner is authorized in its discretion to delay or accelerate the participation of the LTIP Units in allocations of Net Income and Net Loss, or to adjust the allocations made after the Distribution Participation Date, so that the ratio of (i) the total amount of Net Income or Net Loss allocated with respect to each LTIP Unit in the taxable year in which that LTIP Unit’s Distribution Participation Date falls, to (ii) the total amount distributed to that LTIP Unit with respect to such period, is more nearly equal to such ratio as computed for the Class A Units held by the General Partner.
4. Adjustments.
The Partnership shall maintain at all times a one-to-one correspondence between LTIP Units and Class A Units for conversion, distribution and other purposes, including without limitation complying with the following procedures; provided that the foregoing is not intended to alter the Capital Account Limitation (as defined in Section 7.C of this Exhibit E), the special allocations pursuant to Section 6.01.D of the Partnership Agreement, differences between non-liquidating distributions to be made with respect to the LTIP Units and Class A Units prior to the Distribution Participation Date for such LTIP Units, differences between liquidating distributions to be made with respect to the LTIP Units and Class A Units pursuant to Section 13.02 of the
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Partnership Agreement or Section 2.A of this Exhibit E in the event that the Capital Accounts attributable to the LTIP Units are less than those attributable to the Class A Units due to insufficient special allocations pursuant to Section 6.01.D of the Partnership Agreement or related provisions. If an Adjustment Event (as defined below) occurs, then the General Partner shall make a corresponding adjustment to the LTIP Units to maintain such one-for-one correspondence between Class A Units and LTIP Units. The following shall be “Adjustment Events”: (A) the Partnership makes a distribution on all outstanding Class A Units in Partnership Units, (B) the Partnership subdivides the outstanding Class A Units into a greater number of units or combines the outstanding Class A Units into a smaller number of units, or (C) the Partnership issues any Partnership Units in exchange for its outstanding Class A Units by way of a reclassification or recapitalization of its Class A Units. If more than one Adjustment Event occurs, the adjustment to the LTIP Units need be made only once using a single formula that takes into account each and every Adjustment Event as if all Adjustment Events occurred simultaneously. For the avoidance of doubt, the following shall not be Adjustment Events: (x) the issuance of Partnership Units in a financing, reorganization, acquisition or other similar business transaction, (y) the issuance of Partnership Units pursuant to any employee benefit or compensation plan or distribution reinvestment plan, or (z) the issuance of any Partnership Units to the General Partner in respect of a capital contribution to the Partnership of proceeds from the sale of securities by the General Partner. If the Partnership takes an action affecting the Class A Units other than actions specifically described above as Adjustment Events and in the opinion of the General Partner such action would require an adjustment to the LTIP Units to maintain the one-to-one correspondence described above, the General Partner shall have the right to make such adjustment to the LTIP Units, to the extent permitted by law and by the terms of any plan pursuant to which the LTIP Units have been issued, in such manner and at such time as the General Partner, in its sole discretion, may determine to be appropriate under the circumstances. If an adjustment is made to the LTIP Units as herein provided the Partnership shall promptly file in the books and records of the Partnership an officer’s certificate setting forth such adjustment and a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after filing of such certificate, the Partnership shall mail a notice to each holder of LTIP Units setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment.
5. Ranking.
The LTIP Units shall rank on parity with the Class A Units in all respects, subject to the proviso in the first sentence of Section 4 of this Exhibit E.
6. No Liquidation Preference.
The LTIP Units shall have no liquidation preference.
7. Right to Convert LTIP Units into Class A Units.
A. Conversion Right. A holder of LTIP Units shall have the right (the “Conversion Right”), at his or her option, at any time to convert all or a portion of his or her Vested LTIP Units into Class A Units. Holders of LTIP Units shall not have the right to convert Unvested LTIP Units into Class A Units until they become Vested LTIP Units; provided, however, that when a holder of LTIP Units is notified of the expected occurrence of an event that will cause his or her Unvested LTIP Units to become Vested LTIP Units, such Person may give the Partnership a Conversion Notice conditioned upon and effective as of the time of vesting, and such Conversion Notice, unless subsequently revoked by the holder of the LTIP Units, shall be accepted by the Partnership subject to such condition. The General Partner shall have the right at
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any time to cause a conversion of Vested LTIP Units into Class A Units. In all cases, the conversion of any LTIP Units into Class A Units shall be subject to the conditions and procedures set forth in this Section 7.
B. Number of Units Convertible. A holder of Vested LTIP Units may convert such Vested LTIP Units into an equal number of fully paid and non-assessable Class A Units, giving effect to all adjustments (if any) made pursuant to Section 4. Notwithstanding the foregoing, in no event may a holder of Vested LTIP Units convert a number of Vested LTIP Units that exceeds (x) the Economic Capital Account Balance of such holder, to the extent attributable to its ownership of LTIP Units, divided by (y) the Class A Unit Economic Balance, in each case as determined as of the effective date of conversion (the “Capital Account Limitation”).
C. Notice. In order to exercise his or her Conversion Right, a holder of LTIP Units shall deliver a notice (a “Conversion Notice”) in the form attached as Attachment A to this Exhibit E to the Partnership not less than 10 nor more than 60 days prior to a date (the “Conversion Date”) specified in such Conversion Notice. Each holder of LTIP Units covenants and agrees with the Partnership that all Vested LTIP Units to be converted pursuant to this Section 7 shall be free and clear of all liens. Notwithstanding anything herein to the contrary, a holder of LTIP Units may deliver a Redemption Notice pursuant to Section 8.06 of the Agreement relating to those Class A Units that will be issued to such holder upon conversion of such LTIP Units into Class A Units in advance of the Conversion Date; provided, however, that the redemption of such Class A Units by the Partnership shall in no event take place until the Conversion Date. For clarity, it is noted that the objective of this paragraph is to put a holder of LTIP Units in a position where, if he or she so wishes, the Class A Units into which his or her Vested LTIP Units will be converted can be redeemed by the Partnership simultaneously with such conversion, with the further consequence that, if the General Partner elects to assume the Partnership’s redemption obligation with respect to such Class A Units under Section 8.06 of the Agreement by delivering to such holder Shares rather than cash, then such holder can have such Shares issued to him or her simultaneously with the conversion of his or her Vested LTIP Units into Class A Units. The General Partner shall cooperate with a holder of LTIP Units to coordinate the timing of the different events described in the foregoing sentence.
D. Forced Conversion. The Partnership, at any time at the election of the General Partner, may cause any number of Vested LTIP Units held by a holder of LTIP Units to be converted (a “Forced Conversion”) into an equal number of Class A Units, giving effect to all adjustments (if any) made pursuant to Section 4; provided, that the Partnership may not cause a Forced Conversion of any LTIP Units that would not at the time be eligible for conversion at the option of the holder of such LTIP Units pursuant to Section 7.B above. In order to exercise its right to cause a Forced Conversion, the Partnership shall deliver a notice (a “Forced Conversion Notice”) in the form attached as Attachment B to this Exhibit E to the applicable holder not less than 10 nor more than 60 days prior to the Conversion Date specified in such Forced Conversion Notice. A Forced Conversion Notice shall be provided in the manner provided in Section 15.01 of the Agreement.
E. Conversion Procedures. A conversion of Vested LTIP Units for which the holder thereof has given a Conversion Notice or the Partnership has given a Forced Conversion Notice shall occur automatically after the close of business on the applicable Conversion Date without any action on the part of such holder of LTIP Units, as of which time such holder of LTIP Units shall be credited on the books and records of the Partnership with the issuance as of the opening of business on the next day of the number of Class A Units issuable upon such conversion. After the conversion of LTIP Units as aforesaid, the Partnership shall deliver to such holder of LTIP Units, upon his or her written request, a certificate of the General Partner certifying the number of
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Class A Units and remaining LTIP Units, if any, held by such Person immediately after such conversion.
F. Treatment of Capital Account. For purposes of making future allocations under Section 6.01.D of the Agreement and applying the Capital Account Limitation, the portion of the Economic Capital Account balance of the applicable holder of LTIP Units that is treated as attributable to his or her LTIP Units shall be reduced, as of the date of conversion, by the product of the number of LTIP Units converted multiplied by the Class A Unit Economic Balance.
G. Mandatory Conversion in Connection with a Transaction. If the Partnership or the General Partner shall be a party to any transaction (including without limitation a merger, consolidation, unit exchange, self tender offer for all or substantially all Class A Units or other business combination or reorganization, or sale of all or substantially all of the Partnership’s assets, but excluding any transaction which constitutes an Adjustment Event), in each case as a result of which Class A Units shall be exchanged for or converted into the right, or the holders of Class A Units shall otherwise be entitled, to receive cash, securities or other property or any combination thereof (each of the foregoing being referred to herein as a “Transaction”), then the General Partner shall, immediately prior to the Transaction, exercise its right to cause a Forced Conversion with respect to the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with the Transaction or that would occur in connection with the Transaction if the assets of the Partnership were sold at the Transaction price or, if applicable, at a value determined by the General Partner in good faith using the value attributed to the Partnership Units in the context of the Transaction (in which case the Conversion Date shall be the effective date of the Transaction and the conversion shall occur immediately prior to the effectiveness of the Transaction).
In anticipation of such Forced Conversion and the consummation of the Transaction, the Partnership shall use commercially reasonable efforts to cause each holder of LTIP Units to be afforded the right to receive in connection with such Transaction in consideration for the Class A Units into which his or her LTIP Units will be converted the same kind and amount of cash, securities and other property (or any combination thereof) receivable upon the consummation of such Transaction by a holder of the same number of Class A Units, assuming such holder of Class A Units is not a Person with which the Partnership consolidated or into which the Partnership merged or which merged into the Partnership or to which such sale or transfer was made, as the case may be (a “Constituent Person”), or an affiliate of a Constituent Person. In the event that holders of Class A Units have the opportunity to elect the form or type of consideration to be received upon consummation of the Transaction, prior to such Transaction the General Partner shall give prompt written notice to each holder of LTIP Units of such election, and shall use commercially reasonable efforts to afford such holders the right to elect, by written notice to the General Partner, the form or type of consideration to be received upon conversion of each LTIP Unit held by such holder into Class A Units in connection with such Transaction. If a holder of LTIP Units fails to make such an election, such holder (and any of its transferees) shall receive upon conversion of each LTIP Unit held him or her (or by any of his or her transferees) the same kind and amount of consideration that a holder of a Class A Unit would receive if such holder of Class A Units failed to make such an election.
Subject to the rights of the Partnership and the General Partner under any Vesting Agreement and the terms of any plan under which LTIP Units are issued, the Partnership shall use commercially reasonable effort to cause the terms of any Transaction to be consistent with the provisions of this Section 7 and to enter into an agreement with the successor or purchasing entity, as the case may be, for the benefit of any holders of LTIP Units whose LTIP Units will not be converted into Class A Units in connection with the Transaction that will (i) contain provisions enabling the holders of LTIP Units that remain outstanding after such Transaction to convert their
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LTIP Units into securities as comparable as reasonably possible under the circumstances to the Class A Units and (ii) preserve as far as reasonably possible under the circumstances the distribution, special allocation, conversion, and other rights set forth in the Agreement for the benefit of the holders of LTIP Units.
8. Redemption at the Option of the Partnership.
LTIP Units will not be redeemable at the option of the Partnership; provided, however, that the foregoing shall not prohibit the Partnership from repurchasing LTIP Units from the holder thereof if and to the extent such holder agrees to sell such Units.
9. Voting Rights.
A. Voting with Class A Units. Holders of LTIP Units shall have the right to vote on all matters submitted to a vote of the holders of Class A Units; holders of LTIP Units and Class A Units shall vote together as a single class, together with any other class or series of units of limited partnership interest in the Partnership upon which like voting rights have been conferred. In any matter in which the LTIP Units are entitled to vote, including an action by written consent, each LTIP Unit shall be entitled to vote a Percentage Interest equal on a per unit basis to the Percentage Interest of the Class A Units.
B. Special Approval Rights. In addition to, and not in limitation of, the provisions of Section 9.A above (and notwithstanding anything appearing to be contrary in the Agreement), the General Partner and/or the Partnership shall not, without the affirmative consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the then outstanding LTIP Units, given in person or by proxy, either in writing or at a meeting, take any action that would materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units; but subject in any event to the following provisions: (i) no consent of the holders of LTIP Units will be required if and to the extent that any such alteration, change, modification or amendment would similarly alter, change, modify or amend the rights, powers or privileges of the Class A Units; (ii) with respect to the occurrence of any merger, consolidation or other business combination or reorganization, so long as the LTIP Units either (x) are all converted into Class A Units immediately prior to the effectiveness of the transaction, (y) remain outstanding with the terms thereof materially unchanged or (z) if the Partnership is not the surviving entity in such transaction, are exchanged for a security of the surviving entity with terms that are materially the same with respect to rights to allocations, distributions, redemption, conversion and voting as the LTIP Units and without any income, gain or loss expected to be recognized by the holder upon the exchange for federal income tax purposes (and with the terms of the Class A Units or such other securities into which the LTIP Units (or the substitute security therefor) are convertible materially the same with respect to rights to allocations, distributions, redemption, conversion and voting), the occurrence of any such event shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units, provided further, that if some, but not all, of the LTIP Units are converted into Class A Units immediately prior to the effectiveness of the transaction (and neither clause (y) or (z) above is applicable), then the consent required pursuant to this Section will be the consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the LTIP Units to be outstanding following such conversion; (iii) any creation or issuance of any Class A Units or of any class of series of common or preferred units of the Partnership (whether ranking junior to, on a parity with or senior to the LTIP Units with respect to payment of distributions, redemption rights and the distribution of assets upon liquidation, dissolution or winding up), which either (x) does not require the consent of the holders of Class A Units or (y) does require such consent and is authorized by a vote of the holders of Class A Units; and LTIP Units voting together as a single class, together with any
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other class or series of units of limited partnership interest in the Partnership upon which like voting rights have been conferred, shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units; and (iv) any waiver by the Partnership of restrictions or limitations applicable to any outstanding LTIP Units with respect to any holder or holders thereof shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units with respect to other holders. The foregoing voting provisions will not apply if, as of or prior to the time when the action with respect to which such vote would otherwise be required will be taken or be effective, all outstanding LTIP Units shall have been converted and/or redeemed, or provision is made for such redemption and/or conversion to occur as of or prior to such time.
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Attachment A to Exhibit E
Notice of Election
by Partner to Convert
LTIP Units into Class A Units
The undersigned holder of LTIP Units hereby irrevocably elects to convert the number of Vested LTIP Units in GKK Capital LP (the “Partnership”) set forth below into Class A Units in accordance with the terms of the Second Amended and Restated Agreement of Limited Partnership of the Partnership, as amended. The undersigned hereby represents, warrants, and certifies that the undersigned: (a) has title to such LTIP Units, free and clear of the rights or interests of any other person or entity other than the Partnership; (b) has the full right, power, and authority to cause the conversion of such LTIP Units as provided herein; and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consent or approve such conversion.
Name of Holder: | ||||
(Please Print: Exact Name as Registered with Partnership) | ||||
Number of LTIP Units to be Converted: | ||||
Conversion Date: | ||||
(Signature of Holder: Sign Exact Name as Registered with Partnership) |
(Street Address) | |||||
(City) | (State) | (Zip Code) | |||
Signature Guaranteed by: |
Attachment B to Exhibit E
Notice of Election
by Partnership to Force Conversion
of LTIP Units into Class A Units
GKK Capital LP (the “Partnership”) hereby irrevocably elects to cause the number of LTIP Units held by the holder of LTIP Units set forth below to be converted into Class A Units in accordance with the terms of the Second Amended and Restated Agreement of Limited Partnership of the Partnership, as amended.
Name of Holder: | ||
(Please Print: Exact Name as Registered with Partnership) |
Number of LTIP Units to be Converted: | |||
Conversion Date: |
Exhibit 10.6
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AND GUARANTY AGREEMENT
This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AND GUARANTY AGREEMENT (this “Amendment”) is dated as of February 28, 2014 and is entered into by and among GPT PROPERTY TRUST LP, a Delaware limited partnership (the “Borrower”), GRAMERCY PROPERTY TRUST INC., a Maryland corporation (“Parent”), and CERTAIN SUBSIDIARIES OF PARENT, as guarantors (“Guarantors”), the lenders party hereto from time to time (the “Lenders”), and DEUTSCHE BANK AG NEW YORK BRANCH (“DBNY”), as Administrative Agent (together with its permitted successors in such capacity, “Administrative Agent”), and each of the other Agents party hereto, and is made with reference to that certain AMENDED AND RESTATED CREDIT AND GUARANTY AGREEMENT dated as of September 24, 2013 (as amended or otherwise Modified through the date hereof, the “Credit Agreement”) by and among the Borrower, Parent, the Guarantors, the Lenders, the Administrative Agent, and the other Agents named therein. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement after giving effect to this Amendment.
WHEREAS, Borrower has submitted a written request to Administrative Agent for (i) a Commitment Increase pursuant to Section 2.24 of the Credit Agreement in the amount of Fifty Million and 00/100 Dollars ($50,000,000) to be implemented in two stages, and, (ii) a one-time waiver of the condition set forth in Section 2.24(a) of the Credit Agreement that provides that Borrower may only request a Commitment Increase once in any consecutive twelve month period as a result of the two stages of the increase in the Revolving Commitments. The first increase was in the amount of Twenty-Five Million and 00/100 Dollars ($25,000,000) and was completed on February 24, 2014 (the “First Commitment Increase”). The second increase will be in the amount of Twenty-Five Million and 00/100 Dollars ($25,000,000) and will be completed as of the date hereof (the “Second Commitment Increase”);
WHEREAS, on the effective date of the Second Commitment Increase, PNC Bank, National Association will be admitted as a Lender under the Credit Agreement pursuant to that certain Accession Agreement dated as of the date hereof and the Second Commitment Increase shall be allocated solely to PNC Bank, National Association;
WHEREAS, in connection with the foregoing, the parties have agreed to amend the Credit Agreement upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows:
SECTION I. AMENDMENT TO CREDIT AGREEMENT
A. The definition of Capitalization Rate is hereby deleted in its entirety and replaced with the following:
“Capitalization Rate” means 7.50%.”
B. Appendix A to the Credit Agreement as previously in effect is hereby replaced in its entity with Appendix A attached hereto as Exhibit A.
SECTION II. WAIVER
The undersigned Lenders and the Agent hereby waive the condition set forth in Section 2.24(a) of the Credit Agreement that provides that Borrower may only request a Commitment Increase once in any consecutive twelve month period in order to permit the $50,000,000 Commitment Increase to be implemented in two stages as follows: the First Commitment Increase and the Second Commitment Increase.
SECTION III. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the date hereof only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the “Amendment Effective Date”):
A. Execution. Administrative Agent shall have received (i) a counterpart signature page of this Amendment duly executed by each of the Credit Parties and (ii) a counterpart signature page of this Amendment duly executed by the Requisite Lenders.
B. Fees. The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Amendment Effective Date, including, to the extent invoiced, reimbursement or other payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or any other Credit Document.
C. Necessary Consents. Each Credit Party shall have obtained all consents and approvals necessary to implement the transactions contemplated by this Amendment.
SECTION IV. REPRESENTATIONS AND WARRANTIES
In order to induce Administrative Agent and Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, each Credit Party hereby represents, warrants and agrees as follows:
A. Each Credit Party represents and warrants that it has all requisite power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as modified by this Amendment and the other Credit Documents and has been duly authorized to do so.
B. Each Credit Party represents and warrants that this Amendment has been duly executed and delivered by each of the Credit Parties and constitutes a legal, valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors’ rights generally and except as enforceability may be limited by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
C. Each Credit Party represents and warrants that no event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Default.
D. Each Credit Party acknowledges and agrees that, as of the date hereof, it does not have any offsets, defenses, claims, counterclaims, setoffs, or other basis for reduction with respect to any of the Obligations.
E. Each Credit Party represents and warrants that each of the representations and warranties contained the Credit Agreement and the other Credit Documents are true and correct in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true and correct in all material respects on and as of such earlier date.
SECTION V. ACKNOWLEDGMENT AND CONSENT
In order to induce Administrative Agent and Lenders to enter into this Amendment, each Guarantor hereby:
A. acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to all the terms and conditions set forth in this Amendment and to the modification and waiver of the Credit Agreement as provided herein. Each Guarantor hereby confirms that each Credit Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guarantee or secure, as the case may be, to the fullest extent possible in accordance with the Credit Documents the payment and performance of all “Obligations” under each of the Credit Documents to which is a party;
B. acknowledges and agrees that any of the Credit Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment; and
C. acknowledges and agrees that (x) notwithstanding the conditions to effectiveness set forth in this Amendment, such Guarantor is not required by the terms of the Credit Agreement or any other Credit Document to consent to the modifications to or waivers of the Credit Agreement effected pursuant to this Amendment and (y) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of such Guarantor to any future modifications or waivers with respect to the Credit Agreement.
SECTION VI. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement and the Other Credit Documents.
(i) On and after the Amendment Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the “Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended prior to the date hereof and by this Amendment.
(ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall not constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of any Agent or Lender under, the Credit Agreement or any of the other Credit Documents.
(iv) This Amendment constitutes a Credit Document.
B. Headings. Section and Subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect.
C. Applicable Law. The choice of law and venue provisions stated in the Credit Agreement are incorporated herein by this reference, and this Amendment shall be construed and enforced in accordance therewith.
D. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.
E. Beneficiaries. This Amendment is made and entered into solely for the benefit of the Lenders and the other parties hereto, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Amendment.
[Remainder of this page intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
CREDIT PARTIES: | GPT PROPERTY TRUST LP | ||
By: | Gramercy Property Trust Inc., | ||
its general partner | |||
By: | /s/ Benjamin P. Harris | ||
Name: Benjamin P. Harris | |||
Title: President |
OTHER CREDIT PARTIES: | ||
GRAMERCY PROPERTY TRUST INC. | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT AUSTIN OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT BELLMAWR OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT chicago depot owner LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President |
[Signature Page to First Amendment to Amended and Restated Credit and Guaranty Agreement]
GPT CHICAGO MANNHEIM OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President |
GPT EAST BRUNSWICK TERMINAL OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT ELKRIDGE TERMINAL OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT GALESBURG OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT GARLAND OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT HACKS CROSSING OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President |
[Signature Page to First Amendment to Amended and Restated Credit and Guaranty Agreement]
GPT HOUSTON TERMINAL OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT MANASSAS WAREHOUSE OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT MORELAND AVE OWNER LLC (FKA GPT ATLANTA FEDEX OWNER LLC) | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT MORRISTOWN OFFICE OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President | ||
GPT ORLANDO TERMINAL OWNER LLC | ||
By: | /s/ Benjamin P. Harris | |
Name: Benjamin P. Harris | ||
Title: President |
[Signature Page to First Amendment to Amended and Restated Credit and Guaranty Agreement]
GPT PERU OWNER LLC | |||
By: | /s/ Benjamin P. Harris | ||
Name: Benjamin P. Harris | |||
Title: President | |||
GPT SELIG DRIVE OWNER LLC | |||
By: | /s/ Benjamin P. Harris | ||
Name: Benjamin P. Harris | |||
Title: President | |||
GPT SWEDESBORO FACILITY OWNER LLC | |||
By: | /s/ Benjamin P. Harris | ||
Name: Benjamin P. Harris | |||
Title: President | |||
GPT VERNON OWNER LP | |||
By: | GPT Vernon Owner LLC | ||
its general partner | |||
By: | /s/ Benjamin P. Harris | ||
Name: Benjamin P. Harris | |||
Title: President |
[Signature Page to First Amendment to Amended and Restated Credit and Guaranty Agreement]
DEUTSCHE BANK AG NEW YORK BRANCH, as Administrative Agent, Swing Line Lender, Issuing Bank and a Lender | ||
By: | /s/ James Rolison | |
Name: James Rolison | ||
Title: Managing Director | ||
By: | /s/ Robert W. Pettinato | |
Name: Robert W. Pettinato | ||
Title: Managing Director |
[Signature Page to Amendment]
DEUTSCHE BANK SECURITIES INC., as Joint Lead Arranger and Bookrunner | ||
By: | /s/ James Millon | |
Name: James Millon | ||
Title: Vice President | ||
By: | /s/ Lisa Paterson | |
Name: Lisa Paterson | ||
Title: Director |
[Signature Page to Amendment]
MERRILL LYNCH, PIERCE, FENNER & SMITH, as Joint Lead Arranger | ||
By: | /s/ Philip T. Bearden | |
Name: Philip T. Bearden | ||
Title: Director |
[Signature Page to Amendment]
BANK OF AMERICA, N.A., as Co-Syndication Agent and a Lender | ||
By: | /s/ Ann E. Kenzie | |
Name: Ann E. Kenzie | ||
Title: Senior Vice President |
[Signature Page to Amendment]
ROYAL BANK OF CANADA, as Co-Syndication Agent and a Lender | ||
By: | /s/ Joshua Freedman | |
Name: Joshua Freedman | ||
Title: Authorized Signatory |
[Signature Page to Amendment]
THE BANK OF NEW YORK MELLON, as a Lender | ||
By: | /s/ Carol Murray | |
Name: Carol Murray | ||
Title: Managing Director |
[Signature Page to Amendment]
MORGAN STANLEY BANK, N.A., as a Lender | ||
By: | /s/ Nick Zangari | |
Name: Nick Zangari | ||
Title: Authorized Signatory |
[Signature Page to Amendment]
PNC BANK, NATIONAL ASSOCIATION, as a Lender | ||
By: | /s/ Brian P. Kelly | |
Name: Brian P. Kelly | ||
Title: Senior Vice President |
[Signature Page to Amendment]
EXHIBIT A
APPENDIX A TO CREDIT AGREEMENT
Please see attached.
APPENDIX A
TO AMENDED AND RESTATED
CREDIT AND GUARANTY AGREEMENT
Revolving Commitments
Lender | Revolving Commitment | Pro Rata Share | ||||||
Deutsche Bank AG New York Branch | $ | 25,000,000 | 16 2/3 | % | ||||
Bank of America, N.A. | $ | 25,000,000 | 16 2/3 | % | ||||
Royal Bank of Canada | $ | 25,000,000 | 16 2/3 | % | ||||
The Bank of New York Mellon | $ | 25,000,000 | 16 2/3 | % | ||||
Morgan Stanley Bank, N.A. | $ | 25,000,000 | 16 2/3 | % | ||||
PNC Bank, N.A. | $ | 25,000,000 | 16 2/3 | % | ||||
Total | $ | 150,000,000 | 100 | % |
Exhibit 21.1
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ENTITY | JURISDICTION | |
GPT Property Trust LP | Delaware | |
GKK Management Co. LLC | Delaware | |
GPT BOA Portfolio Member LLC | Delaware | |
GPT Allentown Owner GP LLC | Delaware | |
GPT Allentown Owner LP | Delaware | |
GPT Hutchins Owner LLC | Delaware | |
Gramercy Investment Trust | Maryland | |
Gramercy Investment Trust II | Maryland |
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
(i) | Registration Statement (Form S-8 No. 333-121051) pertaining to the Gramercy Property Trust Inc. Equity Incentive Plan; |
(ii) | Registration Statement (Form S-8 No. 333-149838) pertaining to the Gramercy Property Trust Inc. 2008 Employee Stock Purchase Plan; and |
(iii) | Registration Statement (Form S-8 No. 333-182477) pertaining to the Gramercy Property Trust Inc. 2012 Inducement Equity Incentive Plan. |
of our reports dated March 7, 2014 with respect to the Consolidated Financial Statements and schedules of Gramercy Property Trust Inc., and the effectiveness of internal control over financial reporting of Gramercy Property Trust Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2013.
/s/ ERNST & YOUNG LLP
New York, New York
March 14, 2014
Exhibit 31.1
I, Gordon F. Dugan, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Gramercy Property Trust Inc. (the registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 14, 2014
/s/ Gordon F. DuGan
Name: Gordon F. DuGan
Title: Chief Executive Officer
Exhibit 31.2
I, Jon W. Clark, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Gramercy Property Trust Inc. (the registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 14, 2014
/s/ Jon W. Clark
Name: Jon W. Clark
Title: Chief Financial Officer
Exhibit 32.1
In connection with the Annual Report of Gramercy Property Trust Inc. (the Company) on Form 10-K as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Gordon F. DuGan, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Gordon F. DuGan
Name: Gordon F. DuGan
Title: Chief Executive Officer
Date: March 14, 2014
Exhibit 32.2
In connection with the Annual Report of Gramercy Property Trust Inc. (the Company) on Form 10-K as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jon W. Clark, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Jon W. Clark
Name: Jon W. Clark
Title: Chief Financial Officer
Date: March 14, 2014
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