10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007 For the quarterly period ended September 30, 2007
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 333-127405

 


CB RICHARD ELLIS REALTY TRUST

(Exact name of registrant as specified in its charter)

 


 

Maryland   56-2466617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

515 South Flower Street, Suite 3100, Los Angeles, California 90071

(Address of principal executive offices) (Zip Code)

(609) 683-4900

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x

The number of shares outstanding of the registrant’s common shares, $0.01 par value, was 27,124,593, as of October 31, 2007.

 



Table of Contents

CB RICHARD ELLIS REALTY TRUST

INDEX

 

          Page

Part I. FINANCIAL INFORMATION

  

Item 1.

   Condensed Consolidated Financial Statements (unaudited)   
   Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006    1
   Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006    2
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006    3
   Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2007    4
   Notes to Condensed Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2007 and 2006    5-25

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    26-40

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    41

Item 4.

   Controls and Procedures    41

Item 4T.

   Controls and Procedures    41

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    42

Item 1A.

   Risk Factors    42

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    43

Item 3.

   Defaults Upon Senior Securities    43

Item 4.

   Submission of Matters to a Vote of Security Holders    43

Item 5.

   Other Information    43

Item 6.

   Exhibits    44
   Signatures    45

Ex–31.1:

   Certification   

Ex–31.2:

   Certification   

Ex–32.1:

   Certification   

Ex–32.2:

   Certification   


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Balance Sheets

as of September 30, 2007 and December 31, 2006 (unaudited)

(In Thousands, Except Share Data)

 

     September 30,
2007
    December 31,
2006
 

ASSETS

    

Investments in Real Estate:

    

Land

   $ 49,148     $ 25,217  

Site Improvements

     18,022       1,787  

Buildings and Improvements

     183,903       40,662  

Tenant Improvements

     9,493       6,369  
                
     260,566       74,035  

Less: Accumulated Depreciation and Amortization

     (5,463 )     (3,385 )
                

Net Investments in Real Estate

     255,103       70,650  

Real Estate and Other Assets Held for Sale

     55,813       —    

Cash and Cash Equivalents

     45,343       14,021  

Restricted Cash

     265       —    

Accounts and Other Receivables

     124       74  

Deferred Rent

     616       297  

Acquired Above Market Leases, Net of Accumulated Amortization of $599 and $360, respectively

     12,232       653  

Acquired In-Place Lease Value, Net of Accumulated Amortization of $6,527 and $4,032, respectively

     28,184       11,485  

Deferred Financing Costs, Net of Accumulated Amortization of $178 and $110, respectively

     1,283       357  

Lease Commissions, Net of Accumulated Amortization of $35 and $12, respectively

     170       117  

Other Assets

     1,122       153  
                

Total Assets

   $ 400,255     $ 97,807  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES

    

Notes Payable, less discount of $2,702 and $0, respectively

   $ 109,370     $ 34,975  

Loan Payable

     65,000       —    

Liabilities Related to Real Estate and Other Assets Held for Sale

     434       —    

Security Deposits

     147       104  

Accounts Payable and Accrued Expenses

     3,971       1,316  

Accrued Offering Costs Payable to Related Party

     4,351       4,810  

Distributions Payable

     3,099       892  

Acquired Below Market Leases, Net of Accumulated Amortization of $1,311 and $858, respectively

     12,457       2,571  

Investment Management Fee Payable to Related Party

     221       166  
                

Total Liabilities

     199,050       44,834  

MINORITY INTEREST

     1,534       1,629  

SHAREHOLDERS’ EQUITY

    

Common Stock, $.01 par value, 990,000,000 shares authorized; 25,358,200 and 8,056,012 issued and outstanding as of September 30, 2007 and December 31, 2006, respectively

     254       81  

Additional Paid-in-Capital

     214,608       60,906  

Accumulated Deficit

     (15,552 )     (9,643 )

Accumulated Other Comprehensive Income

     361       —    
                

Total Shareholders’ Equity

     199,671       51,344  
                

Total Liabilities and Shareholders’ Equity

   $ 400,255     $ 97,807  
                

See accompanying notes to condensed consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

(In Thousands, Except Share Data)

 

     Three Months
Ended
September 30, 2007
   Three Months
Ended
September 30, 2006
    Nine Months
Ended
September 30, 2007
    Nine Months
Ended
September 30, 2006
 

REVENUES

         

Rental

   $ 3,326    $ 1,651     $ 6,983     $ 4,937  

Tenant Reimbursements

     585      441       1,534       1,320  
                               
     3,911      2,092       8,517       6,257  
                               

EXPENSES

         

Operating and Maintenance

     297      228       752       676  

Property Taxes

     344      286       934       806  

Interest

     1,330      446       2,348       1,337  

General and Administrative

     452      195       1,196       438  

Investment Management Fee to Related Party

     405      172       904       515  

Class C Fee to Related Party

     —        —         —         145  

Depreciation and Amortization

     2,115      1,142       4,585       3,469  
                               
     4,943      2,469       10,719       7,386  
                               

INTEREST AND OTHER INCOME

     1,160      44       2,198       204  
                               

INCOME (LOSS) BEFORE MINORITY INTEREST

     128      (333 )     (4 )     (925 )

MINORITY INTEREST

     2      229       (2 )     1,021  
                               

INCOME (LOSS) FROM CONTINUING OPERATIONS

     126      (562 )     (2 )     (1,946 )

DISCONTINUED OPERATIONS

         

Revenues From Discontinued Operations

     398      —         398       —    

Expenses From Discontinued Operations

     87      —         87       —    

Minority Interest - Discontinued Operations

     3      —         3       —    
                               

INCOME FROM DISCONTINUED OPERATIONS

     308      —         308       —    
                               

NET INCOME (LOSS)

   $ 434    $ (562 )   $ 306     $ (1,946 )
                               

Basic and Diluted Income (Loss) from Continuing Operations per Share

   $ 0.01    $ (0.08 )   $ 0.00     $ (0.28 )
                               

Basic and Diluted Income from Discontinued Operations per Share

     0.01      0.00       0.02       0.00  
                               

Basic and Diluted Net Income (Loss) per Share

   $ 0.02    $ (0.08 )   $ 0.02     $ (0.28 )
                               

Weighted Average Common Shares Outstanding—Basic and Diluted

     22,538,536      6,967,762       15,386,375       6,967,762  

See accompanying notes to condensed consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2007 and 2006 (unaudited)

(In Thousands)

 

    

Nine Months

Ended
September 30, 2007

   

Nine Months

Ended
September 30, 2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income (Loss)

   $ 306     $ (1,946 )

Adjustments to Reconcile Net Income (Loss) to Net Cash Flows Provided by Operating Activities:

    

Minority Interest

     1       1,021  

Depreciation and Amortization of Building and Improvements

     2,074       1,461  

Amortization of Deferred Financing Cost

     68       44  

Amortization of Acquired In-Place Lease Value

     2,488       2,003  

Amortization of Above and Below Market Leases

     (214 )     (132 )

Amortization of Lease Commissions

     22       6  

Amortization of Discount on Notes Payable

     18       —    

Class C Fee to Related Party

     —         91  

Changes in Assets and Liabilities:

    

Accounts and Other Receivables

     (50 )     64  

Deferred Rent

     (319 )     (143 )

Other Assets

     98       (209 )

Accounts Payable and Accrued Expenses

     2,370       519  

Investment Management Fee Payable to Related Party

     55       31  
                

Net Cash Flows Provided By Operating Activities

     6,917       2,810  
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of Real Estate Property

     (142,660 )     (17,839 )

Acquisition of Real Estate Held for Sale

     (55,560 )     —    

Purchase Deposit

     (791 )     —    

Restricted Cash

     (265 )     —    

Lease Commissions

     (75 )     (94 )

Improvements to Investments in Real Estate

     (283 )     (407 )
                

Net Cash Flows Used in Investing Activities

     (199,634 )     (18,340 )
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from Common Stocks – Public Offering and Dividend Reinvestment

     174       —    

Proceeds from Additional Paid-in-Capital – Public Offering and Dividend Reinvestment

     168,222       —    

Redemption of Common Shares

     (308 )     —    

Payment of Public Offering Cost

     (14,672 )     —    

Payment of Distributions

     (4,008 )     (2,619 )

Distribution to Minority Interest

     (96 )     (11 )

Borrowing on Loan Payable

     65,000       —    

Proceeds from Notes Payable

     10,945       —    

Principal Payments on Notes Payable

     (270 )     —    

Deferred Financing Costs

     (994 )     —    

Security Deposits

     43       96  
                

Net Cash Flows Provided by (Used in) Financing Activities

     224,036       (2,534 )
                

Effect of Foreign Currency Translation

     3       —    
                

Net Increase (Decrease) in Cash and Cash Equivalents

     31,322       (18,064 )

Cash and Cash Equivalents, Beginning of Period

     14,021       22,231  
                

Cash and Cash Equivalents, End of Period

   $ 45,343     $ 4,167  
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Cash Paid During the Period for Interest

   $ 1,828     $ 1,302  

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

    

Distributions Declared and Payable

   $ 3,099     $ 873  

Accrued Acquisition Costs Related to Real Property

   $ 719     $ —    

Notes Payable Assumed on Acquisition of the Carolina Portfolio

   $ 63,390     $ —    

See accompanying notes to condensed consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statement of Shareholders’ Equity

For the Nine Months Ended September 30, 2007 (unaudited)

(In Thousands, Except Share Data)

 

     Common Stock    

Additional
Paid-in-

Capital

   

Accumulated

Deficit

   

Accumulated
Other
Comprehensive

Income

  

Total
Shareholders’

Equity

 
     Shares     Amount           

Balance at January 1, 2007

   8,056,012     $ 81     $ 60,906     $ (9,643 )   $ —      $ 51,344  

Net Contributions From Public Offering of Common Shares, $0.01 Per Value

   17,340,559       174       168,222       —         —        168,396  

Costs Associated with Public Offering

   —         —         (14,213 )     —         —        (14,213 )

Redemption of Common Shares

   (38,371 )     (1 )     (307 )     —         —        (308 )

Foreign Currency Translation Gain

   —         —         —         —         361      361  

Distributions

   —         —         —         (6,215 )     —        (6,215 )

Net Income

   —         —         —         306       —        306  
                                             

Balance at September 30, 2007

   25,358,200     $ 254     $ 214,608     $ (15,552 )   $ 361    $ 199,671  
                                             

See accompanying notes to condensed consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

1. Organization and Nature of Business

CB Richard Ellis Realty Trust (the “Company”) was formed on March 30, 2004 under the laws of the state of Maryland. CBRE Operating Partnership, L.P. (“CBRE OP”) was formed in Delaware on March 30, 2004, with the Company as the sole general partner (the “General Partner”). The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with its taxable period ended December 31, 2004. The Company was incorporated to raise capital and acquire ownership interests in high quality real estate properties, including office, retail, industrial, and multi-family residential properties, as well as other real estate-related assets. CBRE OP was formed as a holding company to own direct investment interests in properties and other assets, as well as for the purpose of operating these investment interests. This structure is commonly known in the real estate industry as an umbrella partnership REIT.

On July 1, 2004, the Company commenced operations and issued 6,844,313 common shares of beneficial interest in connection with the initial capitalization of the Company. For each common share the Company issued, one limited partnership unit in CBRE OP was issued to the Company in exchange for the cash proceeds from the issuance of the common shares. In addition, CBRE REIT Holdings, LLC (“REIT Holdings”) an affiliate of CBRE Advisors LLC (the “Investment Advisor”), purchased 29,937 limited partnership units in CBRE OP as a limited partner. During October 2004, the Company issued an additional 123,449 common shares of beneficial interest to an unrelated third-party investor.

The registration statement relating to our initial public offering was declared effective on October 24, 2006. CNL Securities Corp. is the dealer manager of our offering. The registration statement covers up to $2,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by CBRE Advisors LLC, the Investment Advisor, or another firm we choose for that purpose. During the period October 24, 2006 through September 30, 2007, the Company issued 18,461,141 additional common shares of beneficial interest.

The Company operates in an umbrella partnership REIT structure in which its majority-owned subsidiary, CBRE OP, owns, directly or indirectly, substantially all of the properties acquired on behalf of the Company. The Company, as the sole general partner of CBRE OP, owns approximately 99% of the common partnership units therein. REIT Holdings, an affiliate of the Investment Advisor, holds the remaining interest through 246,361 limited partnership units representing approximately a 1% ownership interest in the total limited partnership units. In exchange for services provided to the Company relating to its formation and future services, REIT Holdings also owns a Class B limited partnership interest (“Class B interest”). The Investment Advisor is affiliated with the Company in that the two entities have common officers and trustees, some of whom also own equity interests in the Investment Advisor and the Company. All business activities of the Company are managed by the Investment Advisor.

Unless the context otherwise requires or indicates, references to “CBRE REIT,” “we,” “our,” and “us” refer to the activities of and the assets and liabilities of the business and operations of CB Richard Ellis Realty Trust and its subsidiaries.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under Generally Accepted Accounting Principles (U.S. GAAP) for complete financial statements. The consolidated financial statements and notes thereto should be read in conjunction with the Company’s current Annual Report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2006.

Principles of Consolidation

Because the Company is the sole general partner of CBRE OP and has majority control over its management and major operating decisions, the accounts of CBRE OP are consolidated in the Company’s financial statements. The interests of REIT Holdings are reflected in minority interest in the accompanying consolidated financial statements. All significant inter-company accounts and transactions are eliminated in consolidation. CB Richard Ellis Investors, LLC (“CBRE Investors”), an affiliate of the Investment Advisor, also owns an interest in the Company through its ownership of 243,227 common shares of beneficial interest at September 30, 2007 and December 31, 2006.

Unaudited Interim Condensed Consolidated Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America. The condensed consolidated financial statements as of September 30, 2007 and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006 and related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Common Share and Limited Partnership Unit Splits

The Company’s board of trustees, including the independent trustees, approved a share split in which each of the Company’s outstanding common shares and each limited partnership unit of CBRE OP were converted into 1.1974571 common shares and 1.1974571 limited partnership units of CBRE OP, respectively, effective on October 16, 2006. As a result, the Company has restated all historical shares, limited partnership unit, and per share data to give effect to this share split. The share split ratio was based on an independent third party valuation of the Company’s existing assets and liabilities of $10.67 per Class A limited partnership unit (before the share split) as compared to a projection of $8.91 per Class A limited partnership unit after the public offering is completed.

 

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Table of Contents

CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Segment Information

Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, established standards for disclosure about operating segments and related disclosure about products and services, geographic areas and major customers. The Company currently operates in two geographic areas, the United States and the United Kingdom. The Company views its operations as two reportable segments, a Domestic segment and an International segment (which are each comprised of aggregated operating segments), namely the acquisition, development, ownership, and operation of high quality real estate in these reportable segments.

Cash Equivalents

The Company considers short-term investments with a maturity of three months or less when purchased to be cash equivalents. As of September 30, 2007 and December 31, 2006 cash equivalents consisted primarily of investments in money market funds.

Restricted Cash

Restricted cash represents those cash accounts for which the use of funds is restricted by loan covenant. At September 30, 2007, our restricted cash balance was $265,000 which represents amounts set aside as impounds for future property tax payments as required by our agreements with the lenders.

Discontinued Operations and Real Estate Held for Sale

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS 144”), the income or loss and net gain on dispositions of operating properties and the income or loss on all properties classified as held for sale are reflected in the consolidated statements of operations as discontinued operations for all periods presented. A property is classified as held for sale when certain criteria, as set forth under SFAS 144, are met. At such time, the Company presents the respective assets and liabilities separately on the balance sheet and ceases to record depreciation and amortization expense. Properties held for sale are reported at the lower of their carrying value or their estimated current sales value less costs to sell. As of September 30, 2007 the Company had 16 buildings classified as held for sale (see Notes 4 and 6).

Accounting for Derivative Financial Investments and Hedging Activities

We account for our derivative and hedging activities, if any, in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires all derivative instruments to be carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS 133. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. As of September 30, 2007, we have one interest rate cap agreement in place with an estimated fair value of $150,000. Included in earnings for the period ended September 30, 2007, is $50,000 related to the change in fair value of the interest rate cap.

 

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Investments in Real Estate

The Company’s investment in real estate is stated at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

 

Buildings and improvements    39 years
Site improvements    15 years
Tenant improvements    Shorter of the useful lives or the terms of the related leases

Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred. As of September 30, 2007 and December 31, 2006, the Company owned thirty-one and eight real estate investments, respectively.

On September 15, 2004, the Company purchased the REMEC Corporate Campus (“REMEC”), located in San Diego, California, for approximately $26,667,000, with cash of $26,566,000, and an additional $101,000 paid in January of 2005. On November 3, 2004, the Company purchased 300 Constitution Drive (“300 Constitution”), located in Taunton, Massachusetts, for approximately $19,806,000.

On June 21, 2005, the Company acquired Deerfield Commons I, a multi-tenant commercial office building, for approximately $19,577,000. In addition, our wholly owned subsidiary also purchased Deerfield Commons II, an entitled land parcel, for approximately $2,262,000. The properties are located in Alpharetta, Georgia.

On January 9, 2006, the Company acquired the Texas Portfolio with cash of approximately $17,839,000 and the application of a $500,000 purchase deposit totaling approximately $18,339,000. The Texas Portfolio is comprised of the three multi-tenant industrial/warehouse buildings (660 Dorothy, 505 Century and 631 International) located in Allen and Richardson, Texas.

On April 27, 2007, the Company acquired 602 Central Blvd., a single tenant office building in Coventry, England, United Kingdom. The purchase price was approximately £11,981,200 ($23,843,000), including transaction costs and acquisition fees.

On August 29, 2007, the Company acquired Bolingbrook Point III, a multi tenant warehouse building located in Bolingbrook, Illinois. The purchase price was approximately $18,169,000, including transaction costs and acquisition fees.

On August 30, 2007, the Company acquired a portfolio of 30 distribution and manufacturing industrial buildings located in North and South Carolina (the “Carolina Portfolio”). The purchase price of the Carolina Portfolio was $219,729,000, including transaction costs and acquisition fees.

On September 24, 2007, the Company acquired 215 Commerce Court, a single tenant distribution building, located in Spartanburg, South Carolina. The purchase price was approximately $2,954,000, including transaction costs and acquisition fees.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Other Assets

Other assets consist primarily of purchase deposits paid in connection with future acquisitions that have not yet been applied to investments in real estate, prepaid insurance, and prepaid property taxes. Other assets will be amortized to expense or reclassified to other asset accounts upon being put into service in future periods.

In addition, other assets include an interest rate cap based on its September 30, 2007 fair value. The interest rate cap is valued quarterly and the net change is recognized in earnings. The interest rate cap has a term of 33 months from August 27, 2007 to May 27, 2010 and has a notional amount of £5,500,000 ($11,258,000) and caps the three month London Inter-Bank Offering Rate (LIBOR) at 6.25% during such period. Included in other assets is the fair value of the interest rate cap of $150,000, which includes $50,000 in earnings for the change in fair value of the interest rate cap during the nine months ended September 30, 2007.

Other assets include the following as of September 30, 2007 and December 31, 2006 (in thousands):

 

    

September 30,

2007

   December 31,
2006

Purchase deposit

   $ 791    $ —  

Prepaid insurance

     149      144

Prepaid property taxes

     21      —  

Interest rate cap at fair value

     150      —  

Other

     11      9
             

Total

   $ 1,122    $ 153
             

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Impairment of Long-Lived Assets

The Company assesses whether there has been impairment in the value of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Management believes no impairment in the net carrying values of the investments in real estate has occurred.

Purchase Accounting for Acquisition of Investments in Real Estate

The Company applies purchase accounting to all acquired real estate investments. The purchase price of the real estate is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering 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 rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the purchase price of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases; and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the real estate acquired as such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. In the accompanying consolidated balance sheets, accumulated other comprehensive income consists of foreign currency translation adjustments.

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable period ended December 31, 2004. To qualify as a REIT, the Company must distribute annually at least 90% of its adjusted taxable income, as defined in the Code, to its shareholders and satisfy certain other organizational and operating requirements. The Company generally will not be subject to U.S. federal income taxes if it distributes 100% of its taxable income for each year to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to U.S. federal income taxes and excise taxes on its undistributed taxable income. The Company believes that it has met all of the REIT distribution and technical requirements for the nine months ended September 30, 2007 and the year ended December 31, 2006, and was not subject to any U.S. federal income taxes. Management intends to continue to adhere to these requirements and maintain the Company’s REIT status.

Revenue Recognition

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, the Company has received irrevocable stand-by letters of credit totaling $8,353,000 and $3,785,000 as security for such leases at September 30, 2007 and December 31, 2006, respectively.

Recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented in accordance with Emerging Issues Task Force Issue 99 – 19, Reporting Revenue Gross as a Principal versus Net as an Agent (“Issue 99 -19”) requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk.

Allowances for uncollectible tenant and deferred rent receivables—Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. Management of the Company did not consider it necessary to have an allowance of uncollectible rent receivables as of September 30, 2007 and December 31, 2006.

Offering Costs

Offering costs incurred through September 30, 2007 totaling $19,283,000 are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Of the total amount, $14,771,000 was incurred to CNL Securities Corp., as dealer manager; $3,969,000 was incurred to CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor, $51,000 was incurred to the Investment Advisor for reimbursable marketing costs and $492,000 was incurred to other service providers. Each party will be paid the amount incurred from proceeds of the public offering.

Deferred Financing Costs

Direct costs incurred in connection with obtaining financing are amortized over the respective term of the loan on a straight-line basis, which approximates the effective interest method.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Translation of Non-U.S. Currency Amounts

The financial statements and transactions of our United Kingdom real estate operation is reported in its functional currency, namely GBP-pound sterling and is then translated into U.S. dollars. Assets and liabilities of this operation are denominated in the functional currency and are then translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the reporting period. Translation adjustments are reported in “Accumulated Other Comprehensive Income” a component of Stockholders’ Equity.

The carrying value of our United Kingdom assets and liabilities fluctuate due to changes in the exchange rate between the U.S. dollar and the GBP-pound sterling. The exchange rate of the U.S. dollar to the GBP-pound sterling was $2.0469 at September 30, 2007.

Class B and Class C Interests – Related Party

Effective July 1, 2004, REIT Holdings, was granted a Class B interest and a Class C interest in CBRE OP. The Class B interest entitled REIT Holdings to distributions made by CBRE OP in an amount equal to (i) 20% of the distributions of earnings to the partners in excess of distributed earnings of 6% per annum of the aggregate purchase price paid for all outstanding common partnership units in CBRE OP; and (ii) 20% of all net proceeds of any disposition of properties to be distributed to the partners after subtracting (x) the costs of such disposition, (y) the amount of equity capital invested in such property which has not been reinvested or returned to the partners, and (z) an amount equal to a 10% annual, uncompounded rate of return on such invested capital. The Class C interest entitled REIT Holdings to a profits interest which had the right to receive distributions made by CBRE OP in amounts equal to (i) 3% of the aggregate distribution to the Class A partnership unit holders and the holder of the Class C interest, and (ii) up to 3% of the net sales proceeds upon liquidation of the assets of CBRE OP. The Class B interest is subject to redemption by the Company in the event of termination of the Investment Advisory Agreement and the Class C interest was subject to conversion by the Company into Class A limited partnership units upon such termination. In addition, a listing on a public exchange will be deemed a disposition of all properties for purposes of the Class B interest and would have triggered a conversion of the Class C interest into Class A limited partnership units.

The Class B interest is an equity instrument issued to non-employees in exchange for services. Prior to the modification of the Class B interest on October 24, 2006, the Company determined the fair value of the Class B interest, recorded an allocation of earnings/ (loss) to minority interest holder, and adjusted the minority interest balance to reflect the current period change in fair value, if any.

Effective October 24, 2006, the board of trustees, including our independent trustees, approved the Amended and Restated Agreement of Limited Partnership of CBRE OP (the “Amended Partnership Agreement”) which modified the terms of the Class B limited partnership interest so that the holder is entitled to receive distributions made by CBRE OP in an amount equal to 15% of all net proceeds of any disposition of properties to be distributed to the partners after subtracting (i) the costs of such distribution, (ii) the amount of equity capital invested in such property which has not been reinvested or returned to the partners, and (iii) an amount equal to 7% annual, uncompounded return on such invested capital. The terms of the termination provision relating to the Class B limited partnership interest were also amended to require its forfeiture in the event the Advisor unilaterally terminates the Investment Advisory Agreement. As a result future changes in the fair value of the Class B interest will be deferred from recognition in the financial statements until a listing of the common shares on a national securities exchange or a change in a control transaction takes place.

The Class C interest was an equity instrument issued to non-employees in exchange for services. Each reporting period prior to the measurement date, the Company determined the fair value of the Class C interest and recorded the current period expense, if any. Subsequent to the measurement date, distributions to the Class C interest were recorded as an allocation of earnings/(loss) to minority interest holder and a distribution paid to the minority interest balance.

On October 24, 2006, the board of trustees, including the independent trustees, approved the exchange of the Class C limited partnership interest in CBRE OP held by REIT Holdings for 216,424 limited partnership units in CBRE OP with an aggregate value of approximately $1,928,000 on the date of exchange. The number of limited partnership units received in exchange for the Class C limited partnership interest was based on an independent third party valuation approved by the board of trustees, including the independent trustees.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Net Income (Loss) Per Share

Basic net income (loss) per share from continuing operations and discontinued operations is computed by dividing income (loss) from continuing operations and discontinued operations by the weighted average number of common shares outstanding during each period. The computation of diluted net income (loss) from continuing operations and discontinued operations per share further assumes the dilutive effect of stock options, stock warrants and contingently issuable shares, if any. In accordance with SFAS No. 128, Earnings Per Share, as the Company has recorded net losses from continuing operations and discontinued operations for the three and nine months ended September 30, 2006, the effect, if any, would be anti–dilutive, and accordingly are excluded from the earnings per share computation. In addition, for the three and nine months ended September 30, 2007 the Company has reported net income; however, no stock options, stock warrants or contingently issuable shares have ever been issued. As a result, there is no difference in basic and diluted shares.

New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year beginning on or before November 15, 2007, provided the provisions of SFAS 157 are applied. Management is currently evaluating the impact SFAS 159 will have on the Company’s consolidated financial statements.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurement SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of SFAS 157 will have a material impact on the Company’s consolidated financial statements.

In July 2006, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in measuring income taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 only allows a favorable tax position to be included in the calculation of tax liabilities and expenses if a company concludes that it is more likely than not that its adopted tax position will prevail if challenged by tax authorities. FIN 48 also provides guidance on the accounting and recording of interest and penalties on uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

3. Acquisitions of Real Estate

The Texas Portfolio, consisting of three properties (660 N. Dorothy, 505 Century, and 631 International), was acquired for approximately $18,339,000 on January 9, 2006, 602 Central Blvd. was acquired for $23,843,000 on April 27, 2007, Bolingbrook Point III was acquired on August 29, 2007 for $18,169,000, the Carolina Portfolio was acquired for $219,729,000 on August 30, 2007 and 215 Commerce Court was acquired on September 24, 2007 for $2,954,000. These property acquisitions are accounted for in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, site improvements, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above and below-market leases and the value of in-place leases and tenant relationships, if any, based in each case on their respective fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate. The purchase price allocation to the assets and liabilities acquired at Bolingbrook Point III and the Carolina Portfolio are preliminary and are subject to revision based on the finalization of appraisals of the assets and liabilities acquired.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for the above noted acquisitions designated as real estate held for investment (in thousands):

 

Property

   Land   

Site

Improvements

  

Building

Improvements

  

Tenant

Improvements

  

Acquired in-

Place Lease

Value

  

Above

Market

Lease
Value

  

Below

Market

Lease
Value

   

Discount

on Notes

   Purchase
Price
  

Principal

Amount

Assumed

Notes

   

Net
Assets

Acquired

660 North Dorothy

   $ 1,576    $ 381    $ 3,438    $ 198    $ 1,231    $ 31    $ (19 )   $ —      $ 6,836      —       $ 6,836

505 Century

     950      273      3,716      119      996      50      (8 )     —        6,096      —         6,096

631 International

     923      216      2,934      285      1,098      8      (57 )     —        5,407      —         5,407

602 Central Blvd.

     3,630      321      17,830      —        2,485      —        (424 )     —        23,843      —         23,843

Bolingbrook Point III

     2,423      522      13,433      164      1,078      549      —         —        18,169      —         18,169

Fairforest Bldg 5

     1,798      2,493      12,065      101      1,253      —        (788 )     118      17,040      (11,308 )     5,732

Fairforest Bldg. 6

     697      441      3,719      538      669      802      —         194      7,060      (3,832 )     3,228

Fairforest Bldg. 7

     758      532      5,174      —        —        —        —         —        6,464      —         6,464

HJ Park Bldg. 1

     569      622      2,440      12      333      298      —         52      4,325      (1,485 )     2,840

North Rhett I

     1,300      386      9,694      432      1,234      —        (2,898 )     201      10,349      (4,968 )     5,381

North Rhett II

     556      149      5,852      27      403      108      —         178      7,273      (2,700 )     4,573

North Rhett III

     581      218      3,484      19      410      105      —         70      4,887      (2,207 )     2,680

North Rhett IV

     2,352      1,669      12,022      88      1,823      —        (2,097 )     396      16,253      (11,258 )     4,995

Jedburg Commerce Park

     4,279      3,236      21,633      157      5,075      9,023      —         —        43,403      —         43,403

Mount Holly Bldg.

     827      862      3,023      15      309      —        (147 )     153      5,042      (2,700 )     2,342

Orangeburg Park Bldg.

     570      693      3,834      98      389      —        (5 )     177      5,756      (2,746 )     3,010

Kings Mt. I

     289      360      2,935      158      483      713      —         126      5,064      (2,335 )     2,729

Kings Mt. II

     769      1,453      10,014      951      1,443      —        (3,875 )     354      11,109      (7,044 )     4,065

Union Cross Bldg. I

     851      761      3,894      27      631      221      —         177      6,562      (3,332 )     3,230

Union Cross Bldg. II

     1,578      1,507      11,679      62      1,106      —        (93 )     524      16,363      (10,195 )     6,168
                                                                              
   $ 27,276    $ 17,095    $ 152,813    $ 3,451    $ 22,449    $ 11,908    $ (10,411 )   $ 2,720    $ 227,301    $ (66,110 )   $ 161,191
                                                                              

Building improvements are depreciated over 39 years; Site Improvements are depreciated over 15 years; Tenant Improvements, Value of In-Place Leases, Above-Market Lease Values and Below-Market Lease Values, are amortized over the remaining lease terms at the time of acquisition.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

The following tables summarizes the estimated fair values of the Carolina Portfolio properties acquired and designated as real estate held for sale at September 30, 2007 (in thousands).

 

Fairforest Bldgs. 1-4

   $ 23,281

Highway 290 Commerce Pk – Bldgs 1, 5 and 7

     12,709

Orchard Business Park 2

     719

Greenville/Spartanburg Ind.

     3,775

Community Cash Complex 1-5

     8,213

Cherokee Corporate Park

     4,082

215 Commerce Court

     2,954
      

Total

   $ 55,733
      

At such time, the Company presents the respective assets separately on the balance sheet, presents the revenue and expenses separately on the statement of operations and it ceases to record depreciation and amortization expense.

4. Real Estate and Other Assets Held for Sale and Related Liabilities

Real estate and other assets held for sale include real estate for sale in their present condition that have met all of the “held for sale” criteria of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included as a single line item in the accompanying consolidated balance sheets. There were no real estate assets held for sale at December 31, 2006.

Real estate and other assets held for sale and related liabilities were as follows (in thousands):

 

    

September 30,

2007

  

December 31,

2006

Assets:

     

Real estate held for sale

   $ 55,733    $ —  

Current assets

     80   
             

Total real estate and other assets held for sale

     55,813      —  

Liabilities:

        —  

Accounts payable and accrued expenses

     434      —  
             

Total liabilities related to real estate and other assets held for sale

     434      —  
             

Net real estate and other assets held for sale

   $ 55,379      —  
             

5. Acquisitions Related Intangible Assets

The Company’s acquisition related intangible assets are included in the consolidated balance sheet as acquired in–place lease value, acquired above market lease value and acquired below market lease value as of September 30, 2007 and 2006.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

The following is a schedule of future amortization of acquisition related intangible assets as of September 30, 2007 (in thousands):

 

    

Acquired

In-Place Lease Value

  

Below Market

Lease Value

  

Above Market

Lease Value

2007 (Three months ending December 31, 2007)

   $ 1,676    $ 393    $ 325

2008

     6,669      1,571      1,304

2009

     6,412      1,570      1,301

2010

     5,078      1,442      1,203

2011

     4,385      1,416      1,117

Thereafter

     3,964      6,065      6,982
                    
   $ 28,184    $ 12,457    $ 12,232
                    

The amortization of the above and below-market lease values included in rental revenue were $(139,000) and $224,000, respectively, for the three months ended September 30, 2007, and $ (52,000) and $103,000, respectively, for the three months ended September 30, 2006. The amortization of in-place lease value included in amortization expense was $1,095,000 and $639,000 for the three months ended September 30, 2007 and 2006, respectively.

The amortization of the above and below-market lease values included in rental revenue were $(239,000) and $453,000, respectively, for the nine months ended September 30, 2007, and $(177,000) and $309,000, respectively, for the nine months ended September 30, 2006. The amortization of in-place lease value included in amortization expense was $2,488,000 and $2,003,000 for the nine months ended September 30, 2007 and 2006, respectively.

6. Discontinued Operations

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or disposal of Long Lived Assets (“SFAS 144”), the income and the net gain on dispositions of operating properties are reflected in the consolidated statements of operations as discontinued operations for all periods presented. The following table summarizes the components that comprise income from discontinued operations for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006

REVENUES:

           

Rental

   $ 340    $ —      $ 340    $ —  

Tenant Reimbursements

     58      —        58      —  
                           

Total Revenues

     398      —        398      —  
                           

EXPENSES:

        —           —  

Operating and Maintenance

     11      —        11      —  

Property Taxes

     70      —        70      —  

General and Administrative

     6      —        6      —  
                           

Total Expenses

     87      —        87      —  
                           

Minority Interest in Discontinued Operations

     3      —        3      —  
                           

Total Income from Discontinued Operations

   $ 308    $ —      $ 308    $ —  
                           

Revenues and expenses from discontinued operations for the three and nine months ended September 30, 2007 represent the activities of a held for sale portfolio of light industrial and warehouse distribution buildings acquired during the quarter ended September 30, 2007 for $55,733,000. The properties are currently being marketed for sale.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

7. Debt

Notes Payable secured by real property are summarized as follows (in thousands).

 

     

Interest Rate as of

September 30,

2007

   

Maturity Date

   Balance as of

Property

       

September 30,

2007

   

December 31,

2006

REMEC

   4.79 %  

November 1, 2011

   $ 13,250     $ 13,250

300 Constitution

   4.84 %  

April 1, 2012

     12,000       12,000

Deerfield Commons I

   5.23 %  

December 1, 2012

     9,725       9,725

602 Central Blvd. (a)

   6.70 %  

April 27, 2014

     11,258       —  

Fairforest Bldg. 5

   6.33 %  

February 1, 2024

     11,276       —  

Fairforest Bldg. 6

   5.42 %  

June 1, 2019

     3,812       —  

HJ Park – Bldg. 1

   4.98 %  

March 1, 2013

     1,465       —  

North Rhett I

   5.65 %  

August 1, 2019

     4,944       —  

North Rhett II

   5.20 %  

October 1, 2002

     2,688       —  

North Rhett III

   5.75 %  

February 1, 2020

     2,197       —  

North Rhett IV

   5.80 %  

February 1, 2025

     11,226       —  

Mt Holly Bldg.

   5.20 %  

October 1, 2020

     2,688       —  

Orangeburg Park Bldg.

   5.20 %  

October 1, 2020

     2,734       —  

Kings Mountain I

   5.27 %  

October 1, 2020

     2,325       —  

Kings Mountain II

   5.47 %  

January 1, 2020

     7,011       —  

Union Cross Bldg. I

   5.50 %  

July 1, 2021

     3,319       —  

Union Cross Bldg. II

   5.53 %  

June 1, 2021

     10,154       —  
                   

Notes Payable

          112,072       34,975

Less Discount

          (2,702 )  
                   

Notes Payable Less Discount

        $ 109,370     $ 34,975
                   

(a) Variable interest rate of 6.75% at September 30, 2007.

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, the Company assumed 13 loans with principal balances totaling $66,110,000 from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% and mature between March 1, 2013 and February 1, 2025. The fair value of the loans assumed at acquisition was $63,390,000. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $270,000 were made during the quarter. The Company indemnifies the loans against environmental costs and expenses and guarantees the loans under certain conditions.

In addition, the Company entered into a credit agreement with Bank of America, N.A. to provide us a $65,000,000 term loan and a $10,000,000 revolving line of credit (collectively, the “Credit Facility”). The one year term loan was fully drawn upon at the closing of the Carolina Portfolio on August 30, 2007. None of the revolving line of credit has been drawn. The Credit Facility matures in August, 2008 and bears interest at a floating rate of LIBOR plus 1.25%, with a rate of 6.379% as of September 30, 2007. An upfront fee of $112,500 was paid to Bank of America, N.A. and a fee of 0.2% per annum is accrued on unfunded balances under the revolving line of credit. The loan contains various financial covenants and restrictions including a fixed charge coverage ration of 1.6, as defined in the credit agreement. As of September 30, 2007, the Company was in compliance with all such covenants and restrictions. The Credit Facility is unsecured, but the Company is required to pay down a proportion of the Credit Facility, as defined in the credit agreement, if any of the unencumbered properties in the Carolina Portfolio, including all of the properties held for sale, or Bolingbrook Point III are financed or sold.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

On April 27, 2007, the Company, in connection with the acquisition of 602 Central Blvd, entered into a £5,500,000 ($11,258,000 at September 30, 2007) financing arrangement with the Royal Bank of Scotland secured by the property. The loan is for a term of seven years and bears interest at a variable rate of interest, adjusted quarterly, based on three month LIBOR plus margin and other costs of 0.67%, or 6.70% per annum as of September 30, 2007. Interest payments only are due quarterly for the term of the loan with principal due at maturity.

The minimum principal payments due for the secured notes payable are as follows as of September 30, 2007 (in thousands):

 

2007 (Three months ending December 31, 2007)

   $ 818

2008

     3,389

2009

     3,583

2010

     3,787

2011

     17,391

Thereafter

     83,104
      
   $ 112,072
      

The loan payable of $65,000,000 is required to be repaid on a proportional basis, as defined in the credit agreement, when unencumbered properties in the Carolina Portfolio or Bolingbrook Point III are financed or sold, the timing of which can not be estimated; however, the total amount of the loan becomes due and payable in August, 2008.

8. Minimum Future Rents Receivable

The following is a schedule of minimum future rentals to be received on non-cancelable operating leases as of September 30, 2007 (in thousands):

 

2007 (Three months ending December 31, 2007)

   $ 4,826

2008

     20,255

2009

     19,639

2010

     16,551

2011

     15,518

Thereafter

     111,626
      
   $ 188,415
      

9. Concentrations

Tenant Concentrations

For the three months ended:

For the three months ended September 30, 2007, the tenant in REMEC accounted for approximately $659,000 or 17% of total revenues, the tenant in 300 Constitution accounted for approximately $488,000 or 12% of total revenues and the tenant in 602 Central Blvd. accounted for approximately 11% of total revenues.

For the three months ended September 30, 2006, the tenant in REMEC accounted for $630,000 or 30% of total revenues, the tenant in 300 Constitution accounted for $492,000 or 24% of total revenues and a tenant in Deerfield Commons I accounted for $323,000 or 15% of total revenues.

For the nine months ended:

For the nine months ended September 30, 2007, the tenant in REMEC accounted for approximately $1,926,000 or 23% of total revenues, the tenant in 300 Constitution accounted for approximately $1,466,000 or 17% of total revenues and a tenant in Deerfield Commons I accounted for approximately $978,000 or 11% of total revenues.

For the nine months ended September 30, 2006, the tenant in REMEC accounted for approximately $1,916, 000 or 31% of total revenues, the tenant in 300 Constitution accounted for approximately $1,475,000 or 24% of total revenues and a tenant in Deerfield Commons I accounted for approximately $957,000 or 15% of total revenues.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

The tenant in 300 Constitution has the right of first offer if the Company decides to sell the property. The leases under which the tenants occupy the properties expire in April 2017 for the tenant in REMEC, March 2013 for the tenant in 300 Constitution, May 2010 for the tenant in Deerfield Commons I and February 2017 for the tenant in 602 Central Blvd.

Geographic Concentrations

As of September 30, 2007, the Company owned twenty-three domestic real estate investments included in continuing operations; one in California, Illinois and Massachusetts; two in Georgia, three in Texas, four in North Carolina and eleven in South Carolina. The Company also owns one property in Coventry, United Kingdom (UK).

Our geographic revenue concentrations from continue operations for the nine months ended September 30, 2007 and 2006 are as follows:

 

    

September 30,

2007

   

September 30,

2006

 

Domestic

    

California

   22.62 %   30.65 %

Georgia

   21.38     25.90  

Massachusetts

   17.21     23.58  

Texas

   15.26     19.87  

Illinois

   1.42     —    

North Carolina

   3.65     —    

South Carolina

   9.96     —    
            

Total Domestic

   91.50     100.00  

International

    

UK

   8.50     —    
            

Total

   100.00 %   100.00 %
            

Our geographic long-lived asset concentrations from continue operations as of September 30, 2007 and December 31, 2006 are as follows:

 

     September 30,
2007
    December 31,
2006
 

Domestic

    

California

   8.36 %   30.45 %

Massachusetts

   6.96     25.51  

Georgia

   6.17     23.58  

Texas

   5.49     20.46  

Illinois

   6.13     —    

North Carolina

   14.11     —    

South Carolina

   44.53     —    
            

Total Domestic

   91.75     100.00  

International

    

UK

   8.25     —    
            

Total

   100.00 %   100.00 %
            

100% of the geographic revenue concentrations from discontinued operations and geographic asset concentrations from discontinued operations are attributable to South Carolina.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

10. Segment Disclosure

The Company’s reportable segments consist of two types of commercial real estate properties for which the Company’s decision makers internally evaluate operating performance and financial results: the Domestic Properties and International Properties. The Company also has certain general and administrative level activities including legal, accounting, tax preparation and shareholder servicing costs which are not considered separate operating segments.

The Company evaluates the performance of its segments based on net operating income, defined as: (rental income and tenant reimbursements) less property and related expenses (property expenses, and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and the Company level general and administrative expenses.

 

Condensed Consolidated Statements of Operations

  

Three Months

Ended

September 30, 2007

   Three Months
Ended
September 30, 2006
   

Nine Months

Ended

September 30, 2007

   

Nine Months

Ended

September 30, 2006

 

Domestic Properties

         

Revenues:

         

Rental

   $ 2,903    $ 1,651     $ 6,266     $ 4,937  

Tenant Reimbursements

     581      441       1,527       1,320  
                               
     3,484      2,092       7,793       6,257  

Property and Related Expenses

         

Operating and Maintenance

     290      228       740       676  

General and Administrative

     8      29       80       68  

Property Taxes

     344      286       934       806  
                               
     642      543       1,754       1,550  
                               

Net Operating Income

     2,842      1,549       6,039       4,707  
                               

International Properties

         

Revenues:

         

Rental

     423      —         717       —    

Tenant Reimbursements

     4      —         7       —    
                               
     427      —         724       —    
                               

Property and Related Expenses

         

Operating and Maintenance

     7      —         12       —    

General and Administrative

     —        —         —         —    

Property Taxes

     —        —         —         —    
                               
     7      —         12       —    
                               

Net Operating Income

     420      —         712       —    
                               

Total Reportable Segments

         

Revenues:

         

Rental

     3,326      1,651       6,983       4,937  

Tenant Reimbursements

     585      441       1,534       1,320  
                               
     3,911      2,092       8,517       6,257  
                               

Property and Related Expenses

         

Operating and Maintenance

     297      228       752       676  

General and Administrative

     8      29       80       68  

Property Taxes

     344      286       934       806  
                               
     649      543       1,766       1,550  
                               

Net Operating Income

   $ 3,262    $ 1,549     $ 6,751     $ 4,707  
                               

Reconciliation Non-GAAP to Consolidated Net Income (Loss)

         

Total Segment Net Operating Income

   $ 3,262    $ 1,549     $ 6,751     $ 4,707  

Interest and Other Income

     1,160      44       2,198       204  
                               
     4,422      1,593       8,949       4,911  
                               

Interest

     1,330      446       2,348       1,337  

General and Administrative

     444      166       1,116       370  

Investment Management Fee to Related Party

     405      172       904       515  

Class C Fee to Related Party

     —        —         —         145  

Depreciation and Amortization

     2,115      1,142       4,585       3,469  
                               

Income (Loss) Before Minority Interest

     128      (333 )     (4 )     (925 )

Minority Interest

     2      229       (2 )     1,021  
                               

Income (Loss) from Continuing Operations

     126      (562 )     (2 )     (1,946 )

Income from Discontinued Operation

     308      —         308       —    
                               

Net Income (Loss)

   $ 434    $ (562 )   $ 306     $ (1,946 )
                               

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

Condensed Balance Sheets

   September 30, 2007    December 31, 2006

Domestic Assets – Continuing Operations

   $ 276,353    $ 83,725

Assets Related to Discontinued Operations

     55,813   

International Assets

     25,336      —  

Non-Segment Assets

     42,753      14,082
             

Total Assets

   $ 400,255    $ 97,807
             

Investing Activities

  

Nine Months

Ended

September 30, 2007

  

Nine Months

Ended

September 30,
2006

Domestic Continuing Operations – Capital Expenditures

   $ 120,231    $ 18,340

Domestic Discontinued Operations – Capital Expenditures

     55,560   

International Capital Expenditures

     23,843      —  
             

Total Investing Activities

   $ 199,634    $ 18,340
             

11. Investment Management and Other Fees to Related Parties

Pursuant to the agreement between the Company, CBRE OP and the Investment Advisor (the “Advisory Agreement”), the Investment Advisor and its affiliates perform services relating to the Company’s on going initial public offering and the management of its assets. Items of compensation and equity participation are as follows:

Investment Management Fee to Related Party

Prior to October 24, 2006, the Investment Advisor received an annual fee equal to 0.75% of the book value of the total assets, as defined in the Advisory Agreement, based on the assets of CBRE OP. The investment management fee was calculated monthly based on the average of total assets, as defined, during such period. On October 24, 2006, the board of trustees, including our independent trustees, approved and the Company entered into the Amended and Restated Agreement of Limited Partnership of CBRE OP (the “Amended Partnership Agreement”) and the Amended and Restated Advisory Agreement (the “Amended Advisory Agreement” and, together with the Amended Partnership Agreement, the “Amended Agreements”). The Company entered into the Amended Agreements which provides an investment management fee of (i) a monthly fee equal to one twelfth of 0.6% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within the Company’s portfolio and (ii) a monthly fee equal to 7.0% of the aggregate monthly net operating income derived from all real estate investments within the Company’s portfolio. The Investment Advisor earned $405,000 and $904,000 for the three and nine months ended September 30, 2007, respectively, and $172,000 and $515,000 for the three and nine months ended September 30, 2006, respectively. In connection with services provided to the Investment Advisor, CNL Fund Management Company, the Sub Advisor and affiliate of the Dealer Manager pursuant to a sub advisory agreement, was paid by the Investment Advisor $156,000 and $125,000 for the three and nine months ended September 30, 2007, respectively.

Acquisition Fee to Related Party

The Investment Advisor may earn an acquisition fee up to 1.0% of (i) the purchase price of real estate investments acquired by the Company, including any debt attributable to such investments, or (ii) when the Company makes an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The Investment Advisor earned $2,349,000 and $2,572,000 for the three and nine months ended September 30, 2007, respectively, and $0 for the three and nine months ended September 30, 2006. In connection with services provided to the Investment Advisor, the Sub Advisor, pursuant to a sub advisory agreement, was paid by the Investment Advisor $439,000 and $481,000 for the three and nine months ended September 30, 2007, respectively. These fees have been capitalized to investments in real estate and related intangibles.

CB Richard Ellis, UK was paid a service fee in conjunction with the April 27, 2007 acquisition of 602 Central Blvd. totaling £9,000 ($18,000) for the nine months ended September 30, 2007. These fees have been capitalized to investments in real estate and related intangibles.

Affiliate Equity Investment

During 2004, CBRE Investors purchased 269,428 common shares of beneficial interest in the Company for $8.10 per share in a private placement. During the nine months ended September 30, 2007 and 2006, CBRE Investors sold none and 18,077 shares, respectively, to employees and related parties.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

James Orphanides, one of the Company’s trustees, purchased 54,348 common shares during the nine months ended September 30, 2007.

During 2004, REIT Holdings purchased 29,937 common partnership units in CBRE OP at $8.10 per unit in a private placement. In exchange for the services provided to the Company, REIT Holdings was granted a Class B limited partnership interest and a Class C limited partnership interest in CBRE OP. For the nine months ended September 30, 2006, REIT Holdings earned approximately $961,000 ($816,000 of which is include as minority interest and $145,000 as Class C fee to related party), relating to its Class C limited partnership interest in CBRE OP. Included in minority interest is $209,000 for the changes in fair value of the Class B interest during the nine months ended September 30, 2006. On October 24, 2006, the Class B limited partnership was modified and the Class C limited partnership interest was exchanged for Class A OP units (see Note 2).

Management Services

Affiliates of the Investment Advisor may also provide leasing, brokerage, property management, or mortgage banking services for the Company. CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor, received property management fees of approximately $54,000 and $73,000 for the three and nine months ended September 30, 2007, respectively, and $9,000 and $33,000, for the three and nine months ended September 30, 2006, respectively, which are included in operating and maintenance expense on the statement of operations. No leasing, brokerage or mortgage banking fees were paid to affiliate of the Investment Advisor for the nine months ended September 30, 2007 and 2006.

12. Equity Incentive Plan and Performance Bonus Plan

Equity Incentive Plan

The Company has adopted a 2004 equity incentive plan. The purpose of the 2004 equity incentive plan is to provide the Company with the flexibility to use share options and other awards to provide a means of performance-based compensation. Key employees, directors, trustees, officers, advisors, consultants or other personnel of the Company and its subsidiaries or other persons expected to provide significant services to the Company or its subsidiaries, including employees of the Investment Advisor, would be eligible to be granted share options, restricted shares, phantom shares, distribution equivalent rights and other share-based awards under the 2004 equity incentive plan. No awards of any kind have been made under this plan during periods ended September 30, 2007 and 2006.

Performance Bonus Plan

The Company has adopted a 2004 performance bonus plan. Annual bonuses under the Company’s 2004 performance bonus plan are awarded by the Company’s Compensation Committee to selected key employees, including employees of the Investment Advisor, based on corporate factors or individual factors (or a combination of both). Subject to the provisions of the 2004 performance bonus plan, the Compensation Committee will (i) determine and designate those key employees to whom bonuses are to be granted; (ii) determine, consistently with the 2004 performance bonus plan, the amount of the bonus to be granted to any key employee for any performance period; and (iii) determine, consistently with the 2004 performance bonus plan, the terms and conditions of each bonus. Bonuses may be so awarded by the Compensation Committee prior to the commencement of any performance period, during or after any performance period. No bonus shall exceed 200% of the key employee’s aggregate salary for the year. The Compensation Committee may provide for partial bonus payments at target and other levels. Corporate performance hurdles for bonuses may be adjusted by the Compensation Committee in its discretion to reflect (i) dilution from corporate acquisitions and share offerings, and (ii) changes in applicable accounting rules and standards. The Compensation Committee may determine that bonuses shall be paid in cash or shares or other equity-based grants, or a combination thereof. The Compensation Committee may also provide that any such share grants be made under the Company’s 2004 equity incentive plan or any other equity-based plan or program the Company may establish. The Compensation Committee may provide for programs under which the payment of bonuses may be deferred at the election of the employee. No bonuses were awarded and no bonus related expenses were incurred by the Company during the periods ended September 30, 2007 and 2006, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

13. Shareholders’ Equity

Under our declaration of trust, we have the authority to issue a total of 1,000,000,000 shares of beneficial interest. Of the total shares authorized, 990,000,000 shares are designated as common shares with a par value of $0.01 per share and 10,000,000 shares are designated as preferred shares.

During the period from July 1, 2004 (date of commencement) to December 31, 2004, the Company issued 6,967,762 common shares of beneficial interest. Funds from the sale of shares were subsequently invested in CBRE OP, with the Company holding 6,967,762 common operating partnership units of CBRE OP. REIT Holdings, an affiliate of the Investment Advisor, holds 29,937 common partnership units which creates the minority interest balance upon consolidation. CBRE OP currently has two classes of interest entitled the “Class A Interest,” (limited partnership units) and the “Class B Interest”. Limited partnership units or new classes of Partnership Interests 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. A Class B Interest was also issued to REIT Holdings. The Class B Interest held by REIT Holdings is entitled to certain distributions, as described in Note 2, and is subject to certain transfer restrictions. The Class C Interest was also issued and held by REIT Holdings and was also entitled to certain distributions and subject to certain transfer restrictions. On October 24, 2006, the Class C interest was exchanged for 216,424 limited partnership units in CBRE OP.

The registration statement relating to the Company’s initial public offering was declared effective on October 24, 2006. CNL Securities Corp. is the dealer manager of our offering. The registration statement covers up to $2,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by CBRE Advisors LLC, the Investment Advisor, or another firm the Company chooses for that purpose.

During the nine months ended September 30, 2007 the Company repurchased 38,371 common shares under the Company’s Share Redemption Program.

14. Distributions

Earnings and profits, which determine the taxability of distributions to stockholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes including the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

The following table reconciles the distributions declared per common share to the distributions paid per common share during the nine months ended September 30, 2007 and 2006:

 

     2007     2006  

Distributions declared per common share

   $ 0.400     $ 0.375  

Less: Distributions declared in the current period, and paid in the subsequent period

     (0.137 )     (0.125 )

Add: Distributions declared in the prior year, and paid in the current year

     0.125       0.125  
                

Distributions paid per common share

   $ 0.388     $ 0.375  
                

Total distribution paid to shareholders during the nine months ended September 30, 2007 and 2006 were $4,008,000 and $2,619,000, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

15. Fair Value of Financial Instruments

The carrying amounts for cash, cash equivalents, accounts and other receivables, as well as the loan payable, accounts payable and accrued expenses approximate their fair value because of the short-term nature of these instruments. The fair value of long-term debt was estimated based on current interest rates available to the Company for debt instruments with similar terms.

The following table summarizes our financial instruments and their calculated fair value at September 30, 2007 and December 31, 2006, (dollars in thousands):

 

     Book Value    Fair Value

Financial Instrument

   2007    2006    2007    2006

Notes Payable

   $ 109,370    $ 34,975    $ 106,685    $ 33,652

16. Commitments and Contingencies

We have agreed to a capital commitment of up to $20 million in CB Richard Ellis Strategic Partners Asia II, LLP, or CBRE Asia Fund, which extends for 24 months after the close of the final capital commitment. On October 16, 2007, we funded $200,000 of our capital commitment. CBRE Investors, our sponsor, formed CBRE Asia Fund, to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. If we and all other currently committed capital investors, had funded their entire commitments in CBRE Asia Fund as of October 15, 2007, we would own an ownership interest of approximately 6.17% in CBRE Asia Fund. A majority of our trustees (including a majority of our independent trustees) not otherwise interested in this transaction approved the transaction as being fair, competitive and commercially reasonable. CBRE Asia Fund is managed by CB Richard Ellis Investors SP Asia II, LLC or the Fund Manager, a subsidiary of CBRE Investors.

On June 22, 2007, July 3, 2007 and July 27, 2007 the Company entered into definitive purchase agreements with certain affiliates of Johnson Development Associates, Inc., an unrelated third party to acquire, subject to customary closing conditions, a portfolio of 34 distribution and light manufacturing industrial buildings and adjacent land located in North Carolina and South Carolina. As of September 30, 2007, three buildings and three land parcels had not closed. On November 1, 2007, two buildings closed as described in the subsequent events footnote. The land parcels are expected to close in mid-November for $960,000 and the 541,910 rentable square foot distribution building located in Charlotte North Carolina is expected to close in the first quarter of 2008 for $25.4 million. The Company has purchase deposits of $41,000 for the land parcels and $510,000 for the Charlotte distribution building in connection with the execution of the agreements that are refundable in the event certain closing conditions are not met.

Litigation – In the ordinary course of business, the Company may be subject to litigation. Currently, neither the Company nor any of the properties are presently subject to any litigation nor, to our knowledge, is any litigation threatened against any of them.

Environmental Matters – The Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Company believes would require additional disclosure or the recording of a loss contingency.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)

 

17. Comprehensive Income

U.S. GAAP requires that the effect of foreign currency translation adjustments be classified as comprehensive income. The following table sets forth our comprehensive income for the periods indicated (in thousands):

 

     Three Months
Ended
September 30,
2007
  

Three Months
Ended
September 30,

2006

   

Nine Months
Ended
September 30,

2007

  

Nine Months
Ended
September 30,

2006

 

Net Income (Loss)

   $ 434    $ (562 )   $ 306    $ (1,946 )

Foreign Currency Translation Gain

     243      —         361      —    
                              

Comprehensive Income (Loss)

   $ 677    $ (562 )   $ 667    $ (1,946 )
                              

18. Subsequent Events

From October 1, 2007 through October 31, 2007, the Company received gross proceeds from the offering of approximately $17,609,502 from the sale of 1,766,393 shares.

On October 16, 2007, the Company funded an initial $200,000 of its capital commitment to CBRE Asia Fund.

On November 1, 2007, the Company acquired a fee interest in two warehouse distribution buildings (230 Commerce Court and 4260 Orchard Park Blvd.) totaling 137,500 rentable square feet located in the Spartanburg, South Carolina market for $4,790,000, exclusive of customary closing costs, which was funded using net proceeds from the Company’s public offering. The buildings are 100% leased, each to a single tenant.

 

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CB RICHARD ELLIS REALTY TRUST

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Explanatory Note

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This document contains various “forward-looking statements.” You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:

 

   

our business strategy;

 

   

our ability to obtain future financing arrangements;

 

   

estimates relating to our future distributions;

 

   

our understanding of our competition;

 

   

market trends;

 

   

projected capital expenditures;

 

   

the impact of technology on our products, operations and business; and

 

   

use of the proceeds of our initial public offering and subsequent offerings.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:

 

   

national, regional and local economic climates;

 

   

future terrorist attacks in the United States or abroad;

 

   

changes in supply and demand for office, retail, industrial and multi-family residential properties;

 

   

our ability to maintain rental rates and maximize occupancy;

 

   

our ability to identify acquisitions;

 

   

our pace of acquisitions and/or dispositions of properties;

 

   

our corporate debt ratings and changes in the general interest rate environment;

 

   

the condition of capital markets;

 

   

the actual outcome of the resolution of any conflict;

 

   

our ability to successfully operate acquired properties;

 

   

our ability to qualify as a REIT;

 

   

environmental uncertainties and risks related to natural disasters; and

 

   

changes in real estate and zoning laws and increases in property taxes.

 

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Overview

We are a Maryland real estate investment trust that invests in real estate properties, focusing on office, retail, industrial and multi-family residential properties, as well as other real estate-related assets. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace, in which we might also acquire interests in mortgages or other investments where we could seek to acquire the underlying property. After the completion of the offering period, we will not invest more than 20% of our total assets in any single investment. In addition, we will seek to maintain a portfolio of geographically diverse assets and may invest up to 30% of our total assets outside of the United States. Investments outside of the United States will be focused in areas in which CB Richard Ellis Investors, LLC, or CBRE Investors, has existing operations or previous investment experience, which today consist of markets in Western Europe (including London, Paris, Milan and Frankfurt), China (including Shanghai and Beijing) and Japan. As of September 30, 2007, we owned twenty-four properties included in continuing operations.

We are externally managed by CBRE Advisors LLC, or the Investment Advisor, and all of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of, CBRE Operating Partnership, L.P., or CBRE OP. Generally, we contribute the proceeds we receive from the issuance of common shares for cash to CBRE OP and CBRE OP, in turn, issues units of limited partnership to us, which entitle us to receive our share of CBRE OP’s earnings or losses and net cash flow. Provided we have sufficient available cash flow, we intend to pay our shareholders quarterly cash dividends. We are structured in a manner that allows CBRE OP to issue limited partnership interests from time to time in exchange for real estate properties. By structuring our acquisitions in this manner, the contributors of real estate to CBRE OP are generally able to defer gain recognition for U.S. federal income tax purposes.

Our business objective is to maximize shareholder value through: (1) maintaining an experienced management team of investment professionals; (2) investing in properties in certain markets where property fundamentals will support stable income returns and where capital appreciation is expected to be above average; (3) acquiring properties at a discount to replacement cost and where there is expected positive rent growth; and (4) repositioning properties to increase their value in the market place. Operating results at our individual properties are impacted by the supply and demand for office, retail, industrial and multifamily space, trends of the national regional economies, the financial health of current and prospective tenants and their customers, capital market trends, construction costs, and interest rate movements. Individual operating property performance is monitored and calculated using certain non-GAAP financial measures such as an analysis of net operating income. An analysis of net operating income as compared to local regional and national statistics may provide insight into short or longer term trends exclusive of capital markets or capital structuring issues. Interest rates are a critical factor in our results of operations. Our properties may be financed with significant amounts of debt, so changes in interest rates may affect both net income and the health of capital markets. For investments outside of the United States, in addition to monitoring local property market fundamentals and capital market trends, we evaluate currency hedging strategies, taxes, the stability of the local government and economy and the experience of our management team in the region.

We commenced operations in July 2004, following an initial private placement of our common shares of beneficial interest. We raised aggregate net proceeds (after commissions and expenses) of approximately $55.5 million from July 2004 to October 2004 in private placements of our common shares.

On October 24, 2006, we commenced an initial public offering of up to $2,000,000,000 in our common shares, 90% of which is offered at a price of $10.00 per share, and 10% of which is offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by CBRE Advisors LLC, the Investment Advisor, or another firm we choose for that purpose. As of October 31, 2007, we had accepted subscriptions from 4,487 investors, issued 20,227,534 common shares and received $202,193,563 in gross proceeds.

We have elected to be taxed as a REIT for U.S. federal income tax purposes.

The table below provides information regarding the properties we own. We purchased all of these properties from unaffiliated third parties. These properties are subject to competition from similar properties within their market areas and their economic performance could be affected by changes in local economic conditions. In evaluating these properties for acquisition, we considered a variety of factors including location, functionality and design, price per square foot, the credit worthiness of tenants, length of lease terms, market fundamentals and the in-place rental rates compared to market rates.

 

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As of September 30, 2007 we owned the following properties:

 

Market

  

Property

   Date
Acquired
  

Year

Built

   Number
of
Buildings
   Approximate
Total
Acquisition Cost
   Net
Rentable
Sq.ft.
   Occupancy  

Domestic

                    

San Diego, CA

  

REMEC Corporate Campus

   9/15/04    1983    4    $ 26,667,000    132,685    100.00 %

Taunton, MA

  

300 Constitution Drive

   11/3/04    1998    1      19,806,000    330,000    100.00  

Alpharetta, GA

  

Deerfield Commons I

   6/21/05    2000    1      19,577,000    121,969    100.00  

Alpharetta, GA

  

Deerfield Commons II

   6/21/05    —      —        2,262,000    —      —    

Richardson, TX

  

660 North Dorothy

   1/9/06    1997    1      6,836,000    120,000    79.17  

Allen, TX

  

505 Century

   1/9/06    1997    1      6,096,000    100,000    72.40  

Richardson, TX

  

631 International

   1/9/06    1998    1      5,407,000    73,112    100.00  

Bolingbrook, IL

  

Bolingbrook Point III

   8/29/07    2006    1      18,168,000    185,045    100.00  

Spartanburg, SC

  

Fairforest Bldg. 5

   8/30/07    2006    1      17,040,000    316,491    100.00  

Spartanburg, SC

  

Fairforest Bldg. 6

   8/30/07    2005    1      7,060,000    101,055    100.00  

Spartanburg, SC

  

Fairforest Bldg. 7

   8/30/07    2006    1      6,464,000    101,459    —    

Spartanburg, SC

  

HJ Park Bldg. 1

   8/30/07    2003    1      4,325,000    70,000    100.00  

Charleston, SC

  

North Rhett I

   8/30/07    1973    1      10,349,000    284,750    100.00  

Charleston, SC

  

North Rhett II

   8/30/07    2001    1      7,273,000    101,705    100.00  

Charleston, SC

  

North Rhett III

   8/30/07    2002    1      4,887,000    79,972    100.00  

Charleston, SC

  

North Rhett IV

   8/30/07    2005    1      16,253,000    316,040    100.00  

Charleston, SC

  

Jedburg Commerce Park

   8/30/07    2007    1      43,403,000    512,686    100.00  

Charleston, SC

  

Mount Holly Bldg.

   8/30/07    2003    1      5,042,000    100,823    100.00  

Charleston, SC

  

Orangeburg Park Bldg.

   8/30/07    2003    1      5,756,000    101,055    100.00  

Charlotte, NC

  

Kings Mt. I

   8/30/07    1998    1      5,064,000    100,000    100.00  

Charlotte, NC

  

Kings Mt. II

   8/30/07    2002    1      11,109,000    301,400    100.00  

Winston-Salem, NC

  

Union Cross Bldg. I

   8/30/07    2005    1      6,562,000    100,853    100.00  

Winston-Salem, NC

  

Union Cross Bldg. II

   8/30/07    2005    1      16,363,000    316,130    100.00  
                                

Total

            26      271,769,000    3,967,230    96.12  
                                

International

                    

Coventry, UK

  

602 Central Blvd

   4/27/07    2001    1      23,843,000    49,985    100.00  
                                

Total

            1      23,843,000    49,985    100.00  
                                

Real Estate Held for Sale

                    

Spartanburg, SC

  

Fairforest Bldgs. 1-4

   8/30/07    1999-2001    4      23,281,000    355,794    100.00  

Spartanburg, SC

  

Highway 290 Commerce ar

   8/30/07    1993-1996    3      12,709,000    268,500    62.80  

Spartanburg, SC

  

Orchard Business Park 2

   8/30/07    1994    1      719,000    17,448    —    

Spartanburg, SC

  

Greenville/Spartanburg Ind.

   8/30/07    1990    1      3,775,000    67,375    100.00  

Spartanburg, SC

  

Community Cash Complex 1-5

   8/30/07    1960/1978    5      8,213,000    552,518    62.72  

Spartanburg, SC

  

Cherokee Corporate Park

   8/30/07    2000    1      4,082,000    60,000    100.00  

Spartanburg, SC

  

215 Commerce Court

   9/24/07    1995    1      2,954,000    100,000    100.00  
                                

Total

            16      55,733,000    1,421,635    77.25  
                                

Grand Total

            43    $ 351,345,000    5,438,851    91.22 %
                                

Critical Accounting Policies

Management believes our most critical accounting policies are accounting for lease revenues (including straight-line rent), regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for our derivatives and hedging activities, if any. Each of these items involves estimates that require management to make judgments that are subjective in nature. Management relies on its experience, collects historical data and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates.

 

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Revenue Recognition and Valuation of Receivables

Our revenues, which are composed largely of rental income, include rents reported on a straight-line basis over the initial term of the lease. If our leases provide for rental increases at specified intervals, we will be required to straight-line the recognition of revenue, which will result in the recording of a receivable for rent not yet due under the lease terms. Accordingly, our management must determine, in its judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. We review unbilled rent receivable on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Should the collectability of unbilled rent with respect to any given tenant be in doubt, we would be required to record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable, which would have an adverse effect on our net income for the year in which the reserve is increased or the direct write-off is recorded and would decrease our total assets and shareholders’ equity.

Investments in Real Estate

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

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

We have adopted SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. SFAS 144 requires that the operations related to properties that have been sold or that we intend to sell be presented as discontinued operations in the statement of operations for all periods presented, and properties we intend to sell be designated as “held for sale” on our balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. These factors contain subjectivity and thus are not able to be precisely estimated. If 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. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate.

Real Estate Purchase Price Allocation

We allocate the purchase price to tangible assets of an acquired property (which includes land, building and tenant improvements) based on the estimated fair values of those tangible assets assuming the building was vacant. Estimates of fair value for land are based on factors such as comparisons to other properties sold in the same geographic area adjusted for unique characteristics. Estimates of fair values of buildings and tenant improvements are based on present values determined based upon the application of hypothetical leases with market rates and terms.

We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any capitalized above-market lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We amortize any capitalized below- market lease values as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.

 

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

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

We amortize the value of in-place leases to expense over the initial term of the respective leases, which we primarily expect to range from five to fifteen years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event may the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense.

These assessments have a direct impact on net income and revenues. If we assign more fair value to the in-place leases versus buildings and tenant improvements, assigned costs would generally be depreciated over a shorter period, resulting in more depreciation expense and a lower net income on an annual basis. Likewise, if we estimate that more of our leases in-place at acquisition is on terms believed to be above the current market rates for similar properties, the calculated present value of the amount above market would be amortized monthly as a direct reduction to rental revenues and ultimately reduce the amount of net income.

Treatment of Management Compensation, Expense Reimbursements

Management of our operations is conducted by the Investment Advisor. Fees related to services provided by the Investment Advisor are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent period costs of our company, such as cash payments for investment management fees paid to the Investment Advisor, are expensed as incurred. In addition, an affiliate of the Investment Advisor owns a partnership interest which represents a profits interest in CBRE OP related to these services.

Subject to certain limitations, we are obligated to reimburse the Investment Advisor for the organizational and offering costs incurred on our behalf. This treatment is consistent with Staff Accounting Bulletin, or SAB, Topic 1.B.1, which requires that we include all of the costs associated with our operations and formation in our financial statements. These costs will then be analyzed and segregated between those which are organizational in nature, those which are offering-related salaries and other general and administrative expenses of the Investment Advisor and its affiliates, and those which qualify as offering expenses in accordance with SAB Topic 5.A. Organizational costs are expensed as incurred in accordance with AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Offering-related salaries and other general and administrative costs of the Investment Advisor and its affiliates will be expensed as incurred and third-party offering expenses will be taken as a reduction against the net proceeds of the offering within additional paid-in capital, or APIC, in accordance with SAB Topic 5.A. Offering costs incurred through September 30, 2007 totaling $19,283,000 are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Offering costs incurred through September 30, 2007 totaling $19,283,000 are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Of the total amount, 14,771,000 was incurred to CNL Securities Corp., as dealer manager; $3,969,000 was incurred to CB Richard Ellis, an affiliate of the Investment Advisor, $51,000 was incurred to the Investment Advisor for reimbursable marketing costs and $492,000 was incurred to other service providers. Each party will be paid the amount incurred from proceeds of the public offering. Each party will be paid the amount incurred from proceeds of the public offering. As of September 30, 2007, the accrued offering costs payable to related party included on our consolidated balance sheet is $4,351,000.

 

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Table of Contents

Discontinued Operations and Real Estate Held for Sale

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS 144”), the income or loss and net gain on dispositions of operating properties and the income or loss on all properties classified as held for sale are reflected in the consolidated statements of operations as discontinued operations for all periods presented. A property is classified as held for sale when certain criteria, as set forth under SFAS 144, are met. At such time, the Company presents the respective assets and liabilities separately on the balance sheet and ceases to record depreciation and amortization expense. Properties held for sale are reported at the lower of their carrying value or their estimated current sales value less costs to sell. As of September 30, 2007, the Company had 16 buildings classified as held for sale (see Notes 4 and 6).

Accounting for Derivative Financial Investments and Hedging Activities

We account for our derivative and hedging activities, if any, in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires all derivative instruments to be carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS 133. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. As of September 30, 2007, we have one interest rate cap agreement in place with an estimated fair value of $150,000. Included in earnings for the period ended September 30, 2007, is $50,000 related to the change in fair value of the interest rate cap.

Accounting for Share-Based Compensation

We have adopted the fair value based method of accounting for share-based compensation. Under this approach, we recognize an expense for the fair value of any share-based compensation at the time it is granted, as well as for transactions with non-employees in which services are performed in exchange for equity instruments.

Variable Interest Entities

In December 2003, the FASB issued Interpretation 46R, Consolidation of Variable Interest Entities, or FIN 46R. The purpose of this interpretation is to provide guidance on how to identify a variable interest entity, or VIE, and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in any entity will need to consolidate that entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s anticipated losses and/or receive a majority of the VIE’s expected residual returns. As of September 30, 2007, we did not have any investment interests in VIEs.

 

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Continuing Rental Operations:

We evaluate the operation of our portfolio based on two geographic segments constituting our Domestic and International operations. The following tables compare the Net Operating Income for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

     Domestic    International
    

Three Months
Ended

September 30, 2007

  

Three Months

Ended

September 30, 2006

  

Three Months
Ended

September 30, 2007

  

Three Months

Ended

September 30, 2006

Revenues

           

Rental Income

   $ 2,903    $ 1,651    $ 423    $ —  

Tenant Reimbursement

     581      441      4      —  
                           
     3,484      2,092      427      —  
                           

Property and Related Expenses

           

Operating and Maintenance

     290      228      7      —  

General and Administrative

     8      29      —        —  

Property Taxes

     344      286      —        —  
                           
     642      543      7      —  
                           

Net Operating Income

   $ 2,842    $ 1,549    $ 420    $ —  
                           
     Domestic    International
    

Nine Months
Ended

September 30, 2007

  

Nine Months

Ended

September 30, 2006

  

Nine Months
Ended

September 30, 2007

  

Nine Months

Ended

September 30, 2006

Revenues:

           

Rental Income

   $ 6,266    $ 4,937    $ 717    $ —  

Tenant Reimbursement

     1,527      1,320      7      —  
                           
     7,793      6,257      724      —  
                           

Property and Related Expenses

           

Operating and Maintenance

     740      676      12      —  

General and Administrative

     80      68      —        —  

Property Taxes

     934      806      —        —  
                           
     1,754      1,550      12      —  
                           

Net Operating Income

   $ 6,039    $ 4,707    $ 712    $ —  
                           

 

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Consolidated Results of Continuing Operations

Comparison of Three Months Ended September 30, 2007 to Three Months Ended September 30, 2006.

Revenues

Rental

Rental revenue increased $1,675,000, or 101%, to $3,326,000 during the three months ended September 30, 2007 as compared to $1,651,000 for the three months ended September 30, 2006. The increase is primarily due to the acquisition of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio.

Tenant Reimbursements

Tenant reimbursements increased $144,000, or 33%, to $585,000 for the three months ended September 30, 2007 compared to $441,000 for the three months ended September 30, 2006. The increase is primarily due to the acquisition of Bolingbrook Point III and the Carolina Portfolio.

Expenses

Operating and Maintenance

Property operating and maintenance expenses increased $69,000 or 30% to $297,000 for the three months ended September 30, 2007 compared to $228,000 for the three month ended September 30, 2006. The increase is primarily due to the acquisition of Bolingbrook Point III and the Carolina Portfolio.

Property Taxes

Property tax expense increased $58,000, or 20%, to $344,000 for the three months ended September 30, 2007 compared to $286,000 for the three months ended September 30, 2006. The increase is primarily due to the acquisition of. Bolingbrook Point III and the Carolina Portfolio.

Interest

Interest expense increased $884,000, or 198%, to $1,330,000 for the three months ended September 30, 2007 compared to $446,000 for the three months ended September 30, 2006 as a result of interest expense associated with 602 Central Blvd., Carolina Portfolio and line of credit borrowings.

General and Administrative

General and administrative expense increased $257,000 or 132% to $452,000 for the three months ended September 30, 2007 compared to $195,000 for the three months ended September 30, 2006. Of the total increase, $74,000 is due to the increase in general corporate legal expenses for the three months ended September 30, 2007 as compared to September 30, 2006; $170,000 is due to the increase in general audit fees and Sarbanes-Oxley assistance fees for the three months ended September 30, 2007 as compared to September 30, 2006; a $31,000 decrease in directors and officers’ insurance for the three months ended September 30, 2007 as compared to September 30, 2006. In addition, shareholder servicing fees, and other professional fees increased by approximately $44,000 for the three months ended September 30, 2007 as compared to September 30, 2006.

Investment Management Fee

Investment management fee expense increased $233,000 or 135% to $405,000 for the three months ended September 30, 2007 compared to $172,000 for the three months ended September 30, 2006. The increase is due to fees earned relative to the management of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio.

Depreciation and Amortization

Depreciation and amortization expense increased $973,000 or 85%, to $2,115,000 for the three months ended September 30, 2007 as compared to $1,142,000 for the three months ended September 30, 2006. The net increase is primarily related to depreciation and amortization attributable to the acquisition of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio.

 

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Interest and Other Income

Interest and other income increased $1,116,000 to $1,160,000 for the three months ended September 30, 2007 compared to $44,000 for the three months ended September 30, 2006. The increase was due to the investing of the Company’s public offering net cash proceeds in interest earning cash equivalents coupled with an increase in short term interest rates paid on cash equivalents.

Minority Interest

Minority interest decreased $227,000 for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. The decrease is attributable the exchange of the limited partnership minority interest for Class A OP units on October 24, 2006.

Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended September 30, 2006.

Revenues

Rental

Rental revenue increased $2,046,000, or 41%, to $6,983,000 during the nine months ended September 30, 2007 as compared to $4,937,000 for the nine months ended September 30, 2006. The increase is due to the acquisition of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio as well as increased occupancy at Deerfield Commons I.

Tenant Reimbursements

Tenant reimbursements increased $214,000, or 16%, to $1,534,000 for the nine months ended September 30, 2007 compared to $1,320,000 for the nine months ended September 30, 2006, primarily as a result of increased tenant operating expense recovery for Deerfield Commons I, the acquisition of Bolingbrook Point III and the Carolina Portfolio.

Expenses

Operating and Maintenance

Property operating and maintenance expenses increased $76,000 or 11% to $752,000 for the nine months ended September 30, 2007 compared to $676,000 for the nine months ending September 30, 2006. The increase is primarily due to the acquisition of Bolingbrook Point III, Carolina Portfolio and increased operating expenses at Deerfield Commons I.

Property Taxes

Property tax expense increased $128,000, or 16%, to $934,000 for the nine months ended September 30, 2007 compared to $806,000 for the nine months ended September 30, 2006. The increase is based on a combination of increased assessments, and expenses associated with the Bolingbrook Point III and Carolina Portfolio acquisitions.

Interest

Interest expense increased $1,011,000 or 76%, to $2,348,000 for the nine months ended September 30, 2007 compared to $1,337,000 for the nine months ended September 30, 2006 as a result of interest expense associated with the 602 Central Blvd., Carolina Portfolio and line of credit borrowings.

General and Administrative

General and administrative expense increased $758,000 to $1,196,000 for the nine months ended September 30, 2007 compared to $438,000 for the nine months ended September 30, 2006. Of the total increase, $318,000 is due to the increase in general corporate legal expense for the nine months ended September 30, 2007 as compared to September 30, 2006; $253,000 is due to the increase in general audit fees and Sarbanes – Oxley assistance fees for the nine months ended September 30, 2007 as compared to September 30, 2006; $113,000 is due to the increase in directors and officers’ insurance for the nine months ended September 30, 2007 as compared to September 30, 2006; In addition, shareholder servicing fees, report production costs, and other professional fees increased by approximately $74,000 for the nine months ended September 30, 2007 as compared to September 30, 2006.

Investment Management Fee and Class C Fee to Related Party

Investment management and Class C fees increased $389,000 to $904,000 for the nine months ended September 30, 2007 compared to $515,000 for the nine months ended September 30, 2006. The increase is due to fees earned relative to the management of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio.

 

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Depreciation and Amortization

Depreciation and amortization expense increased $1,116,000 or 32%, to $4,585,000 for the nine months ended September 30, 2007 as compared to $3,469,000 for the nine months ended September 30, 2006. The net increase is related to tenant improvement and leasing commission activities at Deerfield I and 660 N. Dorothy, and acquisition of 602 Central Blvd., Bolingbrook Point III and the Carolina Portfolio.

Interest and Other Income

Interest and other income increased $1,994,000 to $2,198,000 for the nine months ended September 30, 2007 compared to $204,000 for the nine months ended September 30, 2006. The increase was due to the investing of the Company’s public offering net cash proceeds in interest earning cash equivalents coupled with an increase in short term interest rates paid on cash equivalents.

Minority Interest

Minority interest decreased $1,023,000 for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The decrease is attributable the exchange of the limited partnership minority interest for Class A OP units on October 24, 2006.

Financial Condition, Liquidity and Capital Resources

Overview

Our sources of funds will primarily be the net proceeds of our initial public offering, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements and we do not anticipate a need to raise funds from other than these sources within the next twelve months depending on market conditions, we expect that once the net proceeds of our initial public offering are fully invested, our debt financing will be approximately 65% of the value of the cost of our assets before non-cash reserves and depreciation. The amount of debt we place on an individual property, or the amount of debt incurred by an individual entity in which we invest, may be more or less than 65% of the value of such property or the value of the assets owned by such entity, depending on market conditions and other factors. In fact, depending on market conditions and other factors, we may choose not to place debt on our portfolio or our assets and may choose not to borrow to finance our operations or to acquire properties. Our declaration of trust limits our borrowing to 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to our shareholders in our next quarterly report. Our declaration of trust defines “net assets” as our total assets (other than intangibles) at cost, before deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities, calculated at least quarterly by us on a basis consistently applied; provided, however, that during such periods in which we are obtaining regular independent valuations of the current value of its net assets for purposes of enabling fiduciaries of employee benefit plan stockholders to comply with applicable Department of Labor reporting requirements, “net assets” means the greater of (i) the amount determined pursuant to the foregoing and (ii) the assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other non-cash reserves. Any indebtedness we do incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on the value of our common shares. We believe that, even without any proceeds raised from our initial public offering, we have sufficient cash flow from operations to continue as a going concern for the next twelve months and into the foreseeable future.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to the Investment Advisor and the Dealer Manager. During the offering stage, assuming all of the shares in our primary offering are sold, these payments will include payments of up to $126.0 million for selling commissions, up to $27.0 million for the dealer manager fee, up to $18.0 million for the marketing support fee and up to $28.0 million for organizational and offering expenses. During the acquisition and operational stages, certain services related to the acquisition and management of our investments and our operations will be provided to us by the Investment Advisor pursuant to an advisory agreement entered into in July 2004 which was amended and restated in October 2006. Pursuant to that agreement, we expect to make various payments to the Investment Advisor, including acquisition fees, investment management fees and payments for reimbursements of certain costs incurred by the Investment Advisor in providing related services to us. As the actual amounts to be paid are dependent upon the total equity and debt capital we raise and our results of operations, we cannot determine these amounts at this time.

 

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In order to avoid corporate-level tax on our net taxable income, we are required to pay distributions to our shareholders equal to our net taxable income. In addition, to qualify as a REIT, we are required to pay distributions to our shareholders equal to at least 90% of our net ordinary taxable income. Therefore, once the net proceeds we receive from our initial public offering are substantially fully invested, we will need to raise additional capital in order to grow our business and acquire additional real estate investments. We anticipate borrowing funds to obtain additional capital, but there can be no assurance that we will be able to do so on terms acceptable to us, if at all.

Historical Cash Flows

Our net cash provided by operating activities increased by $4,107,000, or 146% to $6,917,000, for the nine months ended September 30, 2007 compared to $2,810,000 for the nine months ended September 30, 2006. The increase is primarily related to interest income earned from public offering proceeds and net income attributable to the acquisitions of 602 Central Blvd., Bolingbrook Point III and Carolina Portfolio offset by additional corporate level expenses incurred in connection with the Company’s public offering.

Net cash used in investing activities increased by approximately $181,294,000 to $199,634,000 for the nine months ended September 30, 2007, compared to $18,340,000 for the nine months ended September 30, 2006. The increase was the result of differences in our acquisitions during the periods where we acquired the Texas Portfolio of properties during the nine months ended September 30, 2006 for $17,839,000 as compared to acquisitions of 602 Central Blvd., Bolingbrook Point III, Carolina Portfolio for $198,220,000 and the payment of a $791,000 deposit on the Carolina Portfolio during the nine months ended September 30, 2007, an increase of $181,172,000. Capital improvement and lease commission expenditures decreased by $143,000 during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The Company is required to fund tax impounds related to the Carolina Portfolio loans resulting in an increase in restricted cash of $265,000 for the nine months ended September 30, 2007.

Net cash provided by financing activities increased by $226,570,000 to $224,036,000 for the nine months ended September 30, 2007 compared to net cash used in financing activities of $2,534,000 for the nine months ended September 30, 2006. The increase is due to the $153,724,000 in net proceeds, after offering costs, received from the public offering, $74,681,000 in net loan proceeds less principal payments associated with the acquisitions of 602 Central Blvd., Carolina Portfolio and line of credit, offset by an increase in distributions to shareholders and minority interest holder of $1,474,000, shareholder redemptions of $308,000 and reduced security deposit collections of $53,000 for the nine months ended September 30, 2007.

Non-GAAP Supplemental Financial Measure: Funds From Operations

Management believes that Funds From Operations, or FFO, is a useful supplemental measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates and operating costs. Management believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

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 indicative of funds available to fund our cash needs, including our ability to make cash distributions.

 

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The following table presents our FFO for the three months and nine months ended September 30, 2007 and 2006 (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,
2007
    September 30,
2006
    September 30,
2007
    September 30,
2006
 

Reconciliation of net income (loss) to funds from operations:

        

Net Income (Loss)

   $ 434     $ (562 )   $ 306     $ (1,946 )

Adjustments:

        

Minority interest

     2       229       (2 )     1,021  

Class C Fee

     —         —         —         91  

Discontinued Operations

     (308 )     —         (308 )     —    

Real estate depreciation and amortization

     2,115       1,142       4,585       3,469  
                                

Funds from operations

   $ 2,243     $ 809     $ 4,581     $ 2,635  
                                

Financing

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, the Company assumed 13 loans with principal balances totaling $66,110,000 from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% and mature between March 1, 2013 and February 1, 2025. The fair value of the loans assumed at acquisition was $63,390,000. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $270,000 were made during the quarter. The Company indemnifies’ the loans against environmental costs and expenses and guarantees the loans under certain conditions.

In addition, the Company entered into a credit agreement with Bank of America, N.A. to provide us a $65 million term loan and a $10 million revolving line of credit (collectively, the “Credit Facility”). The one year term loan was fully drawn upon at the closing of the Carolina Portfolio on August 30, 2007. None of the revolving line of credit has been drawn. The Credit Facility matures in August, 2008 and bears interest at a floating rate of LIBOR plus 1.25%, with a rate of 6.379% as of September 30, 2007. An upfront fee of $112,500 was paid to Bank of America, N.A. and a fee of 0.2% per annum is accrued on unfunded balances under the revolving line of credit. The loan contains various financial covenants and restrictions including a fixed charge coverage ratio of 1.6, as defined in the credit agreement. As of September 30, 2007, the Company was in compliance with all such covenants and restrictions. The Credit Facility is unsecured, but the Company is required to pay down a proportion of the Credit Facility, as defined in the credit agreement, if any of the unencumbered properties in the Carolina Portfolio, including all of the properties held for sale, or Bolingbrook Point III are financed or sold.

On April 27, 2007, the Company, in connection with the acquisition of 602 Central Blvd, entered into a £5,500,000 ($11,258,000 at September 30, 2007) financing arrangement with the Royal Bank of Scotland secured by the property. The loan is for a term of seven years and bears interest at a variable rate of interest, adjusted quarterly, based on three month LIBOR plus margin and other costs of 0.67%, or 6.70% per annum as of September 30, 2007. Interest payments only are due quarterly for the term of the loan with principal due at maturity.

Distribution Policy

In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, we must make distributions to our shareholders each year in an amount at least equal to 90% of our REIT taxable income.

It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.

To the extent that our cash available for distribution is less than the amount we are required to distribute to quality as a REIT, we may consider various funding sources to cover any shortfall, including borrowing funds on a short-term, or possibly long-term, basis or selling properties. In addition, we may utilize these funding sources to make distributions that exceed the amount we are required to distribute to qualify as a REIT; however, we will not use offering proceeds for this purpose.

 

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Off-Balance Sheet Arrangements

Since inception, we have not maintained any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities. Accordingly, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

Contractual Obligations and Commitments

The following table provides information with respect to our contractual obligations at September 30, 2007. (in thousands):

 

     Payments of principal and interest due by period  

Contractual Obligations

   Total     Less than
One Year
    One to Three
Years
    Three to
Five
Years
    More Than
Five Years
 

Note Payable (and interest payments) Collateralized by REMEC Corporate Campus

   $ (15,895 )   $ (635 )   $ (1,270 )   $ (13,990 )   $ —    

Note Payable (and interest payments) Collateralized by 300 Constitution Drive

     (14,662 )     (581 )     (1,162 )     (12,919 )     —    

Note Payable (and interest payments) Collateralized by Deerfield Commons I

     (13,827 )     (509 )     (1,017 )     (1,252 )     (11,049 )

Note Payable (and interest payments) Collateralized by 602 Central Blvd.

     (16,354 )     (755 )     (1,510 )     (1,510 )     (12,579 )

Note Payable (and interest payments) Collateralized by Carolina Portfolio

     (95,280 )     (6,980 )     (13,961 )     (13,961 )     (60,378 )

Unsecured Loan Payable *

     (65,000 )     (65,000 )      
                                        

Total

   $ (221,018 )   $ (74,460 )   $ (18,920 )   $ (43,632 )   $ (84,006 )
                                        

* Excludes interest for this presentation because of the short term nature of the loan.

The Company is committed to pay $4,351,000 in accrued offering costs payable to a related party. The timing of future payments is uncertain.

The Company has no outstanding tenant improvement obligations as of September 30, 2007.

Income Taxes

We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2004. As a REIT, we generally will not be subject to U.S. federal income tax on income that we distribute currently to our shareholders. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute at least 90% of their annual net taxable income (excluding net capital gains) to their shareholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state, local and foreign taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income. Beginning January 1, 2007, the Texas Portfolio became subject to the Texas Gross Margin Tax. The impact was that the Company incurred approximately $9,000 of Gross Margin Tax for the nine months ended September 30, 2007.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. With the exception of leases with tenants in multifamily properties, we expect to include provisions in the majority of our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual

 

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reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market. Leases in multifamily properties generally turn over on an annual basis and do not typically present the same issue regarding inflation protection due to their short-term nature.

Quantitative and Qualitative Disclosures About Market Risk

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

We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we will borrow primarily at fixed rates or variable rates and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

Notes Payable secured by real property are summarized as follows (in thousands).

 

     

Interest Rate as of
September, 30

2007

  

Maturity Date

   Balance as of

Property

         September 30,
2007
    December 31,
2006

REMEC

   4.79%   

November 1, 2011

   $ 13,250     $ 13,250

300 Constitution

   4.84%   

April 1, 2012

     12,000       12,000

Deerfield Commons I

   5.23%   

December 1, 2012

     9,725       9,725

602 Central Blvd. (a)

   6.70%   

April 27, 2014

     11,258       —  

Fairforest Bldg. 5

   6.33%   

February 1, 2024

     11,276       —  

Fairforest Bldg. 6

   5.42%   

June 1, 2019

     3,812       —  

HJ Park – Bldg. 1

   4.98%   

March 1, 2013

     1,465       —  

North Rhett I

   5.65%   

August 1, 2019

     4,944       —  

North Rhett II

   5.20%   

October 1, 2002

     2,688       —  

North Rhett III

   5.75%   

February 1, 2020

     2,197       —  

North Rhett IV

   5.80%   

February 1, 2025

     11,226       —  

Mt Holly Bldg.

   5.20%   

October 1, 2020

     2,688       —  

Orangeburg Park Bldg.

   5.20%   

October 1, 2020

     2,734       —  

Kings Mt. I

   5.27%   

October 1, 2020

     2,325       —  

Kings Mt. II

   5.47%   

January 1, 2020

     7,011       —  

Union Cross Bldg. I

   5.50%   

July 1, 2021

     3,319       —  

Union Cross Bldg. II

   5.53%   

June 1, 2021

     10,154       —  

Notes Payable

           112,072       34,975
                    

Less Discount

           (2,702 )  
                    

Notes Payable Less Discount

         $ 109,370     $ 34,975
                    

(a) Variable interest rate of 6.70% at September 30, 2007

Upon the maturity of our debt, there is a market risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affect the fair market value of our debt but it has no impact on interest expense or cash flow. A 100 basis point increase or decrease in interest rates on our fixed rate debt would not increase or decrease our annual interest expense our fixed rate debt.

The fair value of the unsecured loan payable approximates the carrying value due to its short-term nature.

 

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The fair value of long-term debt was estimated based on current interest rates available to the Company for debt instruments with similar terms. The following table summarizes our financial instruments and their calculated fair value at September 30, 2007 and December 31, 2006 (dollars in thousands):

 

     Book Value    Fair Value

Financial Instrument

   2007    2006    2007    2006

Notes Payable

   $ 109,370    $ 34,975    $ 106,685    $ 33,652

A 100 basis point increase or decrease in interest rates would increase or decrease the fair market value of our notes payable by $5.6 million at September 30, 2007. In addition 100 basis point increase or decrease in interest rates would either increase annual variable interest expense by approximately $25,000 (net of the effect of the interest rate cap) or decrease variable interest expense by approximately $113,000.

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

Subsequent Events

From October 1, 2007 through October 31, 2007, the Company received gross proceeds of approximately $17,609,502 from the sale of 1,766,393 shares.

On October 16, 2007, the Company funded $200,000 of our capital commitment to the CBRE Asia Fund.

On November 1, 2007 the Company acquired a fee interest in two warehouse distribution buildings (230 Commerce Court and 4260 Orchard Park Blvd.) totaling 137,500 rentable square feet located in the Spartanburg, South Carolina market for $4,790,000, exclusive of customary closing costs, which was funded using net proceeds from the Company’s public offering. The buildings are 100% leased, each to a single tenant.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of quantitative and qualitative disclosures about market risk, see the “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

 

Item 4. Controls and Procedures

Not applicable.

 

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, or the Exchange Act, reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s 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 timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). Notwithstanding the foregoing, no matter how well a control system is designed and operated, it 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. Because 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 not currently required to comply with Section 404 (Management’s Annual Report on Internal Control over Financial Reporting) of the Sarbanes-Oxley Act of 2002 because we are not an “accelerated filer,” as defined by Rule 12b-2 under the Exchange Act. We are in the process of continuously improving our internal controls over financial reporting processes and procedures for our financial reporting so that our management can report on these processes and procedures when required to do so.

Changes in Internal Controls

There have been no significant changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not party to any material legal proceeding as of September 30, 2007.

 

Item 1A. Risk Factors

Other than the risk factors set forth below, there have been no material changes to the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2006 and in Item 1A to Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

Certain of our officers and trustees face conflicts of interest.

Our chairman and our chief financial officer each serve as managing directors of the Investment Advisor and also serve as president and executive managing director, respectively, of CBRE Investors, our sponsor. These individuals also are members of the investment committee of CB Richard Ellis Strategic Partners Asia II, L.P., or CBRE Asia Fund, an entity which we are a limited partner. Our president and chief executive officer serves as the president and chief executive officer of the Investment Advisor and also serves as a managing director of CBRE Investors. Our president and chief executive officer and our chief financial officer directly hold an aggregate 16.8% economic interest in the Investment Advisor. These individuals owe fiduciary duties to these entities and their shareholders. Such fiduciary duties may from time to time conflict with the fiduciary duties owed to us and our shareholders. An affiliate of the Investment Advisor owns one class B limited partnership interest (representing 100% of the class B interest outstanding) in CBRE OP. This interest entitles such affiliate to receive distributions in an amount equal to a percentage of the net proceeds we receive from a sale of a property after certain amounts are paid or provided for. This interest may incentivize the Investment Advisor to recommend the sale of a property or properties that may not be in our best interest at the time. In addition, the premature sale of a property may add concentration risk to the portfolio or may be at a price lower than if we held on to the property and sold it at a later date.

Real property investments made outside of the United States will be subject to currency rate exposure and risks associated with the uncertainty of foreign laws and markets.

We have made, and may in the future make, real property investments, either directly or indirectly, outside of the United States. To the extent that we invest in real property located outside of the United States, in addition to risks inherent in the investment in real estate generally discussed in the prospectus, we will also be subject to fluctuations in foreign currency exchange rates and the uncertainty of foreign laws and markets including, but not limited to, unexpected changes in regulatory requirements, political and economic instability in certain geographic locations, difficulties in managing international operations, potentially adverse tax consequences, additional accounting and control expenses and the administrative burden associated with complying with a wide variety of foreign laws. Changes in foreign currency exchange rates may adversely impact the fair values and earnings streams of our international holdings and, therefore, the returns on our non-dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income qualification tests, it is possible that we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations.

We will be subject to risks that result from our passive ownership of real estate, including our investment in CBRE Asia Fund.

We have invested and may make future investments in which we passively own real estate. A passive investment in real estate, such as our investment in CBRE Asia Fund involves risks not otherwise present with other methods of owning real estate. Examples of these risks include:

 

   

we cannot take part in the operation, management, direction or control of the real estate;

 

   

the party controlling the real estate may have economic or other business interests or goals that are inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties owned by such controlling party or the timing of the termination and liquidation of the controlling party; or

 

   

the possibility that we may incur liabilities as the result of actions taken by the controlling party.

 

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Our ability to redeem all or a portion of our investment in CBRE Asia Fund is subject to significant restrictions.

CBRE Asia Fund is not obligated to redeem the interests of any of its investors, including us, prior to 2017. Except in certain limited circumstances such as transfers to affiliates or successor trustees or state agencies, we will not be permitted to sell our interest in CBRE Asia Fund without the prior written consent of the general partner, which the general partner may withhold in its sole discretion.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Securities

None.

Use of Proceeds from Sale of Registered Securities

During the quarter ended September 30, 2007, we did not sell any equity securities that are not registered under the Securities Act of 1933 as amended. During the quarter ended September 30, 2007, we redeemed 3,000 common shares pursuant to our share redemption program.

The registration statement relating to our initial public offering (No. 333-127405) was declared effective on October 24, 2006 and post-effective amendment no. 2 to such registration statement was declared effective on July 20, 2007. CNL Securities Corp. is the Dealer Manager of our offering. The registration statement covers up to $2,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by CBRE Advisors LLC, the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From October 24, 2006 (effective date) through September 30, 2007, we received gross offering proceeds of approximately $184,584,060.69 from the sale of 18,461,141 shares. As of September 30, 2007, 25,358,200 common shares were issued and outstanding. After payment of approximately $2,572,100 million in acquisition fees, payment of approximately $11,915,781 million in selling commissions, deal manager fees and marketing support fees and payment of approximately $7,367,545 million in organization and offering expenses, as of September 30, 2007, we had raised aggregate net offering proceeds of approximately $162,728,635 million.

 

Item 3. Defaults Upon Senior Securities

None.

 

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

None.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

10.1    Purchase and Sale Agreement, dated July 3, 2007, by and among CBRE Operating Partnership, L.P. (including certain of its subsidiaries as named in the agreement) and an affiliate of Johnson Development Associates, Inc. as named in the agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K which was filed with the Commission on July 9, 2007.
10.2    Credit Agreement, dated August 30, 2007, by and among CBRE Operating Partnership, L.P. and CBRET Carolina TRS, Inc., as borrowers, CB Richard Ellis Realty Trust, Bank of America, N.A. as Administrative Agent, and other lenders thereto, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K which was filed with the Commission on September 5, 2007.
31.1    Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2    Certification of 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, filed 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, filed herewith.

 

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SIGNATURES

Pursuant to the requirements 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.

 

  CB RICHARD ELLIS REALTY TRUST
Date: November 14, 2007  

/s/ JACK A. CUNEO

  Jack A. Cuneo
  President and Chief Executive Officer
Date: November 14, 2007  

/s/ LAURIE ROMANAK

  Laurie Romanak
  Chief Financial Officer

 

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