e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-52566
CORNERSTONE CORE PROPERTIES REIT, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Maryland
|
|
73-1721791 |
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
1920 Main Street, Suite 400, Irvine, California 92614
(Address of Principal Executive Offices)
949-852-1007
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company þ |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act): Yes o No þ
As of June 30, 2010 (the last business day of the registrants second fiscal quarter), there were
22,810,701 shares of common stock held by non-affiliates of the registrant having an aggregate
market value of $169,426,930.
As of
March 16, 2011, there were approximately 23,027,235 shares of common stock of Cornerstone
Core Properties REIT, Inc. outstanding. The Registrant incorporates by reference portions of its
Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which is expected to be
filed no later than April 30, 2011, into Part III of this Form 10-K to the extent stated herein.
CORNERSTONE CORE PROPERTIES REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
2
PART I
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words believes, project, expects, anticipates,
estimates, intends, strategy, plan, may, will, would, will be, will continue,
will likely result, and similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. A detailed discussion of these
and other risks and uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in the section entitled Risk Factors in Item 1A
of this report. We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise. Accordingly, there
can be no assurance that our expectations will be realized.
As used in this report, we, us and our refer to Cornerstone Core Properties REIT, Inc. and
its consolidated subsidiaries except where the context otherwise requires.
ITEM 1. BUSINESS
Our Company
Cornerstone Core Properties REIT, Inc., a Maryland corporation, was formed on October 22, 2004 for
the purpose of engaging in the business of investing in and owning commercial real estate. We have
qualified, and intend to continue to qualify, as a real estate investment trust (REIT) for
federal tax purposes.
We are structured as an umbrella partnership REIT, referred to as an UPREIT, under which
substantially all of our current and future business is, and will be, conducted through a majority
owned subsidiary, Cornerstone Operating Partnership, L.P., a Delaware limited partnership, formed
on November 30, 2004. We are the sole general partner of the operating partnership and have
control over its affairs.
Our external advisor is Cornerstone Realty Advisors, LLC, a Delaware limited liability company. One
of our directors is also a director of our advisor and all of our officers are also officers of our
advisor. Our advisor has contractual and fiduciary responsibilities to us and our stockholders.
Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to
present to us investment opportunities and to provide a continuing and suitable investment program
consistent with the investment policies and objectives adopted by our board of directors. Our
advisor is responsible for managing our affairs on a day-to-day basis and for identifying and
making property acquisitions on our behalf. Currently, there are no employees of Cornerstone Core
Properties REIT, Inc. and its subsidiaries. All management and administrative personnel
responsible for conducting our business are currently employed by affiliates of our advisor. Our
current business consists of acquiring and operating real estate assets. Management evaluates
operating performance on an individual property level. However, as each of our properties has
similar economic characteristics, our properties have been aggregated into one reportable segment.
From our formation through the end of the year ended December 31, 2005, our activities consisted
solely of organizational activities including preparing for and launching our initial public
offering. On January 6, 2006, we commenced an initial public offering of up to 55,400,000 shares of
our common stock, consisting of 44,400,000 shares for sale pursuant to a primary offering and
11,000,000 shares for sale pursuant to our distribution reinvestment plan. On November 25, 2008,
we filed a registration statement on Form S-11 with the SEC to register a follow-on public
offering. Pursuant to the registration statement, as amended, we registered up to 56,250,000
shares of common stock in a primary offering for $8.00 per share, with discounts available to
certain categories of purchasers. We also registered approximately 21,250,000 shares pursuant to
our dividend reinvestment plan at a purchase price equal to $7.60 per share. We stopped making
offers under our initial public offering on June 1, 2009 upon raising gross offering proceeds of
approximately $172.7 million from the sale of approximately 21.7 million shares, including shares
sold under the distribution reinvestment plan. On June 10, 2009, the Securities and Exchange
Commission (SEC) declared our follow-on offering effective and we commenced our follow-on
offering. The initial public offering and follow-on offering are collectively referred to as the
offerings. We retained Pacific Cornerstone Capital, Inc. (PCC), an affiliate of our advisor, to
serve as the dealer manager for the offerings. PCC is responsible for marketing our shares being
offered pursuant to the offerings.
On November 23, 2010 we informed our investors of several decisions made by the board of directors
for the health of our REIT.
3
The Offering. Effective November 23, 2010, we stopped making and accepting offers to
purchase shares of our stock while our board of directors evaluates strategic alternatives to
maximize value.
Suspension of Distribution Reinvestment Plan. Our offerings included a distribution
reinvestment plan under which our stockholders could elect to have all or a portion of their
distributions reinvested in additional shares of our common stock. Consistent with the above
decision with respect to the offerings, we suspended our distribution reinvestment plan
effective on December 14, 2010. All distributions paid after December 14, 2010 have been and
will be made in cash.
Distributions. Our board of directors has resolved to lower our distributions to a current
annualized rate of $0.08 per share (1% based on a share price of $8.00) from the current
annualized rate of $0.48 per share (6% based on a share price of $8.00), effective December
1, 2010. The rate and frequency of distributions is subject to the discretion of our board
of directors and may change from time to time based on our operating results and cash flow.
Stock Repurchase Plan. After careful consideration of the proceeds that will be available
from our distribution reinvestment plan in 2010, and an assessment of our expected capital
expenditures, tenant improvement costs and other costs and obligations related to our
investments, our board of directors concluded that we will not have sufficient funds
available to us to prudently fund any redemptions during 2011. Accordingly, our board of
directors approved an amendment to our stock repurchase program to suspend redemptions under
the program, effective December 31, 2010. We can make no assurances as to when redemptions
will resume. The share redemption program may be amended, resumed, suspended again, or
terminated at any time based in part on our cash and debt position.
As of December 31, 2010, approximately 20.9 million shares of our common stock had been sold in our
initial and follow-on public offering for aggregate gross proceeds of approximately $167.1 million.
This excludes shares issued under our distribution reinvestment plan.
Investment Objectives
Our investment objectives are to:
|
|
|
preserve stockholder capital by owning and operating real estate on an all-cash basis with no permanent financing; |
|
|
|
|
purchase investment grade properties with the potential for capital appreciation to our stockholders; |
|
|
|
|
purchase income-producing properties which will allow us to pay
cash distributions to our stockholders at least quarterly, if not
more frequently; and |
|
|
|
|
provide liquidity to our stockholders within the shortest reasonable time necessary to accomplish the above objectives. |
On or
before September 21, 2012, our board of directors will take action to provide enhanced
liquidity for our stockholders. The directors will consider various plans to enhance liquidity,
including, but not limited to:
|
|
|
modifying our stock repurchase program to increase the number of shares that we can redeem under the program during any given
period, and to expand the sources of funding that we can use to
redeem shares under the program; |
|
|
|
|
seeking stockholder approval to begin an orderly liquidation of
our assets and distribute the available proceeds of such sales to
our stockholders; |
|
|
|
|
listing our stock for trading on a national securities exchange; or |
|
|
|
|
seeking stockholder approval of another liquidity event such as a sale of our assets or a merger with another entity. |
The implementation of one or more of these plans will be at the discretion of our board of
directors based upon its consideration of the best interests of our stockholders. Prior to
September 21, 2012, we believe that we will most likely seek stockholder approval of an amendment
to extend the timing for implementing a liquidity plan. If the stockholders do not approve this
amendment, we will likely modify our stock repurchase program to increase the number of shares that
we can redeem under the program as described above. However, even if we do modify our stock
repurchase program, there is no guarantee that it will provide liquidity for our stockholders.
Our offering proceeds may not be sufficient to fund the increased repurchases under the stock
repurchase program, and we may be unable to sell our properties for a gain or at all.
4
Investment Strategy
Large institutional investors have proven how to build a successful real estate portfolio. They
generally start with a foundation of core holdings. Core holdings are existing, high quality
properties owned all-cash free and clear of debt. We believe that core holdings are necessary
to help investors build the base of their investment portfolio. That is why our primary investment
focus is to acquire investment real estate all cash with no permanent financing.
All cash real estate investments add a layer of safety to conservative real estate investment which
we believe would be difficult to match by any other strategy. By owning and operating properties
on an all-cash basis, risk of foreclosure of mortgage debt is substantially eliminated.
Following acquisition of core real property investments, many large institutional investors then
make core plus, valued added and opportunistic real property investments each of which has
increasing levels of debt, risk and yield.
Acquisition Policies
Primary Investment Focus
We focus on acquiring investment grade real estate including multi-tenant industrial properties
that are:
|
|
|
owned and operated on an all-cash basis with no permanent financing; |
|
|
|
|
high-quality, existing, and currently producing income; |
|
|
|
|
leased to a diversified tenant base; and |
|
|
|
|
leased with overall shorter term operating type leases, allowing
for annual rental increases and greater potential for capital
growth. |
We seek potential property acquisitions meeting the above criteria that are located in major
metropolitan markets throughout the United States.
Among the most important criteria we expect to
use in evaluating the markets in which we purchase properties are:
|
|
|
high population; |
|
|
|
|
historically high levels of tenant demand and lower historic investment volatility for type of property being acquired; |
|
|
|
|
high historical and projected employment growth; |
|
|
|
|
stable household income and general economic stability; |
|
|
|
|
a scarcity of land for new competitive properties; and |
|
|
|
|
sound real estate fundamentals, such as high occupancy rates and strong rent rate potential. |
The markets in which we invest may not meet all of these criteria and the relative importance that
we assign to any one or more of these criteria may differ from market to market or change as
general economic and real estate market conditions evolve. We may also consider additional
important criteria in the future.
Multi-tenant industrial properties generally offer a combination of both warehouse and office space
adaptable to a broad range of tenants and uses and typically cater to local and regional
businesses. Multi-tenant industrial properties comprise one of the major segments of the
commercial real estate market and tenants in these properties come from a broad spectrum of
industries including light manufacturing, assembly, distribution, import/export, general
contractors, telecommunications, general office/ warehouse, wholesale, service, high-tech and other
fields. These properties diversify revenue by generating rental income from multiple businesses in
a variety of industries instead of relying on one or two large tenants.
Other Potential Investments
While we intend to invest in multi-tenant industrial properties, we have the ability to invest in
any type of real estate investment that we believe to be in the best interests of our stockholders,
including other real estate funds or REITs, mortgage funds, mortgage loans and sale lease-backs.
Furthermore, there are no restrictions on the number or size of properties we may purchase or on
the amount or proportion of net proceeds of our initial public offering that we may invest in a
single property. Although we can invest in any type of
5
real estate investment, our charter
restricts certain types of investments. We do not intend to underwrite securities of other issuers
or to engage in the purchase and sale of any types of investments other than real estate
investments.
Investment Policies and Decisions
Our advisor makes recommendations to our board of directors, which approves or rejects all proposed
property acquisitions. Our independent directors will review our investment policies at least
annually to determine whether these policies continue to be in the best interests of our
stockholders.
We purchase properties based on the decision of our board of directors after an examination and
evaluation by our advisor of many factors including but not limited to the functionality of the
property, the historical financial performance of the property, current market conditions for
leasing space at the property, proposed purchase price, terms and conditions, potential cash flows
and potential profitability of the property. The number of properties that we will purchase will
depend on the amount of funds we raise in our offerings and upon the price we pay for the
properties we purchase. To identify properties that best fit our investment criteria, our advisor
will study regional demographics and market conditions and work through local commercial real
estate brokers.
Leases and Tenant Improvements
The properties we acquire generally have operating type leases. Operating type leases generally
have either gross or modified gross payment terms. Under gross leases, the landlord pays all
operating expenses of the property. Under modified gross leases, the tenant reimburses the
landlord for certain operating expenses. A net lease provides that the tenant pays or reimburses
the owner for all or substantially all property operating expenses. As landlord, we will generally
have responsibility for certain capital repairs or replacement of specific structural components of
a property such as the roof, heating and air conditioning systems, the interior floor or slab of
the building as well as parking areas.
When a tenant at one of our properties vacates its space, it is likely that we will be required to
expend funds for tenant improvements and refurbishments to the vacated space in order to attract
new tenants. If we do not have adequate cash on hand to fund tenant improvements and
refurbishments, we may use interim debt financing in order to fulfill our obligations under lease
agreements with new tenants.
Joint Ventures and Other Arrangements
We may acquire some of our properties in joint ventures, some of which may be entered into with
affiliates of our advisor. We may also enter into general partnerships, co-tenancies and other
participations with real estate developers, owners and others for the purpose of owning and leasing
real properties. Among other reasons, we may want to acquire properties through a joint venture
with third parties or affiliates in order to diversify our portfolio of properties in terms of
geographic region, property type and tenant industry group. Joint ventures may also allow us to
acquire an interest in a property without requiring that we fund the entire purchase price. In
addition, certain properties may be available to us only through joint ventures. In determining
whether to recommend a particular joint venture, the advisor will evaluate the real property for
which such joint venture owns or is being formed to own under the same criteria described elsewhere
in this annual report. These entities may employ debt financing. (See Borrowing Policies below.)
Borrowing Policies
We intend to be an all-cash REIT that will own and operate our properties with no permanent
indebtedness. Generally, we will pay the entire purchase price of each property in cash or with
equity securities, or a combination of each. Being an all-cash REIT mitigates the risks associated
with mortgage debt, including the risk of default on the mortgage payments and a resulting
foreclosure of a particular property.
During our offering period, we have and intend to continue to use temporary financing to facilitate
acquisitions of properties in anticipation of receipt of offering proceeds. We will endeavor to
repay such debt financing promptly upon receipt of proceeds in our offering. To the extent
sufficient proceeds from our offerings are unavailable to repay such debt financing within a
reasonable time as determined by our board of directors, we may sell properties or raise equity
capital to repay the debt so that we will own our properties all-cash, with no permanent
acquisition financing.
We may incur indebtedness for working capital requirements, tenant improvements, capital
improvements, leasing commissions and to make distributions including but not limited to those
necessary in order to maintain our qualification as a REIT for federal income tax
purposes. We will endeavor to borrow funds on an unsecured basis but we may secure indebtedness
with some or all of our portfolio of properties if a majority of our independent directors
determine that it is in the best interests of us and our stockholders.
6
We may also acquire properties encumbered with existing financing which cannot be immediately
repaid. To the extent we cannot repay the financing that encumbers these properties within a
reasonable time as determined by a majority of our independent directors, we intend to sell
properties or raise equity capital to pay debt in order to maintain our all-cash status or reserve
an amount of cash sufficient to repay the loan to mitigate the risks of foreclosure.
We may invest in joint venture entities that borrow funds or issue senior equity securities to
acquire properties, in which case our equity interest in the joint venture would be junior to the
rights of the lender or preferred stockholders. In some cases, our advisor may control the joint
venture.
If we list our stock on a national stock exchange, we may thereafter change our strategy and begin
to use permanent debt in our investment strategy. Our charter limits our borrowings to the
equivalent of 75% of our cost, before deducting depreciation or other non-cash reserves, of all our
assets unless any excess borrowing is approved by a majority of our independent directors and is
disclosed to our stockholders in our next quarterly report with an explanation from our independent
directors of the justification for the excess borrowing. While there is no limitation on the
amount we may borrow for the purchase of any single property, we intend to repay such debt within a
reasonable time or raise additional equity capital or sell properties in order to maintain our
all-cash status.
Competition
We compete with a considerable number of other real estate companies seeking to acquire and lease
industrial space, most of which may have greater marketing and financial resources than we do.
Principal factors of competition in our business are the quality of properties (including the
design and condition of improvements), leasing terms (including rent and other charges and
allowances for tenant improvements), attractiveness and convenience of location, the quality and
breadth of tenant services provided and reputation as an owner and operator of quality office
properties in the relevant market. Our ability to compete also depends on, among other factors,
trends in the national and local economies, financial condition and operating results of current
and prospective tenants, availability and cost of capital, construction and renovation costs,
taxes, governmental regulations, legislation and population trends.
We may hold interests in properties located in the same geographic locations as other entities
managed by our advisor or our advisors affiliates. Our properties may face competition in these
geographic regions from such other properties owned, operated or managed by other entities managed
by our advisor or our advisors affiliates. Our advisor or its affiliates have interests that may
vary from those we may have in such geographic markets.
Government Regulations
Our company and the properties we own are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Federal laws such as the National
Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability
Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the
Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right
to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air
emissions, the operation and removal of underground and above-ground storage tanks, the use,
storage, treatment, transportation and disposal of solid and hazardous materials and the
remediation of contamination associated with disposals. Some of these laws and regulations impose
joint and several liability on tenants, owners or operators for the costs to investigate or
remediate contaminated properties, regardless of fault or whether the acts causing the
contamination were legal. Compliance with these laws and any new or more stringent laws or
regulations may require us to incur material expenditures. Future laws, ordinances or regulations
may impose material environmental liability. In addition, there are various federal, state and
local fire, health, life-safety and similar regulations with which we may be required to comply,
and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties. The presence of hazardous substances, or the
failure to properly remediate these substances, may make it difficult or impossible to sell or rent
such property.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous real property owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on, under or in such property. These costs could be substantial.
Such laws often impose liability whether or not the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures or prevent us from entering into leases with
prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions
for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by
private parties. Certain environmental laws and common
law principles could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials into the air. Third parties may seek recovery
from real property owners or operators for personal injury or property damage associated with
exposure to released hazardous substances. The cost of defending against claims of liability, of
complying with
7
environmental regulatory requirements, of remediating any contaminated property, or
of paying personal injury claims could be substantial.
We obtain satisfactory Phase I environmental assessments on each property we purchase. A Phase I
assessment is an inspection and review of the property, its existing and prior uses, aerial maps
and records of government agencies for the purpose of determining the likelihood of environmental
contamination. A Phase I assessment includes only non-invasive testing. It is possible that all
environmental liabilities were not identified in the Phase I assessments we obtained or that a
prior owner, operator or current occupant has created an environmental condition which we do not
know about. There can be no assurance that future law, ordinances or regulations will not impose
material environmental liability on us or that the current environmental condition of our
properties will not be affected by our tenants, or by the condition of land or operations in the
vicinity of our properties such as the presence of underground storage tanks or groundwater
contamination.
Acquisition Activity
At December 31, 2010, we owned thirteen properties. These properties were acquired from June 2006
through August 2010. All of these properties are consolidated into our accompanying consolidated
financial statements and included in the properties summary as provided under Item 2 Properties
referenced below.
We have acquired our properties to date with a combination of the proceeds from our ongoing public
offerings and debt incurred upon the acquisition of certain properties.
Employees
We have no employees and our executive officers are all employees of our advisors affiliates.
Substantially all of our work is performed by employees of our advisors affiliates. We are
dependent on our advisor and PCC for certain services that are essential to us, including the sale
of shares in our ongoing public follow-on offering; the identification, evaluation, negotiation,
purchase and disposition of properties; the management of the daily operations of our real estate
portfolio; and other general and administrative responsibilities. In the event that these companies
are unable to provide the respective services, we will be required to obtain such services from
other sources.
Available Information
Information about us is available on our website (http://www.crefunds.com). We make available,
free of charge, on our Internet website, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such
material with the SEC. These materials are also available at no cost in print to any person who
requests it by contacting our Investor Services Department at 1920 Main Street, Suite 400, Irvine,
California 92614; telephone (877) 805-3333. Our filings with the SEC are available to the public
over the Internet at the SECs website at http://www.sec.gov. You may read and copy any filed
document at the SECs public reference room in Washington, D.C. at 100 F Street, N.E., Room
1580,Washington D.C. Please call the SEC at (800) SEC-0330 for further information about the
public reference rooms.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below can adversely affect our business, operating results,
prospects and financial condition. These risks and uncertainties could cause our actual results to
differ materially from those presented in our forward-looking statements.
General
Disruptions in the financial markets and continuing poor economic conditions could adversely affect
the values of our investments and our ongoing results of operations.
Disruptions in the capital markets during the past several years have constrained equity and debt
capital available for investment in commercial real estate, resulting in fewer buyers seeking to
acquire commercial properties and consequent reductions in property values. Furthermore, the
current state of the economy and the implications of future potential weakening may negatively
impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our portfolio. The current downturn has impacted and may continue to impact
our tenants ability to pay base rent, percentage rent or other charges due to us.
8
Liquidity in the global credit market has been significantly contracted by market disruptions,
making it costly to finance acquisitions, obtain new lines of credit or refinance existing debt,
when debt financing is available at all.
The occurrence of these events could have the following negative effects on us:
|
|
|
the values of our investments in commercial properties could
further decrease below the amounts we paid for the investments; |
|
|
|
|
revenues from our properties could decrease due to lower occupancy
rates, reduced rental rates and potential increases in
uncollectible receivables; |
|
|
|
|
our capital expenditures may increase due to re-leasing costs and commissions; and |
|
|
|
|
we may not be able to refinance our existing indebtedness or to obtain additional debt financing on attractive terms. |
These factors could further impair our ability to make distributions to stockholders and decrease
the value of investments in us.
Financial markets are still recovering from a period of disruption and recession, and we are unable
to predict if and when the economy will stabilize or improve.
The financial markets are still recovering from a recession, which created volatile market
conditions, resulted in a decrease in availability of business credit and led to the insolvency,
closure or acquisition of a number of financial institutions. While the markets showed signs of
stabilizing during 2010, it remains unclear when the economy will fully recover to pre-recession
levels. Continued economic weakness in the U.S. economy generally or a new recession would likely
adversely affect our financial condition and that of our tenants and could impact the ability of
our tenants to pay rent to us.
Our limited operating history makes it difficult for you to evaluate us. In addition we have
incurred losses in the past and may continue to incur losses.
We have acquired thirteen properties as of the date of this report and generated limited income,
cash flow, funds from operations or funds from which to make distributions to our shareholders. In
addition, we have incurred substantial losses since our inception and we may continue to incur
losses.
Because there is no public trading market for our stock it will be difficult for stockholders to
sell their stock. Further, we do not expect to have funds available for redemptions during 2011 and
are uncertain when and on what terms we will be able to resume ordinary redemptions. If
stockholders are able to sell their stock, they will likely sell it at a substantial discount.
There is no current public market for our stock and there is no assurance that a public market will
ever develop for our stock. Our charter contains restrictions on the ownership and transfer of our
stock, and these restrictions may inhibit our stockholders ability to sell their stock. Our
charter prevents any one person from owning more than 9.8% in number of shares or value, whichever
is more restrictive, of the outstanding shares of any class or series of our stock unless exempted
by our board of directors. Our charter also limits our stockholders ability to transfer their
stock to prospective stockholders unless (i) they meet suitability standards regarding income or
net worth, and (ii) the transfer complies with minimum purchase requirements. We have adopted a
stock repurchase program. However, our board of directors has recently suspended redemptions under
the program, effective December 31, 2010. If and when redemptions resume under our stock repurchase
program, it is limited in terms of the number of shares of stock which may be redeemed annually
and may also be limited, suspended or terminated at any time. We have no obligations to purchase
our stockholders stock if redemption would violate restrictions on cash distributions under
Maryland law.
It may be difficult for our stockholders to sell their stock promptly or at all. If our
stockholders are able to sell shares of stock, they may only be able to sell them at a substantial
discount from the price they paid. This may be the result, in part, of the fact that the amount of
funds available for investment is expected to be reduced by sales commissions, dealer manager fees,
organization and offering expenses, and acquisition fees and expenses. If our offering expenses are
higher than we anticipate, we will have a smaller amount available for investment. Unless our
aggregate investments increase in value to compensate for these up-front fees and expenses, it is
unlikely that our stockholders will be able to sell their stock, whether pursuant to our stock
repurchase program or otherwise, without incurring a substantial loss. We cannot assure our
stockholders that their stock will ever appreciate in value to equal the price they paid for their
stock. It is also likely that their stock would not be accepted as the primary collateral for a
loan. Stockholders should consider their stock as an illiquid investment, and they must be
prepared to hold their stock for an indefinite period of time.
9
Competition with third parties for properties and other investments may result in our paying higher
prices for properties which could reduce our profitability and the return on your investment.
We compete with many other entities engaged in real estate investment activities, including
individuals, corporations, banks, insurance companies, other REITs, real estate limited
partnerships, and other entities engaged in real estate investment activities, many of which have
greater resources than we do. Some of these investors may enjoy significant competitive advantages
that result from, among other things, a lower cost of capital and enhanced operating efficiencies.
In addition, the number of entities and the amount of funds competing for suitable investments may
increase. Any such increase would result in increased demand for these assets and increased prices.
If competitive pressures cause us to pay higher prices for properties, our ultimate profitability
may be reduced and the value of our properties may not appreciate or may decrease significantly
below the amount paid for such properties. At the time we elect to dispose of one or more of our
properties, we will be in competition with sellers of similar properties to locate suitable
purchasers, which may result in us receiving lower proceeds from the disposal or result in us not
being able to dispose of the property due to the lack of an acceptable return. This may cause our
stockholders to experience a lower return on their investment.
If we are unable to find or experience delays in finding suitable investments, we may need to
reduce or suspend distributions to our stockholders.
Our ability to achieve our investment objectives and to make distributions depends upon the
performance of our advisor in the acquisition and operation of our investments, and upon the
performance of property managers and leasing agents in the management of our properties and the
identification of prospective tenants. We may be delayed in making investments in properties due to
delays in the sale of our stock, delays in negotiating or obtaining the necessary purchase
documentation for properties, delays in locating suitable investments or other factors. We cannot
be sure that our advisor will be successful in obtaining suitable investments on financially
attractive terms or that our investment objectives will be achieved. We may also make other real
estate investments such as investments in publicly traded REITs, mortgage funds and other entities
which make real estate investments. Until we make real estate investments, we will hold the
proceeds from our public offerings in an interest-bearing account or invest the proceeds in
short-term, investment-grade securities. We expect the rates of return on these short-term
investments to be substantially less than the returns we make on real estate investments. If we are
unable to invest the proceeds from our offerings in properties or other real estate investments for
an extended period of time, distributions to our stockholders may be suspended and may be lower and
the value of their investment could be reduced.
If the suspension of our follow-on offering and our distribution reinvestment plan continue and/or
we do not raise substantial funds in our public offerings, we will be limited in the number and
type of investments we may make, and the value of investments in us will fluctuate with the
performance of the specific properties we acquire.
We suspended our follow-on offering and our distribution reinvestment plan in the fourth quarter of
2010. We are uncertain when and on what terms we will be able to resume the sale of shares under
our follow-on offering or the reinvestment of distributions under the distribution reinvestment
plan. If we are unable to resume sales and reinvestment of distributions, we will have raised
substantially less than the maximum offering amount, will be dependent on the cash flows from our
existing properties and as a result will make fewer new investments. If we do resume sales under
our follow-on offering, our offerings are made on a best efforts basis and no individual, firm or
corporation has agreed to purchase any of our stock. The amount of proceeds we raise in our public
offerings may be substantially less than the amount we would need to achieve a broadly diversified
property portfolio. If we raise substantially less than the maximum offering amount, either due to
the suspension of the offering or other factors, we will make fewer investments resulting in less
diversification in terms of the number of investments owned and the geographic regions in which our
investments are located. In that case, the likelihood that any single propertys performance would
materially reduce our overall profitability will increase. We are not limited in the number or
size of our investments or the percentage of net proceeds we may dedicate to a single investment.
In addition, any inability to raise substantial funds would increase our fixed operating expenses
as a percentage of gross income, and our net income and the distributions we make to stockholders
would be reduced.
We may not generate sufficient cash for distributions. The cash distributions our stockholders
receive may be less frequent or lower in amount than expected.
If the rental revenues from the properties we own do not exceed our operational expenses, we may
reduce or cease cash distributions until such time as we sell a property. Effective December 1,
2010, our distributions were reduced to a current annualized rate of $0.08 per share. We currently
expect to make distributions to our stockholders monthly, but may make distributions quarterly or
not at all. All expenses we incur in our operations, including payment of interest to temporarily
finance properties acquisitions, are deducted from cash funds generated by operations prior to
computing the amount of cash available to be paid as distributions to our stockholders. Our
directors will determine the amount and timing of distributions. Our directors will consider all
relevant factors, including the amount of cash available for distribution, capital expenditure and
reserve requirements and general operational requirements. We cannot
determine with certainty how long it may take to generate sufficient available cash flow to fully
support distributions to our stockholders. We may borrow funds, return capital or sell assets to
make distributions. In the past, we have paid distributions from the proceeds of our offerings.
10
If
we are unable to resume sales of shares under our follow-on offering or the reinvestment of
distributions under the distribution reinvestment plan, we will have less funds available to cover
distributions to our stockholders, which will continue until we generate operating cash flow
sufficient to support distributions to stockholders. As a result, we may need to reduce or cease
cash distributions to stockholders. With limited prior operations, we cannot predict the amount of
distributions our stockholders may receive. We may be unable to maintain cash distributions or
increase distributions over time and may need to cease cash distributions.
We have, and may in the future, pay distributions from sources other than cash provided from
operations.
Until proceeds from our offering are invested and generating operating cash flow sufficient to make
distributions to stockholders, we intend to pay a substantial portion of our distributions from the
proceeds of our offerings or from borrowings in anticipation of future cash flow. To the extent
that we use offering proceeds to fund distributions to stockholders, the amount of cash available
for investment in properties will be reduced. The distributions paid for the four quarters ended
December 31, 2010 were approximately $11.0 million. Of this amount approximately $5.4 million was
reinvested through our dividend reinvestment plan and approximately $5.6 million was paid in cash
to stockholders. For the four quarters ended December 31, 2010 cash flow from operations and funds
from operations (FFO) were approximately $2.3 million and $0.3 million, respectively.
Accordingly, for the four quarters ended December 31, 2010, total distributions exceeded cash flow
from operations and FFO for the same period. We used offering proceeds to pay cash distributions in
excess of cash flow from operations during the four quarters ended December 31, 2010.
If we borrow money to meet the REIT minimum distribution requirement or for other working capital
needs, our expenses will increase, our net income will be reduced by the amount of interest we pay
on the money we borrow and we will be obligated to repay the money we borrow from future earnings
or by selling assets, which will decrease future distributions to stockholders.
If we fail for any reason to distribute at least 90% of our REIT taxable income, then we would not
qualify for the favorable tax treatment accorded to REITs. It is possible that 90% of our income
would exceed the cash we have available for distributions due to, among other things, differences
in timing between the actual receipt of income and actual payment of deductible expenses and the
inclusion/deduction of such income/expenses when determining our taxable income, nondeductible
capital expenditures, the creation of reserves, the use of cash to purchase stock under our stock
repurchase program, and required debt amortization payments. We may decide to borrow funds in
order to meet the REIT minimum distribution requirements even if our management believes that the
then prevailing market conditions generally are not favorable for such borrowings or that such
borrowings would not be advisable in the absence of such tax considerations. Distributions made in
excess of our net income will generally constitute a return of capital to stockholders.
The inability of our advisor to retain or obtain key personnel, property managers and leasing
agents could delay or hinder implementation of our investment strategies, which could impair our
ability to make distributions.
Our success depends to a significant degree upon the contributions of Terry G. Roussel, the
President and Chief Executive Officer of our advisor. Neither we nor our advisor have an
employment agreement with Mr. Roussel or with any of our other executive officers. If Mr. Roussel
was to cease his affiliation with our advisor, our advisor may be unable to find a suitable
replacement, and our operating results could suffer. We believe that our future success depends,
in large part, upon our advisors, property managers and leasing agents ability to hire and
retain highly skilled managerial, operational and marketing personnel. Competition for highly
skilled personnel is intense, and our advisor and any property managers we retain may be
unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to
obtain the services of highly skilled personnel, property managers or leasing agents, our ability
to implement our investment strategies could be delayed or hindered and the value of our
stockholders investments in us may decline.
Risks Related to Conflicts of Interest
Our advisor will face conflicts of interest relating to the purchase and leasing of properties, and
such conflicts may not be resolved in our favor, which could limit our investment opportunities and
impair our ability to make distributions and could reduce the value of our stockholders investment
in us.
We rely on our advisor to identify suitable investment opportunities. We may be buying properties
at the same time as other entities that are affiliated with or sponsored by our advisor. Other
programs sponsored by our advisor or its affiliates also rely on our advisor for investment
opportunities. Many investment opportunities would be suitable for us as well as other programs.
Our advisor could direct attractive investment opportunities or tenants to other entities. Such
events could result in our investing in properties that provide less attractive returns, thus
reducing the level of distributions that we may be able to pay to our stockholders and the value of
their investments in us.
11
If we acquire properties from affiliates of our advisor, the price may be higher than we would pay
if the transaction was the result of arms-length negotiations.
The prices we pay to affiliates of our advisor for our properties will be equal to the prices paid
by them, plus the costs incurred by them relating to the acquisition and financing of the
properties or if the price to us is in excess of such cost, substantial justification for such
excess will exist and such excess will be reasonable and consistent with current market conditions
as determined by a majority of our independent directors. Substantial justification for a higher
price could result from improvements to a property by the affiliate of our advisor or increases in
market value of the property during the period of time the property is owned by the affiliates of
our advisor as evidenced by an appraisal of the property. These prices will not be the subject of
arms-length negotiations, which could mean that the acquisitions may be on terms less favorable to
us than those negotiated in an arms-length transaction. Even though we will use an independent
third party appraiser to determine fair market value when acquiring properties from our advisor and
its affiliates, we may pay more for particular properties than we would have in an arms-length
transaction, which would reduce our cash available for investment in other properties or
distribution to our stockholders.
We may purchase properties from persons with whom our advisor or its affiliates have prior business
relationships and our advisors interest in preserving its relationship with these persons could
result in us paying a higher price for the properties than we would otherwise pay.
We may have the opportunity to purchase properties from third parties including affiliates of our
independent directors who have prior business relationships with our advisor or its affiliates. If
we purchase properties from such third parties, our advisor may experience a conflict between our
interests and its interest in preserving any ongoing business relationship with these sellers.
Our advisor will face conflicts of interest relating to joint ventures that we may form with
affiliates of our advisor, which conflicts could result in a disproportionate benefit to the other
venture partners at our expense.
We may enter into joint venture agreements with third parties (including entities that are
affiliated with our advisor or our independent directors) for the acquisition or improvement of
properties. Our advisor may have conflicts of interest in determining which program should enter
into any particular joint venture agreement. The co-venturer may have economic or business
interests or goals that are or may become inconsistent with our business interests or goals. In
addition, our advisor may face a conflict in structuring the terms of the relationship between our
interests and the interest of the affiliated co-venturer and in managing the joint venture. Since
our advisor and its affiliates will control both the affiliated co-venturer and, to a certain
extent, us, agreements and transactions between the co-venturers with respect to any such joint
venture will not have the benefit of arms-length negotiation of the type normally conducted
between unrelated co-venturers. Co-venturers may thus benefit to our and our stockholders
detriment.
Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale
of our stock, our property acquisitions, the property we own and the sale of our properties and
therefore our advisor and its affiliates may make recommendations to us that we buy, hold or sell
property in order to increase their compensation. Our advisor will have considerable discretion
with respect to the terms and timing of our acquisition, disposition and leasing transactions.
Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale
of our stock and based on our investments. Therefore, our advisor may recommend that we purchase
properties that generate fees for our advisor, but are not necessarily the most suitable investment
for our portfolio. In some instances our advisor and its affiliates may benefit by us retaining
ownership of our assets, while our stockholders may be better served by sale or disposition. In
other instances they may benefit by us selling the properties which may entitle our advisor to
disposition fees and possible success-based sales fees. In addition, our advisors ability to
receive asset management fees and reimbursements depends on our continued investment in properties
and in other assets that generate fees to them. Therefore, the interest of our advisor and its
affiliates in receiving fees may conflict with our interests.
Our advisor and its affiliates, including our officers, one of whom is also a director, will face
conflicts of interest caused by compensation arrangements with us and other Cornerstone-sponsored
programs, which could result in actions that are not in the long-term best interests of our
stockholders.
Our advisor and its affiliates will receive substantial fees from us that are partially tied to the
performance of our investments. These fees could influence our advisors advice to us, as well as
the judgment of the affiliates of our advisor who serve as our officers or directors. Among other
matters, the compensation arrangements could affect their judgment with respect to:
|
|
|
property acquisitions from other advisor-sponsored programs, which
might entitle our advisor to disposition fees and possible
success-based sale fees in connection with its services for the
seller; |
|
|
|
|
whether and when we seek to list our common stock on a national
securities exchange, which listing could entitle our advisor to a
success-based listing fee but could also adversely affect its
sales efforts for other programs if the price at which our stock |
12
|
|
|
trades is lower than the price at which we offered stock to the
public; and |
|
|
|
|
whether and when we seek to sell the company or its assets, which
sale could entitle our advisor to success-based fees but could
also adversely affect its sales efforts for other programs if the
sales price for the company or its assets resulted in proceeds
less than the amount needed to preserve our stockholders capital. |
Considerations relating to their compensation from other programs could result in decisions that
are not in the best interests of our stockholders, which could hurt our ability to make
distributions to our stockholders or result in a decline in the value of their investments in us.
If the competing demands for the time of our advisor, its affiliates and our officers result in
them spending insufficient time on our business, we may miss investment opportunities or have less
efficient operations which could reduce our profitability and result in lower distributions to
stockholders.
We do not have any employees. We rely on the employees of our advisor and its affiliates for the
day-to-day operation of our business. We estimate that over the life of the company, our advisor
and its affiliates will dedicate, on average, less than half of their time to our operations. The
amount of time that our advisor and its affiliates spend on our business will vary from time to
time and is expected to be more while we are raising money and acquiring properties. Our advisor
and its affiliates, including our officers, have interests in other programs and engage in other
business activities. As a result, they will have conflicts of interest in allocating their time
between us and other programs and activities in which they are involved. Because these persons
have competing interests on their time and resources, they may have conflicts of interest in
allocating their time between our business and these other activities. During times of intense
activity in other programs and ventures, they may devote less time and fewer resources to our
business than are necessary or appropriate to manage our business. We expect that as our real
estate activities expand, our advisor will attempt to hire additional employees who would devote
substantially all of their time to our business. There is no assurance that our advisor will
devote adequate time to our business. If our advisor suffers or is distracted by adverse financial
or operational problems in connection with its operations unrelated to us, it may allocate less
time and resources to our operations. If any of these things occur, the returns on our
investments, our ability to make distributions to stockholders and the value of their investments
in us may suffer.
Our officers, one of whom is also a director, face conflicts of interest related to the positions
they hold with our advisor and its affiliates which could hinder our ability to successfully
implement our business strategy and to generate returns to our stockholders.
Our officers, one of whom is also a director, are also officers of our advisor, our dealer manager
and other affiliated entities. As a result, they owe fiduciary duties to these various entities
and their stockholders and members, which fiduciary duties may from time to time conflict with the
fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities
could result in actions or inactions that are detrimental to our business, which could harm the
implementation of our business strategy and our investment, property management and leasing
opportunities. If we do not successfully implement our business strategy, we may be unable to
generate cash needed to make distributions to our stockholders and to maintain or increase the
value of our assets.
Our boards possible loyalties to existing advisor-sponsored programs (and possibly to future
advisor-sponsored programs) could result in our board approving transactions that are not in our
best interest and that reduce our net income and lower our distributions to stockholders.
One of our directors is also a director of our advisor which is an affiliate of the managing member
of another affiliate-sponsored program. The loyalties of this director to the other
affiliate-sponsored program may influence the judgment of our board when considering issues for us
that may affect the other affiliate-sponsored program, such as the following:
|
|
|
We could enter into transactions with the other program, such as
property sales or acquisitions, joint ventures or financing
arrangements. Decisions of our board regarding the terms of those
transactions may be influenced by our boards loyalties to the
other program. |
|
|
|
|
A decision of our board regarding the timing of a debt or equity
offering could be influenced by concerns that the offering would
compete with an offering of the other program. |
|
|
|
|
A decision of our board regarding the timing of property sales
could be influenced by concerns that the sales would compete with
those of the other program. |
|
|
|
|
We could also face similar conflicts and some additional conflicts
if our advisor or its affiliates sponsor additional REITs,
assuming some of our directors are also directors of the
additional REITs. |
13
Our independent directors must evaluate the performance of our advisor with respect to whether our
advisor is presenting to us our fair share of investment opportunities. If our advisor is not
presenting a sufficient number of investment opportunities to us because it is presenting many
opportunities to other advisor-sponsored entities or if our advisor is giving preferential
treatment to other advisor-sponsored entities in this regard, our independent directors may need to
enforce our rights under the terms of the advisory agreement or seek a new advisor.
We are dependent upon our advisor and its affiliates to conduct our operations and to fund our
organization and offering activities. Any adverse changes in the financial health of our advisor
or its affiliates or our relationship with them could hinder our operating performance and the
return on your investment. If our advisor became unable to fund our organization and offering
expenses, we may sell fewer shares in this offering, we may be unable to acquire a diversified
portfolio of properties, our operating expenses may be a larger percentage of our revenue and our
net income may be lower.
We are dependent on Cornerstone Realty Advisors to manage our operations and our portfolio of real
estate assets. Our advisor has limited operating history and it will depend upon the fees and
other compensation that it will receive from us in connection with the purchase, management and
sale of our properties to conduct its operations. To date, the fees we pay to our advisor have
been inadequate to cover its operating expenses. To cover its operational shortfalls, our advisor
has relied on cash raised in private offerings of its sole member as well as private offerings of
an affiliate that has made loans to our advisors sole member. Of these private offerings, the
only one that is ongoing is the private offering of the affiliate that has made loans to our
advisors sole member. A FINRA inquiry concluded in December 2009, which relates to such private
offerings, could adversely affect the success of such private offerings or future private
capital-raising efforts. If our advisor is unable to secure additional capital, it may become
unable to meet its obligations and we might be required to find alternative service providers,
which could result in a significant disruption of our business and may adversely affect the value
of our stockholders investments in us. Furthermore, to the extent that our advisor is unable to
raise adequate funds to support our organization and offering activities, our ability to raise
money in our follow-on offering could be adversely affected. If we sell fewer shares in our
follow-on offering, we may be unable to acquire a diversified portfolio of properties, our
operating expenses may be a larger percentage of our revenue and our net income may be lower.
We are dependent on our affiliated dealer manager to raise funds in our follow-on public offering.
Events that prevent our dealer manager from serving in that capacity would jeopardize the success
of our offering and could reduce the value of our stockholders investments in us.
The success of our follow-on public offering depends to a large degree on the capital-raising
efforts of our affiliated dealer manager. If we were unable to raise significant capital in our
offering, our general and administrative costs would be likely to continue to represent a larger
portion of our revenues than would otherwise be the case, which would likely adversely affect the
value of our stockholders investments in us. In addition, lower offering proceeds would limit the
diversification of our portfolio, which would cause the value of investments in us to be more
dependent on the performance of any one of our properties. Therefore, the value of our
stockholders investments in us could depend on the success of our offering.
We believe that it could be difficult to secure the services of another dealer manager for a public
offering of our shares should our affiliated dealer manager be unable to serve in that capacity.
Therefore, any event that hinders the ability of our dealer manager to conduct offerings on our
behalf would jeopardize the success of our offering and, as described above, could adversely affect
the value of investments in us. A number of outcomes could impair our dealer managers ability to
successfully serve in that capacity.
Our dealer manager has limited capital. In order to conduct its operations, our dealer manager
depends on transaction-based compensation that it earns in connection with offerings in which it
participates. If our dealer manager does not earn sufficient revenues from the offerings that it
manages, it may not have sufficient resources to retain the personnel necessary to market and sell
large amounts of shares on our behalf. In addition, our dealer manager has also relied on our
affiliates in order to fund its operations, and our affiliates have relied on private offerings in
order to make such equity investments in our dealer manager. Should our affiliates become unable
or unwilling to make further equity investments in our dealer manager, our dealer managers
operations and its ability to conduct a successful public offering for us could suffer.
Our dealer manager operates in a highly regulated area and must comply with a complex scheme of
federal and state securities laws and regulations as well as the rules imposed by FINRA. In some
cases, there may not be clear authority regarding the interpretation of regulations applicable to
our dealer manager. In such an environment, the risk of sanctions by regulatory authorities is
heightened. Although these risks are also shared by other dealer managers of public offerings, the
risks may be greater for our dealer manager because of the limited financial resources of our
dealer manager and its affiliates. Limited financial resources may make it more difficult for our
dealer manager to endure regulatory sanctions and to continue to serve effectively as the dealer
manager of our offering.
14
Risks Related to Our Corporate Structure
A limit on the percentage of our securities a person may own may discourage a takeover or business
combination, which could prevent our stockholders from realizing a premium price for their stock.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially
owned, directly or indirectly, by five or fewer individuals (including certain types of entities)
at any time during the last half of each taxable year. To assure that we do not fail to qualify as
a REIT under this test, our charter restricts direct or indirect ownership by one person or entity
to no more than 9.8% in number of shares or value, whichever is more restrictive, of the
outstanding shares of any class or series of our stock unless exempted by our board of directors.
This restriction may have the effect of delaying, deferring or preventing a change in control of
us, including an extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price to our stockholders.
Our charter permits our board of directors to issue stock with terms that may subordinate the
rights of our common stockholders or discourage a third party from acquiring us in a manner that
could result in a premium price to our stockholders.
Our board of directors may increase or decrease the aggregate number of shares of stock or the
number of shares of stock of any class or series that we have authority to issue and classify or
reclassify any unissued common stock or preferred stock and establish the preferences, conversion
or other rights, voting powers, restrictions, limitations as to distributions, qualifications and
terms or conditions of redemption of any such stock. Our board of directors could authorize the
issuance of preferred stock with terms and conditions that could have priority as to distributions
and amounts payable upon liquidation over the rights of the holders of our common stock. Such
preferred stock could also have the effect of delaying, deferring or preventing a change in control
of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price to holders of our common stock.
The payment of the subordinated performance fee due upon termination, and the purchase of interests
in our operating partnership held by our advisor and its affiliates as required in our advisory
agreement, may discourage a takeover attempt that could have resulted in a premium price to our
stockholders.
In the event of a merger in which we are not the surviving entity, and pursuant to which our
advisory agreement is terminated, our advisor and its affiliates may require that we pay the
subordinated performance fee due upon termination, and that we purchase all or a portion of the
operating partnership units they hold at any time thereafter for cash, or our stock, as determined
by the seller. The subordinated performance fee due upon termination ranges from a low of 5% if
the sum of the appraised value of our assets minus our liabilities on the date the advisory
agreement is terminated plus total distributions (other than stock distributions) paid prior to
termination of the advisory agreement exceeds the amount of invested capital plus annualized
returns of 6%, to a high of 15% if the sum of the appraised value of our assets minus our
liabilities plus all prior distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 10% or more. This deterrence may limit the opportunity
for stockholders to receive a premium for their stock that might otherwise exist if an investor
attempted to acquire us through a merger.
Our stockholders will have limited control over changes in our policies and operations, which
increases the uncertainty and risks of an investment in us.
Our board of directors determines our major policies, including our policies regarding financing,
growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend
or revise these and other policies without a vote of the stockholders. Under Maryland General
Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our
boards broad discretion in setting policies and our stockholders inability to exert control over
those policies increases the uncertainty and risks of an investment in us.
A stockholders interest in us may be diluted if we issue additional stock.
Our stockholders do not have preemptive rights to any stock we issue in the future. Therefore, in
the event that we (1) sell stock in the future, including stock issued pursuant to our distribution
reinvestment plan, (2) sell securities that are convertible into stock, (3) issue stock in a
private offering, (4) issue stock upon the exercise of the options granted to our independent
directors, employees of our advisor or others, or (5) issue stock to sellers of properties acquired
by us in connection with an exchange of limited partnership interests in our operating partnership,
investors purchasing stock in our offerings will experience dilution of their percentage ownership
in us. Depending on the terms of such transactions, most notably the price per share, which may be
less than the price paid per share in our offerings, and the value of our properties, investors in
our offerings might also experience a dilution in the book value per share of their stock.
15
A stockholders interest in us may be diluted if we acquire properties for units in our operating
partnership.
Holders of units of our operating partnership will receive distributions per unit in the same
amount as the distributions we pay per share to our stockholders and will generally have the right
to exchange their units of our operating partnership for cash or shares of our stock (at our
option). In the event we issue units in our operating partnership in exchange for properties,
investors purchasing stock in our offerings will experience potential dilution in their percentage
ownership interest in us. Depending on the terms of such transactions, most notably the price per
unit, which may be less than the price paid per share in our offerings, the value of our properties
and the value of the properties we acquire through the issuance of units of limited partnership
interests in our operating partnership, investors in our offerings might also experience a dilution
in the book value per share of their stock.
Although we are not currently afforded the protection of the Maryland General Corporation Law
relating to business combinations our board of directors could opt into these provisions of
Maryland law in the future, which may discourage others from trying to acquire control of us and
may prevent our stockholders from receiving a premium price for their stock in connection with a
business combination.
Under Maryland law, business combinations between a Maryland corporation and certain interested
stockholders or affiliates of interested stockholders are prohibited for five years after the most
recent date on which the interested stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange, or, in circumstances specified in the
statute, an asset transfer or issuance or reclassification of equity securities. Also under
Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have
no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter. Shares owned by the acquirer, by officers or by directors who are employees of
the corporation are not entitled to vote on the matter. Should our board opt into these provisions
of Maryland law, it may discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland
General Corporation Law could provide similar anti-takeover protection.
Our stockholders and our rights to recover claims against our independent directors are limited,
which could reduce our stockholders and our recovery against our independent directors if they
negligently cause us to incur losses.
Our charter provides that no independent director shall be liable to us or our stockholders for
monetary damages and that we will generally indemnify them for losses unless they are grossly
negligent or engage in willful misconduct. As a result, our stockholders and we may have more
limited rights against our independent directors than might otherwise exist under common law, which
could reduce our stockholders and our recovery from these persons if they act in a negligent
manner. In addition, we may be obligated to fund the defense costs incurred by our independent
directors (as well as by our other directors, officers, employees and agents) in some cases, which
would decrease the cash otherwise available for distributions to our stockholders.
Stockholders cannot currently, and may not in the future be able to sell their stock under our
stock repurchase program.
Our board of directors has amended our stock repurchase program to suspend redemptions under the
program, effective December 31, 2010. Our board of directors may amend our stock repurchase program
to suspend repurchases or amend other terms without stockholder approval. Our board is also free to
terminate the program at any time upon 30 days written notice to our stockholders. In addition,
the stock repurchase program includes numerous restrictions that would limit our stockholders
ability to sell stock.
The offering price was not established on an independent basis and stockholders may be paying more
for our stock than its value or the amount our stockholders would receive upon liquidation.
The offering price of our shares of stock bears no relationship to our book or asset value or to
any other established criteria for valuing stock. The board of directors considered the following
factors in determining the offering price for our common stock:
|
|
|
the offering prices of comparable non-traded REITs; and |
|
|
|
|
the recommendation of the dealer manager. |
However, the offering price is likely to be higher than the price at which our stockholders could
resell their shares because (1) our public offering involves the payment of underwriting
compensation and other directed selling efforts, which payments and efforts are likely to produce a
higher sales price than could otherwise be obtained, and (2) there is no public market for our
shares. Moreover, the offering price is likely to be higher than the amount our stockholders would
receive per share if we were to liquidate at this time because of the up-front fees that we pay in
connection with the issuance of our shares as well as the recent reduction in the demand for real
estate as a result of the recent credit market disruptions and economic slowdown.
16
Because the dealer manager is one of our affiliates, investors in our stock will not have the
benefit of an independent review of us or our prospectus customarily undertaken in underwritten
offerings.
The dealer manager of our offerings, Pacific Cornerstone Capital, Inc., is an affiliate of our
advisor and will not make an independent review of us or our offerings. Accordingly, investors in
our stock do not have the benefit of an independent review of the terms of our offerings. Further,
the due diligence investigation of us by the dealer manager cannot be considered to be an
independent review and, therefore, may not be as meaningful as a review conducted by an
unaffiliated broker-dealer or investment banker.
Payment of fees to our Advisor and its affiliates will reduce cash available for investment and
distribution.
Our advisor and its affiliates will perform services for us in connection with the offer and sale
of our stock, the selection and acquisition of our properties, and possibly the management and
leasing of our properties. They will be paid significant fees for these services, which will
reduce the amount of cash available for investment in properties and distribution to stockholders.
The fees to be paid to our advisor and its affiliates were not determined on an arms-length basis.
We cannot be sure that a third-party unaffiliated with our advisor would not be willing to provide
such services to us at a lower price.
We may also pay significant fees during our listing/liquidation stage. Although most of the fees
payable during our listing/liquidation stage are contingent on our investors first enjoying
agreed-upon investment returns, affiliates of our advisor could also receive significant payments
even without our reaching the investment-return thresholds should we seek to become self-managed.
Due to the apparent preference of the public markets for self-managed companies, a decision to list
our shares on a national securities exchange might well be preceded by a decision to become
self-managed. And given our advisors familiarity with our assets and operations, we might prefer
to become self-managed by acquiring entities affiliated with our advisor. Such an internalization
transaction could result in significant payments to affiliates of our advisor irrespective of
whether our stockholders enjoyed the returns on which we have conditioned other performance-based
compensation.
These fees increase the risk that the amount available for payment of distributions to our
stockholders upon a liquidation of our portfolio would be less than the purchase price of the
shares of stock in the offering. Substantial up-front fees also increase the risk that our
stockholders will not be able to resell their shares of stock at a profit, even if our stock is
listed on a national securities exchange.
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders
could be reduced and the value of our investments could decline.
If we need additional capital in the future to improve or maintain our properties or for any other
reason, we will have to obtain financing from other sources, such as cash flow from operations,
borrowings, property sales or future equity offerings. These sources of funding may not be
available on attractive terms or at all. If we cannot procure additional funding for capital
improvements, our investments may generate lower cash flows or decline in value, or both.
Our advisor does not have as strong an economic incentive to avoid losses as do sponsors who have
made significant equity investments in the companies they sponsor.
Terry G. Roussel, our chief executive officer and an affiliate of our advisor, has invested $1,000
in 125 shares of our stock. As of the date of this report, our advisor and its affiliates have only
invested $200,000 in Cornerstone Operating Partnership, L.P. Without significant exposure for our
advisor, our investors may be at a greater risk of loss because our advisor and its affiliates do
not have as much to lose from a decrease in the value of our stock as do those sponsors who make
more significant equity investments in the companies they sponsor.
General Risks Related to Investments in Real Estate and Real Estate Related Investments
Economic and regulatory changes that impact the real estate market may reduce our net income and
the value of our properties.
We are subject to risks related to the ownership and operation of real estate, including but not
limited to:
|
|
|
worsening general or local economic conditions and financial
markets could cause lower demand, tenant defaults, and reduced
occupancy and rental rates, some or all of which would cause an
overall decrease in revenue from rents; |
|
|
|
|
increases in competing properties in an area which could require increased concessions to tenants and reduced rental rates; |
|
|
|
|
increases in interest rates or unavailability of permanent
mortgage funds which may render the sale of a property difficult
or unattractive; and |
17
|
|
|
changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes. |
Some or all of the foregoing factors may affect our properties, which would reduce our net income,
and our ability to make distributions to our stockholders.
Lease terminations could reduce our revenues from rents and our distributions to our stockholders
and cause the value of our stockholders investment in us to decline.
The success of our investments depends upon the occupancy levels, rental income and operating
expenses of our properties and our company. In the event of a tenant default or bankruptcy, we may
experience delays in enforcing our rights as landlord and may incur costs in protecting our
investment and re-leasing our property. In the event of tenant default or bankruptcy, or lease
terminations or expiration, we may be unable to re-lease the property for the rent previously
received. We may be unable to sell a property with low occupancy without incurring a loss. These
events and others could cause us to reduce the amount of distributions we make to stockholders and
the value of our stockholders investment in us to decline.
Rising expenses at both the property and the company level could reduce our net income and our cash
available for distribution to stockholders.
Our properties are subject to operating risks common to real estate in general, any or all of which
may reduce our net income. If any property is not substantially occupied or if rents are being
paid in an amount that is insufficient to cover operating expenses, we could be required to expend
funds with respect to that property for operating expenses. The properties are subject to
increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance
and administrative expenses. If we are unable to lease properties on a basis requiring the tenants
to pay such expenses, we would be required to pay some or all of those costs which would reduce our
income and cash available for distribution to stockholders.
Costs incurred in complying with governmental laws and regulations may reduce our net income and
the cash available for distributions.
Our company and the properties we own are subject to federal, state and local laws and regulations
relating to environmental protection and human health and safety. Federal laws such as the
National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and
Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act,
the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community
Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges,
air emissions, the operation and removal of underground and above-ground storage tanks, the use,
storage, treatment, transportation and disposal of solid and hazardous materials and the
remediation of contamination associated with disposals. The properties we own and those we expect
to acquire are subject to the Americans with Disabilities Act of 1990 which generally requires
that certain types of buildings and services be made accessible and available to people with
disabilities. These laws may require us to make modifications to our properties. Some of these
laws and regulations impose joint and several liability on tenants, owners or operators for the
costs to investigate or remediate contaminated properties, regardless of fault or whether the acts
causing the contamination were legal. Compliance with these laws and any new or more stringent
laws or regulations may require us to incur material expenditures. Future laws, ordinances or
regulations may impose material environmental liability. In addition, there are various federal,
state and local fire, health, life-safety and similar regulations with which we may be required to
comply, and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants operations, the existing condition of land when we
buy it, operations in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties. The presence of hazardous substances, or the
failure to properly remediate these substances, may make it difficult or impossible to sell or rent
such property. Any material expenditures, fines, or damages we must pay will reduce our ability to
make distributions and may reduce the value of our stockholders investment in us.
Discovery of environmentally hazardous conditions may reduce our cash available for distribution to
our stockholders.
Under various federal, state and local environmental laws, ordinances and regulations, a current or
previous real property owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on, under or in such property. These costs could be substantial.
Such laws often impose liability whether or not the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures or prevent us from entering into leases with
prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions
for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by
private parties. Certain environmental laws and common law principles could be used to impose
liability for release of and exposure to hazardous substances, including asbestos-containing
materials into the air. Third parties may seek recovery from real property owners or operators for
personal injury or property damage associated with exposure to released hazardous substances. The
cost of defending against claims of liability, of complying with
18
environmental regulatory requirements, of remediating any contaminated property, or of paying
personal injury claims could be substantial and reduce our ability to make distributions and the
value of our stockholders investments in us.
Any uninsured losses or high insurance premiums will reduce our net income and the amount of our
cash distributions to stockholders.
Our advisor will attempt to obtain adequate insurance to cover significant areas of risk to us as a
company and to our properties. However, there are types of losses at the property level, generally
catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods,
hurricanes, pollution or environmental matters, which are uninsurable or not economically
insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We
may not have adequate coverage for such losses. If any of our properties incurs a casualty loss
that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In
addition, other than any working capital reserve or other reserves we may establish, we have no
source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we
must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would
result in lower distributions to stockholders.
We may have difficulty selling real estate investments, and our ability to distribute all or a
portion of the net proceeds from such sale to our stockholders may be limited.
Equity real estate investments are relatively illiquid. Therefore, we will have a limited ability
to vary our portfolio in response to changes in economic or other conditions. In addition, the
liquidity of real estate investments has been further reduced by the recent turmoil in the capital
markets, which has constrained equity and debt capital available for investment in commercial real
estate, resulting in fewer buyers seeking to acquire commercial properties and consequent
reductions in property values. As a result of these factors, we will also have a limited ability
to sell assets in order to fund working capital and similar capital needs. When we sell any of our
properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds
from the sale of properties to our stockholders; for example, we may use such proceeds to:
|
|
|
purchase additional properties; |
|
|
|
|
repay debt, if any; |
|
|
|
|
buy out interests of any co-venturers or other partners in any joint venture in which we are a party; |
|
|
|
|
create working capital reserves; or |
|
|
|
|
make repairs, maintenance, tenant improvements or other capital
improvements or expenditures to our remaining properties. |
Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that
is imposed on gain recognized by a REIT from the sale of property characterized as dealer property.
In order to ensure that we avoid such characterization, we may be required to hold our properties
for a minimum period of time, generally two years, and comply with certain other requirements in
the Internal Revenue Code.
Real estate market conditions at the time we decide to dispose of a property may be unfavorable
which could reduce the price we receive for a property and lower the return on our stockholders
investment in us.
We intend to hold the properties in which we invest until we determine that selling or otherwise
disposing of properties would help us to achieve our investment objectives. General economic
conditions, availability of financing, interest rates and other factors, including supply and
demand, all of which are beyond our control, affect the real estate market. We may be unable to
sell a property for the price, on the terms, or within the time frame we want. Accordingly, the
gain or loss on our stockholders investment in us could be affected by fluctuating market
conditions.
As part of otherwise attractive portfolios of properties, substantially all of which we can own on
an all-cash basis, we may acquire some properties with existing lock-out provisions which may
inhibit us from selling a property, or may require us to maintain specified debt levels for a
period of years on some properties.
Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing
properties. These provisions would affect our ability to turn our investments into cash and thus
affect cash available for distributions to our stockholders. Loan provisions may prohibit us from
reducing the outstanding indebtedness with respect to properties, refinancing such indebtedness on
a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such
properties.
19
Loan provisions could impair our ability to take actions that would otherwise be in the best
interests of our stockholders and, therefore, may have an adverse impact on the value of our stock,
relative to the value that would result if the loan provisions did not exist. In particular, loan
provisions could preclude us from participating in major transactions that could result in a
disposition of our assets or a change in control even though that disposition or change in control
might be in the best interests of our stockholders.
If we sell properties by providing financing to purchasers of our properties, distribution of net
sales proceeds to our stockholders would be delayed and defaults by the purchasers could reduce our
cash available for distribution to stockholders.
If we provide financing to purchasers, we will bear the risk that the purchaser may default.
Purchaser defaults could reduce our cash distributions to our stockholders. Even in the absence of
a purchaser default, the distribution of the proceeds of sales to our stockholders, or their
reinvestment in other assets, will be delayed until the promissory notes or other property we may
accept upon a sale are actually paid, sold, refinanced or otherwise disposed of or completion of
foreclosure proceedings.
Actions of our joint venture partners could subject us to liabilities in excess of those
contemplated or prevent us from taking actions that are in the best interests of our stockholders
which could result in lower investment returns to our stockholders.
We are likely to enter into joint ventures with affiliates and other third parties to acquire or
improve properties. We may also purchase properties in partnerships, co-tenancies or other
co-ownership arrangements. Such investments may involve risks not otherwise present when acquiring
real estate directly, including, for example:
|
|
|
joint venturers may share certain approval rights over major decisions; |
|
|
|
|
that such co-venturer, co-owner or partner may at any time have
economic or business interests or goals which are or which become
inconsistent with our business interests or goals, including
inconsistent goals relating to the sale of properties held in the
joint venture or the timing of termination or liquidation of the
joint venture; |
|
|
|
|
the possibility that our co-venturer, co-owner or partner in an investment might become insolvent or bankrupt; |
|
|
|
|
the possibility that we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner; |
|
|
|
|
that such co-venturer, co-owner or partner may be in a position to
take action contrary to our instructions or requests or contrary
to our policies or objectives, including our policy with respect
to qualifying and maintaining our qualification as a REIT; |
|
|
|
|
disputes between us and our joint venturers may result in
litigation or arbitration that would increase our expenses and
prevent its officers and directors from focusing their time and
effort on our business and result in subjecting the properties
owned by the applicable joint venture to additional risk; or |
|
|
|
|
that under certain joint venture arrangements, neither venture
partner may have the power to control the venture, and an impasse
could be reached which might have a negative influence on the
joint venture. |
These events might subject us to liabilities in excess of those contemplated and thus reduce our
stockholders investment returns. If we have a right of first refusal or buy/sell right to buy out
a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes
exercisable or we may be required to purchase such interest at a time when it would not otherwise
be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have
sufficient cash, available borrowing capacity or other capital resources to allow us to elect to
purchase an interest of a co-venturer subject to the buy/sell right, in which case we may be forced
to sell our interest as the result of the exercise of such right when we would otherwise prefer to
keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire
to exit the venture.
If we make or invest in mortgage loans, our mortgage loans may be affected by unfavorable real
estate market conditions, including interest rate fluctuations, which could decrease the value of
those loans and the return on our stockholders investments in us.
If we make or invest in mortgage loans, we will be at risk of defaults by the borrowers on those
mortgage loans as well as interest rate risks. To the extent we incur delays in liquidating such
defaulted mortgage loans; we may not be able to obtain sufficient proceeds to repay all amounts due
to us under the mortgage loan. Further, we will not know whether the values of the properties
securing the mortgage loans will remain at the levels existing on the dates of origination of those
mortgage loans. If the values of the underlying properties fall, our risk will increase because of
the lower value of the security associated with such loans. In addition, interest rate
fluctuations could reduce our returns as compared to market interest rates and reduce the value of
the mortgage loans in the event we sell them.
20
Delays in restructuring or liquidating non-performing mortgage loans could reduce the return on our
stockholders investment.
If we invest in mortgage loans, they may become non-performing after origination or acquisition for
a wide variety of reasons. Such non-performing loans may require a substantial amount of workout
negotiations and/or restructuring, which may entail, among other things, a substantial reduction in
the interest rate and a substantial write-down of the loan. However, even if a restructuring is
successfully accomplished, upon maturity of such loan, replacement takeout financing may not be
available. We may find it necessary or desirable to foreclose on some of the collateral securing
one or more of our investments. Intercreditor provisions may substantially interfere with our
ability to do so. Even if foreclosure is an option, the foreclosure process can be lengthy and
expensive. Borrowers often resist foreclosure actions by asserting numerous claims, counterclaims
and defenses, including, without limitation, lender liability claims and defenses, in an effort to
prolong the foreclosure action. In some states, foreclosure actions can take up to several years or
more to litigate. At any time during the foreclosure proceedings, the borrower may file for
bankruptcy, which would have the effect of staying the foreclosure action and further delaying the
foreclosure process. Foreclosure litigation tends to create a negative public image of the
collateral property and may result in disrupting ongoing leasing and management of the property.
Foreclosure actions by senior lenders may substantially affect the amount that we may receive from
an investment.
If a significant portion of our assets are deemed investment securities, we may become subject to
the Investment Company Act of 1940 which would restrict our operations and we could not continue
our business.
If we fail to qualify for an exemption or exception from the Investment Company Act of 1940, we
would be required to comply with numerous additional regulatory requirements and restrictions which
could adversely restrict our operations and force us to discontinue our business. Our investments
in real estate represent the substantial majority of our total asset mix, which would not subject
us to the Investment Company Act. If, however, in the future we originate or acquire mortgage
loans and make investments in joint ventures (not structured in compliance with the Investment
Company Act) and other investment assets that are deemed by the SEC or the courts to be investment
securities and these assets exceed 40% of the value of our total assets, we could be deemed to be
an investment company and subject to these additional regulatory and operational restrictions.
Even if otherwise deemed an investment company, we may qualify for an exception or exemption from
the Investment Company Act. For example, under the real estate/mortgage exception, entities that
are primarily engaged in the business of purchasing and otherwise acquiring mortgages and interests
in real estate are exempt from registration under the Investment Company Act. Under the real estate
exception, the SEC Staff has provided guidance that would require us to maintain 55% of our assets
in qualifying real estate interests. In order for an asset to constitute a qualifying real estate
interest or qualifying asset, the interest must meet various criteria. Fee interests in real estate
and whole mortgage loans are generally considered qualifying assets. If we were required to
register as an investment company but failed to do so, we would be prohibited from engaging in our
business, and criminal and civil actions could be brought against us. In addition, our contracts
would be unenforceable unless a court required enforcement, and a court could appoint a receiver to
take control of us and liquidate our business.
Risks Associated with Debt Financing
We expect to continue to use temporary acquisition financing to acquire properties and otherwise
incur other indebtedness, which will increase our expenses and could subject us to the risk of
losing properties in foreclosure if our cash flow is insufficient to make loan payments.
We used temporary acquisition financing to acquire nine of the thirteen properties we own as of
December 31, 2010. We may continue to use temporary acquisition financing to acquire additional
properties. This will enable us to acquire properties before we have raised offering proceeds for
the entire purchase price. We plan to use subsequently raised offering proceeds to pay off the
temporary acquisition financing.
We may borrow funds for operations, tenant improvements, capital improvements or for other working
capital needs. We may also borrow funds to make distributions including but not limited to funds
to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual
REIT taxable income to our stockholders. We may also borrow if we otherwise deem it necessary or
advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes.
To the extent we borrow funds, we may raise additional equity capital or sell properties to pay
such debt.
If there is a shortfall between the cash flow from a property and the cash flow needed to service
temporary acquisition financing on that property, then the amount available for distributions to
stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since
defaults on indebtedness secured by a property may result in lenders initiating foreclosure
actions. In that case, we could lose the property securing the loan that is in default. For tax
purposes, a foreclosure of any of our properties would be treated as a sale of the property for a
purchase price equal to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we
would recognize taxable income on foreclosure,
but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of
mortgage debt to the entities that own
21
our properties. When we give a guaranty on behalf of an
entity that owns one of our properties, we will be responsible to the lender for satisfaction of
the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or
cross-default provisions, a default on a single property could affect multiple properties.
Liquidity in the global credit markets has been significantly contracted by market disruptions
during the past several years, making it costly to obtain new debt financing, when debt financing
is available at all. To the extent that market conditions prevent us from obtaining temporary
acquisition financing on financially attractive terms, our ability to make suitable investments in
commercial real estate could be delayed or limited. If we are unable to invest the proceeds from
this offering in suitable real estate investments for an extended period of time, distributions to
our stockholders may be suspended and may be lower and the value of investments in our shares could
be reduced.
Lenders may require us to enter into restrictive covenants relating to our operations, which could
limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and
operating policies and our ability to incur additional debt. Loan documents we have entered into
contain covenants that limit our ability to further mortgage the property, discontinue insurance
coverage, or replace our advisor. These or other limitations may limit our flexibility and prevent
us from achieving our operating plans.
High levels of debt or increases in interest rates could increase the amount of our loan payments,
reduce the cash available for distribution to stockholders and subject us to the risk of losing
properties in foreclosure if our cash flow is insufficient to make loan payments.
Our policies do not limit us from incurring debt. High debt levels would cause us to incur higher
interest charges, would result in higher debt service payments, and could be accompanied by
restrictive covenants. Interest we pay could reduce cash available for distribution to
stockholders. Additionally, variable rate debt could result in increases in interest rates which
would increase our interest costs, which would reduce our cash flows and our ability to make
distributions to our stockholders. In addition, if we need to repay existing debt during periods
of rising interest rates, we could be required to liquidate one or more of our investments in
properties at times which may not permit realization of the maximum return on such investments and
could result in a loss.
Federal Income Tax Risks
If we fail to qualify as a REIT, we will be subjected to tax on our income and the amount of
distributions we make to our stockholders will be less.
We have elected to be taxed as a REIT under the Internal Revenue Code. A REIT generally is not
taxed at the corporate level on income it currently distributes to its stockholders. Qualification
as a REIT involves the application of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The determination of various factual matters
and circumstances not entirely within our control may affect our ability to continue to qualify as
a REIT. In addition, new legislation, regulations, administrative interpretations or court
decisions could significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification.
If we were to fail to qualify as a REIT in any taxable year:
|
|
|
we would not be allowed to deduct our distributions to our stockholders when computing our taxable income; |
|
|
|
|
we would be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at
regular corporate rates; |
|
|
|
|
we would be disqualified from being taxed as a REIT for the four
taxable years following the year during which qualification was
lost, unless entitled to relief under certain statutory
provisions; |
|
|
|
|
we would have less cash to make distributions to our stockholders; and |
|
|
|
|
we might be required to borrow additional funds or sell some of
our assets in order to pay corporate tax obligations we may incur
as a result of our disqualification. |
22
Even if we maintain our status as a REIT, we may be subject to federal and state income taxes in
certain events, which would reduce our cash available for distribution to our stockholders.
Net income from a prohibited transaction will be subject to a 100% tax. We may not be able to
pay sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to
retain income we earn from the sale or other disposition of our property and pay income tax
directly on such income. In that event, our stockholders would be treated as if they earned that
income and paid the tax on it directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed payment of such tax
liability. We may also be subject to state and local taxes on our income or property, either
directly or at the level of our operating partnership or at the level of the other companies
through which we indirectly own our assets. Any federal or state taxes we pay will reduce the cash
available to make distributions to our stockholders.
To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which
may delay or hinder our ability to meet our investment objectives and reduce the overall return to
our stockholders.
To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other
things, the sources of our income, nature of our assets and the amounts we distribute to our
stockholders. We may be required to make distributions to stockholders at times when it would be
more advantageous to reinvest cash in our business or when we do not have funds readily available
for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on
the basis of maximizing profits and the value of our stockholders investments in us.
If our operating partnership is classified as a publicly-traded partnership under the Internal
Revenue Code, it will be subjected to tax on our income and the amount of distributions we make to
our stockholders will be less.
We structured our operating partnership so that it would be classified as a partnership for federal
income tax purposes. In this regard, the Internal Revenue Code generally classifies publicly
traded partnerships (as defined in Section 7704 of the Internal Revenue Code) as associations
taxable as corporations (rather than as partnerships), unless substantially all of their taxable
income consists of specified types of passive income. In order to minimize the risk that the
Internal Revenue Code would classify our operating partnership as a publicly traded partnership
for tax purposes, we placed certain restrictions on the transfer and/or redemption of partnership
units in our operating partnership. If the Internal Revenue Service were to assert successfully
that our operating partnership is a publicly traded partnership, and substantially all of our
operating partnerships gross income did not consist of the specified types of passive income, the
Internal Revenue Code would treat our operating partnership as an association taxable as a
corporation. In such event, the character of our assets and items of gross income would change and
would prevent us from qualifying and maintaining our status as a REIT. In addition, the imposition
of a corporate tax on our operating partnership would reduce the amount of cash distributable to us
from our operating partnership and therefore would reduce our amount of cash available to make
distributions to you.
Distributions payable by REITs do not qualify for the reduced tax rates under recently enacted tax
legislation.
Recently enacted tax legislation generally reduces the maximum tax rate for dividend distributions
payable by corporations to individuals meeting certain requirements to 15% through 2010.
Distributions payable by REITs, however, generally continue to be taxed at the normal rate
applicable to the individual recipient, rather than the 15% preferential rate. Although this
legislation does not adversely affect the taxation of REITs or distributions paid by REITs, the
more favorable rates applicable to regular corporate distributions could cause investors who are
individuals to perceive investments in REITs to be relatively less attractive than investments in
the stocks of non-REIT corporations that make distributions, which could reduce the value of the
stock of REITs, including our stock.
Distributions to tax-exempt investors may be classified as unrelated business taxable income and
tax-exempt investors would be required to pay tax on the unrelated business taxable income and to
file income tax returns.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the
sale of stock should generally constitute unrelated business taxable income to a tax-exempt
investor. However, there are certain exceptions to this rule. In particular:
|
|
|
under certain circumstances, part of the income and gain
recognized by certain qualified employee pension trusts with
respect to our stock may be treated as unrelated business taxable
income if our stock is predominately held by qualified employee
pension trusts, such that we are a pension-held REIT (which we
do not expect to be the case); |
|
|
|
|
part of the income and gain recognized by a tax exempt investor
with respect to our stock would constitute unrelated business
taxable income if such investor incurs debt in order to acquire
the common stock; and |
|
|
|
|
part or all of the income or gain recognized with respect to our
stock held by social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and
qualified group legal services plans which are exempt from federal
income taxation under Sections 501(c)(7), (9), (17), or (20) of
the Code may be treated as unrelated business taxable income. |
23
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2010, our portfolio consists of thirteen properties which were approximately
70.26% leased. The following table provides summary information regarding our properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
Square |
|
|
Purchase |
|
|
|
|
|
|
2010 |
|
Property |
|
Location |
|
Date Purchased |
|
Footage |
|
|
Price |
|
|
Debt |
|
|
% Leased |
|
2111 South Industrial Park |
|
North Tempe, AZ |
|
June 1, 2006 |
|
|
26,800 |
|
|
$ |
1,975,000 |
|
|
$ |
|
|
|
|
65.67 |
% |
Shoemaker Industrial Buildings |
|
Santa Fe Springs, CA |
|
June 30, 2006 |
|
|
18,921 |
|
|
|
2,400,000 |
|
|
|
|
|
|
|
100.00 |
% |
15172 Goldenwest Circle |
|
Westminster, CA |
|
December 1, 2006 |
|
|
102,200 |
|
|
|
11,200,000 |
|
|
|
2,328,000 |
|
|
|
0.00 |
%(1) |
20100 Western Avenue |
|
Torrance, CA |
|
December 1, 2006 |
|
|
116,433 |
|
|
|
19,650,000 |
|
|
|
3,876,000 |
|
|
|
74.23 |
% |
Mack Deer Valley |
|
Phoenix, AZ |
|
January 21, 2007 |
|
|
180,985 |
|
|
|
23,150,000 |
|
|
|
3,188,000 |
|
|
|
100.00 |
% |
Marathon Center |
|
Tampa Bay, FL |
|
April 2, 2007 |
|
|
52,020 |
|
|
|
4,450,000 |
|
|
|
|
|
|
|
26.07 |
% |
Pinnacle Park Business Center |
|
Phoenix, AZ |
|
October 2, 2007 |
|
|
159,661 |
|
|
|
20,050,000 |
|
|
|
3,753,000 |
|
|
|
100.00 |
% |
Orlando Small Bay Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter |
|
Winter Garden, FL |
|
November 15, 2007 |
|
|
49,125 |
|
|
|
|
|
|
|
|
|
|
|
58.02 |
% |
Goldenrod |
|
Orlando, FL |
|
November 15, 2007 |
|
|
78,646 |
|
|
|
|
|
|
|
|
|
|
|
61.82 |
% |
Hanging Moss |
|
Orlando, FL |
|
November 15, 2007 |
|
|
94,200 |
|
|
|
|
|
|
|
|
|
|
|
93.63 |
% |
Monroe South |
|
Sanford, FL |
|
November 15, 2007 |
|
|
172,500 |
|
|
|
|
|
|
|
|
|
|
|
60.70 |
% |
Orlando Small Bay Portfolio |
|
|
|
|
|
|
394,471 |
|
|
|
37,128,000 |
|
|
|
15,860,000 |
|
|
|
68.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monroe North Commerce Center |
|
Sanford, FL |
|
April 17, 2008 |
|
|
181,348 |
|
|
|
14,275,000 |
|
|
|
6,869,000 |
|
|
|
63.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1830 Santa Fe |
|
Santa Ana, CA |
|
August 5, 2010 |
|
|
12,200 |
|
|
|
1,315,000 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,245,039 |
|
|
$ |
135,593,000 |
|
|
$ |
35,874,000 |
|
|
|
70.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On September 27, 2010, the United States Bankruptcy Court for the
District of Delaware granted the motion of debtor Universal
Building Products, the parent company of the single tenant
occupying 15172 Goldenwest Circle, to set aside the tenants
lease of 15172 Goldenwest Circle. Rental income from this tenant
represents 6.76% of total revenue for the year ended December 31,
2010. The tenant vacated the property on October 1, 2010 and we
have engaged an experienced broker to re-lease the property. |
Historical Occupancy
The following table sets forth annualized occupancy rates for our material properties for the past
five years (or such shorter period for which information is available):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized Percent Leased (%) |
Property |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
15172 Goldenwest Circle |
|
|
75 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
20100 Western Avenue |
|
|
74 |
|
|
|
63 |
|
|
|
100 |
|
|
|
95 |
|
|
|
100 |
|
Mack Deer Valley |
|
|
100 |
|
|
|
80 |
|
|
|
80 |
|
|
|
99 |
|
|
|
44 |
(2) |
Pinnacle Park Business Center |
|
|
100 |
|
|
|
100 |
|
|
|
99 |
|
|
|
96 |
|
|
|
53 |
(2) |
Orlando Small Bay Portfolio |
|
|
71 |
|
|
|
77 |
|
|
|
94 |
|
|
|
97 |
|
|
|
|
(1) |
Monroe North Commerce Center |
|
|
47 |
|
|
|
82 |
|
|
|
100 |
|
|
|
98 |
|
|
|
|
(1) |
|
|
|
(1) |
|
Pre-acquisition leasing information not available. |
24
|
|
|
(2) |
|
These projects completed construction and were put in operation during
third quarter of 2006. Accordingly, these numbers represent the
leasing-up period for these projects. |
Historical Annualized Average Rents
The following table sets forth average effective annualized rent per square foot for our material
properties for the past five years (or such shorter period for which information is available):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Effective Annualized Rent per Square Foot (3) |
Property |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
15172 Goldenwest Circle |
|
$ |
7.49 |
|
|
$ |
8.10 |
|
|
$ |
7.29 |
|
|
$ |
7.56 |
|
|
$ |
7.10 |
|
20100 Western Avenue |
|
$ |
10.21 |
|
|
$ |
10.16 |
|
|
$ |
11.41 |
|
|
$ |
11.35 |
|
|
$ |
11.26 |
|
Mack Deer Valley |
|
$ |
7.93 |
|
|
$ |
8.87 |
|
|
$ |
8.73 |
|
|
$ |
7.75 |
|
|
$ |
3.74 |
(2) |
Pinnacle Park Business Center |
|
$ |
7.00 |
|
|
$ |
6.78 |
|
|
$ |
7.65 |
|
|
$ |
8.24 |
|
|
$ |
1.43 |
(2) |
Orlando Small Bay Portfolio |
|
$ |
7.27 |
|
|
$ |
7.71 |
|
|
$ |
7.59 |
|
|
$ |
7.35 |
|
|
$ |
|
(1) |
Monroe North Commerce Center |
|
$ |
7.64 |
|
|
$ |
6.83 |
|
|
$ |
5.83 |
|
|
$ |
5.87 |
|
|
$ |
|
(1) |
|
|
|
(1) |
|
Pre-acquisition leasing information not available. |
|
(2) |
|
These projects completed construction and were put in operation during
third quarter of 2006. Accordingly, these numbers represent the
lease-up period for these projects. |
|
(3) |
|
Average effective annualized rent per square foot is calculated by
dividing annual rental revenues by sum of quarterly occupied square
footage. |
Portfolio Lease Expirations
The following table sets forth lease expiration information for each of the ten years following
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Approx. |
|
|
|
|
|
|
Total |
|
|
Percent of |
|
|
|
|
|
|
|
Amount of |
|
|
Base Rent |
|
|
Leasable |
|
|
Total |
|
|
|
No. of |
|
|
Expiring |
|
|
of Expiring |
|
|
Area |
|
|
Annual Base |
|
Year Ending |
|
Leases |
|
|
Leases |
|
|
Leases |
|
|
Expiring |
|
|
Rent Expiring |
|
December 31 |
|
Expiring |
|
|
(Sq. Feet) |
|
|
(Annual $) |
|
|
(%) |
|
|
(%) |
|
Month to Month |
|
|
3 |
|
|
|
6,775 |
|
|
|
28,000 |
|
|
|
0.5 |
% |
|
|
0.4 |
% |
2011 |
|
|
56 |
(1) |
|
|
366,007 |
|
|
|
2,702,000 |
|
|
|
29.4 |
% |
|
|
41.3 |
% |
2012 |
|
|
19 |
|
|
|
185,605 |
|
|
|
1,365,000 |
|
|
|
14.9 |
% |
|
|
20.9 |
% |
2013 |
|
|
26 |
|
|
|
210,150 |
|
|
|
1,485,000 |
|
|
|
16.9 |
% |
|
|
22.7 |
% |
2014 |
|
|
12 |
|
|
|
128,048 |
|
|
|
563,000 |
|
|
|
10.3 |
% |
|
|
8.6 |
% |
2015 |
|
|
4 |
|
|
|
24,904 |
|
|
|
183,000 |
|
|
|
2.0 |
% |
|
|
2.8 |
% |
2016 |
|
|
3 |
|
|
|
38,094 |
|
|
|
217,000 |
|
|
|
3.1 |
% |
|
|
3.3 |
% |
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
$ |
959,583 |
|
|
$ |
6,543,000 |
|
|
|
77.1 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Although a majority of the leases expire within the next twelve
months, historically, we have experienced a greater than 54%
renewal rate with existing tenants. Renewal terms typically range
from 1 to 3 years. |
25
Real Estate-Related Investment
As of December 31, 2010 and 2009, we had invested in one real estate loan receivable, the Sherburne
Commons Mortgage Loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value |
|
Book Value |
|
|
|
|
|
|
Loan Name |
|
|
|
|
|
|
|
|
|
|
|
|
|
as of |
|
as of |
|
|
|
|
|
|
Location of Related |
|
Date |
|
|
|
|
|
Payment |
|
December 31, |
|
December 31, |
|
Rate |
|
Annual |
|
Maturity |
Property or Collateral |
|
Originated |
|
Loan Type |
|
Type |
|
2010 |
|
2009 |
|
Type |
|
Interest Rate |
|
Date |
Sherburne Commons
Mortgage Loan
Nantucket,
Massachusetts |
|
|
12/14/2009 |
|
|
1st Mortgage |
|
Interest Only |
|
$ |
8,000,000 |
|
|
$ |
6,911,000 |
|
|
Fixed |
|
|
8.0 |
% |
|
|
1/1/2015 |
|
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we may become subject to legal proceeding,
claims, or disputes. As of the date hereof, we are not a party to any pending legal proceedings.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
During the period covered by this report, there was no established public trading market for our
shares of common stock. In order for Financial Industry Regulatory Authority (FINRA) members to
participate in the offering and sale of shares of common stock pursuant to our ongoing public
offerings, we are required to disclose in each annual report distributed to stockholders a per
share estimated value of the shares, the method by which it was developed and the date of the data
used to develop the estimated value. In addition, we prepare annual statements of estimated share
values to assist fiduciaries of retirement plans subject to the annual reporting requirements of
Employee Retirement Income Security Act (ERISA) in the preparation of their reports relating to
an investment in our shares. For these purposes, the deemed value of a share of our common stock
is $8.00 per share as of December 31, 2010 (ignoring purchase price discounts for certain
categories of purchasers). However, this estimated value is likely to be higher than the price at
which you could resell your shares because (1) our public offering involves the payment of
underwriting compensation and other directed selling efforts, which payments and efforts are likely
to produce a higher sales price than could otherwise be obtained, and (2) there is no public market
for our shares. Moreover, this estimated value is likely to be higher than the amount you would
receive per share if we were to liquidate at this time because of the up-front fees that we pay in
connection with the issuance of our shares as well as the recent reduction in the demand for real
estate as a result of the recent credit market disruptions and economic slowdown. We expect to
continue to use the most recent public offering price for a share of our common stock as the
estimated per share value reported in our annual reports on Form 10-K until 18 months have passed
since the last sale of a share of common stock in a public offering, excluding public offerings
conducted on behalf of selling stockholders or offerings related to a dividend reinvestment plan,
employee benefit plan, or the redemption of interests in our operating partnership. After the
18-month period described above, we expect the estimated share values reported in our annual
reports will be based on estimates of the values of our assets net of our liabilities. We do not
currently anticipate that our advisor will obtain new or updated appraisals for our properties in
connection with such estimates, and accordingly, these estimated share values should not be viewed
as estimates of the amount of net proceeds that would result from a sale of our properties at that
time. We expect that any estimates of the value of our properties will be performed by our
advisor; however, our board of directors could direct our advisor to engage one or more third-party
valuation firms in connection with such estimates.
Stock Repurchase Program
Our board of directors has adopted a stock repurchase program that enables our stockholders to sell
their stock to us in limited circumstances. Our board of directors may amend, suspend or terminate
the program at any time upon thirty days prior notice to our stockholders.
26
On November 23, 2010, our board of directors concluded that we would not have sufficient funds
available to us to fund any redemption during 2011. Accordingly, our board of directors approved an
amendment to our stock repurchase agreement to suspend redemptions under the program effective
December 31, 2010. We can make no assurance as to when and on what terms redemptions will resume.
The share redemption program may be amended, resumed, suspended again, or terminated at any time
based in part on our cash and debt position.
The terms of our stock repurchase program provide that, as long as our common stock is not listed
on a national securities exchange, our stockholders who have held their stock for at least one year
may be able to have all or any portion of their shares of stock redeemed. At that time, we may,
subject to the conditions and limitations described below, redeem the shares of stock presented for
redemption for cash to the extent that we have sufficient funds available to us to fund such
redemption. Currently, the amount that we may pay to redeem stock will be the redemption price set
forth in the following table which is based upon the number of years the stock is held:
|
|
|
Number Years Held |
|
Redemption Price |
Less than 1
|
|
No Redemption Allowed |
1 or more but less than 2
|
|
90% of your purchase price |
2 or more but less than 3
|
|
95% of your purchase price |
Less than 3 in the event of death
|
|
100% of your purchase price |
3 or more but less than 5
|
|
100% of your purchase price |
5 or more
|
|
Estimated liquidation value |
We have no obligation to repurchase our stockholders shares of stock. Our stock repurchase program
has limitations and restrictions and may be cancelled. We intend to redeem shares using proceeds
from our distribution reinvestment plan but we may use other available cash to repurchase the
shares of a deceased shareholder. Our board of directors may modify our stock repurchase program so
that we can also redeem stock using the proceeds from the sale of our properties or other sources.
Until September 21, 2012 our stock repurchase program limits the number of shares of stock we can
redeem (other than redemptions due to death of a stockholder) to those that we can purchase with
net proceeds from the sale of stock under our distribution reinvestment plan in the prior calendar
year. Until September 21, 2012 we do not intend to redeem more than the lesser of (i) the number of
shares that could be redeemed using the proceeds from our distribution reinvestment plan in the
prior calendar year or (ii) 5% of the number of shares outstanding at the end of the prior calendar
year.
For the purpose of calculating the stock repurchase price for shares received as part of the
special 10% stock distribution declared in July 2008, the purchase price of such shares will be
deemed to be equal to the purchase price paid by the stockholder for shares held by the stockholder
immediately prior to the special 10% stock distribution. For example, if, immediately prior to the
special 10% stock distribution, you owned 1,010 shares of our common stock, 1,000 of which you had
purchased in the primary offering at $8.00 per share and the remaining 10 of which you had
purchased under the distribution reinvestment plan at $7.60 per share, then, of the 101 shares you
received as part of the special stock distribution, 100 of these shares would be deemed to have a
purchase price of $8.00 per share and one share would be deemed to have a purchase price of $7.60.
These deemed purchase prices would be used in conjunction with the holding period thresholds set
forth as above to calculate the stock redemption price for the additional shares. Therefore, if
you were to submit a redemption request after holding the 101 additional shares for more than one
year, but less than two years, the stock redemption price for 100 of these shares would be 90% of
$8.00, or $7.20 per share, and the stock redemption price for the remaining share would be 90% of
$7.60, or $6.84. In the event that all of your shares of stock will be repurchased, shares
purchased pursuant to our distribution reinvestment plan may be excluded from the foregoing
one-year holding period requirement, in the discretion of the board of directors.
The estimated liquidation value for the repurchase of shares of stock held for 5 or more years will
be determined by our advisor or another person selected for such purpose and will be approved by
our board of directors. The stock repurchase price is subject to adjustment as determined from time
to time by our board of directors. At no time will the stock repurchase price exceed the price at
which we are offering our common stock for sale at the time of the repurchase. We do not charge
any fees for participating in our stock repurchase program, however the transfer agent we have
appointed to administer the program may charge a transaction fee for processing a redemption
request.
During the twelve months ended December 31, 2010, we redeemed shares pursuant to our stock
repurchase program as follows:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value of Shares |
|
|
Total Number of |
|
Average Price Paid |
|
Available That May Yet Be |
Period |
|
Shares Redeemed(1) |
|
per Share |
|
Redeemed Under the Program (1) |
January |
|
|
249,146 |
|
|
$ |
7.46 |
|
|
$ |
6,057,000 |
|
February |
|
|
100,999 |
|
|
$ |
7.63 |
|
|
$ |
4,198,000 |
|
March |
|
|
159,479 |
|
|
$ |
7.76 |
|
|
$ |
2,190,000 |
|
April |
|
|
161,356 |
|
|
$ |
7.82 |
|
|
$ |
928,000 |
|
May |
|
|
123,562 |
|
|
$ |
7.64 |
|
|
$ |
|
|
June (1) |
|
|
39,822 |
|
|
$ |
7.98 |
|
|
$ |
|
|
July |
|
|
13,750 |
|
|
$ |
8.00 |
|
|
$ |
|
|
August |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
September |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
October |
|
|
5,225 |
|
|
$ |
7.98 |
|
|
$ |
|
|
November |
|
|
25,228 |
|
|
$ |
7.98 |
|
|
$ |
|
|
December |
|
|
16,348 |
|
|
$ |
7.96 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In May 2010, stock repurchases equaled the funds available
for repurchase in 2010, accordingly, we made no further
ordinary redemptions (other than redemptions due to death
of a stockholder) for the remainder of 2010. On November
23, 2010 our board of directors approved an amendment to
our stock repurchase program to suspend any redemptions,
include redemptions due to death of a stockholder, under
the program, effective December 31, 2010. |
Stockholders
As of March 15, 2011, we had approximately 23.0 million shares of common stock outstanding held by
approximately 4,825 stockholders of record.
Distributions
In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we
must pay distributions to our shareholders each taxable year equal to at least 90% of our net
ordinary taxable income. Our board generally declares distributions on a quarterly basis and paid
on a monthly basis. Monthly distributions are paid based on daily record and distribution
declaration dates so our investor will be entitled to be paid distributions beginning on the day
that they purchase shares.
During the years ended December 31, 2010 and 2009, we paid distributions, including any
distributions reinvested, aggregating approximately $11.0 million and $10.5 million, respectively
to our stockholders. The following table shows the distributions paid based on daily record dates
for each day during the period from January 1, 2009 through December 31, 2010, aggregated by
quarter as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from |
|
|
|
Distribution Declared (1) |
|
|
Funds from |
|
|
operating |
|
Period |
|
Cash |
|
|
Reinvested |
|
|
Total |
|
|
Operations |
|
|
activities |
|
First quarter 2009 |
|
$ |
1,020,000 |
|
|
$ |
1,464,000 |
|
|
$ |
2,484,000 |
|
|
$ |
706,000 |
|
|
$ |
1,090,000 |
|
Second quarter 2009 |
|
|
1,125,000 |
|
|
|
1,523,000 |
|
|
|
2,648,000 |
|
|
|
819,000 |
|
|
|
733,000 |
|
Third quarter 2009 (2) |
|
|
1,181,000 |
|
|
|
1,554,000 |
|
|
|
2,735,000 |
|
|
|
(4,074,000 |
) |
|
|
1,126,000 |
|
Fourth quarter 2009 (3) |
|
|
1,231,000 |
|
|
|
1,546,000 |
|
|
|
2,777,000 |
|
|
|
(1,913,000 |
) |
|
|
(61,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,557,000 |
|
|
$ |
6,087,000 |
|
|
$ |
10,644,000 |
|
|
$ |
(4,462,000 |
) |
|
$ |
2,888,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter 2010 |
|
$ |
1,221,000 |
|
|
$ |
1,490,000 |
|
|
$ |
2,711,000 |
|
|
$ |
844,000 |
|
|
$ |
1,103,000 |
|
Second quarter 2010 |
|
|
1,256,000 |
|
|
|
1,468,000 |
|
|
|
2,724,000 |
|
|
|
933,000 |
|
|
|
461,000 |
|
Third quarter 2010 |
|
|
1,323,000 |
|
|
|
1,448,000 |
|
|
|
2,771,000 |
|
|
|
355,000 |
|
|
|
1,003,000 |
|
Fourth quarter 2010 (4) |
|
|
1,524,000 |
|
|
|
481,000 |
|
|
|
2,005,000 |
|
|
|
(1,857,000 |
) |
|
|
(265,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,324,000 |
|
|
$ |
4,887,000 |
|
|
$ |
10,211,000 |
|
|
$ |
275,000 |
|
|
$ |
2,302,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
100% and 95.07% of the distributions declared during 2010 and 2009 represented a return of capital for
federal income tax purposes, respectively. |
|
(2) |
|
Funds from operations includes note receivable impairment reserve charge of approximately $4.6 million. |
|
(3) |
|
Funds from operations includes real estate impairment reserve charge of approximately $2.4 million. |
28
|
|
|
(4) |
|
Funds from operations includes real estate impairment reserve charge of approximately $2.0 million. |
The declaration of distributions is at the discretion of our board of directors and our board will
determine the amount of distributions on a regular basis. The amount of distributions will depend
on our funds from operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other factors our board of
directors deem relevant. On November 23, 2010, our board of directors resolved to lower our
distributions to a current annualized rate of $0.08 per share (1% based on a share price of $8.00)
from the current annualized rate of $0.48 per share (6% based on a share price of $8.00),
effective December 1, 2010. The rate and frequency of distributions is subject to the discretion
of our board of directors and may change from time to time based on our operating results and cash
flow.
Funds from Operations and Modified Funds from Operations
Funds from operations (FFO) is a non-GAAP financial measure that is widely recognized as a
measure of REIT operating performance. We compute FFO in accordance with the definition outlined
by the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net
income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by the
accounting principles generally accepted in the United States of America (GAAP) , and gains (or
losses) from sales of property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and
subsidiaries. Our FFO may not be comparable to FFO reported by other REITs that do not define the
term in accordance with the current NAREIT definition or that interpret the current NAREIT
definition differently than we do. We believe that FFO is helpful to investors and our management
as a measure of operating performance because it excludes depreciation and amortization, gains and
losses from property dispositions, and extraordinary items, and as a result, when compared year to
year, reflects the impact on operations from trends in occupancy rates, rental rates, operating
costs, development activities, general and administrative expenses, and interest costs, which is
not immediately apparent from net income. Historical cost accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over
time. Since real estate values have historically risen or fallen with market conditions, many
industry investors and analysts have considered the presentation of operating results for real
estate companies that use historical cost accounting alone to be insufficient. As a result, our
management believes that the use of FFO, together with the required GAAP presentations, provide a
more complete understanding of our performance. Factors that impact FFO include start-up costs,
fixed costs, delay in buying assets, lower yields on cash held in accounts pending investment,
income from portfolio properties and other portfolio assets, interest rates on acquisition
financing and operating expenses. FFO should not be considered as an alternative to net income
(loss), as an indication of our performance, nor is it indicative of funds available to fund our
cash needs, including our ability to make distributions.
Changes in the accounting and reporting rules under GAAP have prompted a significant increase in
the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use
modified funds from operations (MFFO), which excludes from FFO acquisition expenses, reversal of
amortization of above/below rent, non-cash amounts related to straight line rent, impairments of
real estate assets and impairment of note receivable to further evaluate our operating performance.
We compute MFFO in accordance with the definition suggested by the Investment Program Association
(the IPA), the trade association for direct investment programs (including non-listed REITs).
However, certain adjustments included in the IPAs definition are not applicable to us and are
therefore not included in the foregoing definition.
We believe that MFFO is a helpful measure of operating performance because it excludes costs that
management considers more reflective of investing activities or non-operating changes. Accordingly,
we believe that MFFO can be a useful metric to assist management, investors and analysts in
assessing the sustainability of our operating performance. As explained below, managements
evaluation of our operating performance excludes the items considered in the calculation based on
the following considerations:
|
|
|
Real estate acquisition expenses. In evaluating investments in real estate,
including both business combinations and investments accounted for under the equity
method of accounting, managements investment models and analysis differentiate costs
to acquire the investment from the operations derived from the investment. These
acquisition costs have been funded from the proceeds of our initial public offering
and other financing sources and not from operations. We believe by excluding
expensed acquisition costs, MFFO provides useful supplemental information that is
comparable for each type of our real estate investments and is consistent with
managements analysis of the investing and operating performance of our properties.
Real estate acquisition expenses include those paid to our advisor and to third
parties. |
|
|
|
|
Adjustments for amortization of above or below market rent. Similar to
depreciation and amortization of other real estate related assets that are excluded
from FFO, GAAP implicitly assumes that the value of lease assets diminishes
predictably over time and that these charges be recognized currently in revenue.
Since real estate values and market lease rates in the aggregate have historically
risen or fallen with market conditions, management believes that by excluding these
charges, MFFO provides useful supplemental information on the operating performance
of our real estate. |
29
|
|
|
Adjustments for straight line rents. Under GAAP, rental income recognition can be
significantly different than underlying contract terms. By adjusting for these
items, MFFO provides useful supplemental information on the economic impact of our
lease terms and presents results in a manner more consistent with managements
analysis of our operating performance. |
|
|
|
|
Impairment charges. Impairment charges relate to a fair value adjustment, which
is based on the impact of current market fluctuations and underlying assessments of
general market conditions and the specific performance of the holding, which may not
be directly attributable to our current operating performance. As these losses
relate to underlying long-term assets and liabilities, where we are not speculating
or trading assets, management believes MFFO provides useful supplemental information
by focusing on the changes in our core operating fundamentals rather than changes
that may reflect anticipated losses. In particular, because GAAP impairment charges
are not allowed to be reversed if the underlying fair values improve or because the
timing of impairment charges may lag the onset of certain operating consequences, we
believe MFFO provides useful supplemental information related to the sustainability
of rental rates, occupancy and other core operating fundamentals. |
FFO or MFFO should not be considered as an alternative to net income (loss) nor as an indication of
our liquidity. Nor is either indicative of funds available to fund our cash needs, including our
ability to make distributions. Both FFO and MFFO should be reviewed along with other GAAP
measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other
REITs.
We believe that MFFO is helpful as a measure of operating performance because it excludes costs
that management considers more reflective of investing activities or non-operating changes.
Our calculations of FFO and MFFO for each of the last three years are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 (1) |
|
|
2009 (2) |
|
|
2008 |
|
Net loss |
|
$ |
(3,133,000 |
) |
|
$ |
(8,111,000 |
) |
|
$ |
(1,452,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to noncontrolling interest |
|
|
(2,000 |
) |
|
|
(8,000 |
) |
|
|
3,000 |
|
Real estate assets depreciation and amortization |
|
|
3,406,000 |
|
|
|
3,641,000 |
|
|
|
3,575,000 |
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO) |
|
$ |
275,000 |
|
|
$ |
(4,462,000 |
) |
|
$ |
2,120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquisition costs |
|
$ |
52,000 |
|
|
$ |
430,000 |
|
|
$ |
|
|
Reverse amortization of above/below market rent |
|
|
39,000 |
|
|
|
37,000 |
|
|
|
656,000 |
|
Straight line rent |
|
|
39,000 |
|
|
|
(65,000 |
) |
|
|
(330,000 |
) |
Impairment of real estate assets |
|
|
2,020,000 |
|
|
|
2,360,000 |
|
|
|
|
|
Impairment of note receivable |
|
|
|
|
|
|
4,626,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified funds from operations (MFFO) |
|
$ |
2,425,000 |
|
|
$ |
2,926,000 |
|
|
$ |
2,446,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
22,921,142 |
|
|
|
21,806,219 |
|
|
|
14,241,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per weighted average shares |
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
0.15 |
|
MFFO per weighted average shares |
|
$ |
0.11 |
|
|
$ |
0.13 |
|
|
$ |
0.17 |
|
|
|
|
(1) |
|
During the fourth quarter of 2010, we recorded an impairment of real estate of approximately $2.0 million. |
|
(2) |
|
During the third quarter of 2009, we recorded a note receivable
impairment reserve of approximately $4.6 million and during the fourth
quarter of 2009, we recorded an impairment of real estate of
approximately $2.4 million. |
Recent Sales of Unregistered Securities
On August 6, 2008, we granted our non-employee directors nonqualified stock options to purchase an
aggregate of 20,000 shares of our common stock at an exercise price at $8.00 per share under our
Employee and Director Incentive Stock Plan pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933.
30
We did not sell any equity securities that were not registered under the Securities Act of 1933
during the period covered by this Form 10-K.
Use of Proceeds from Registered Securities
Initial Public Offering
Our registration statement (SEC File No. 333-121238) for our initial public offering of up to
44,400,000 shares of our common stock at $8.00 per share and up to 11,000,000 additional shares at
$7.60 per share pursuant to our distribution reinvestment plan was declared effective on September
22, 2005. The aggregate offering amount of the shares registered for sale in our initial public
offering, assuming the maximum number of shares were sold was $438.8 million. The offering
commenced on January 6, 2006 and was terminated June 1, 2009 prior to the sale of all shares
registered.
As of the termination of the offering on June 1, 2009, excluding issuance of approximately 1.2
million shares under our distribution reinvestment plan, we had sold approximately 20.5 million
shares of common stock in our initial public offering, raising gross offering proceeds of
approximately $163.7 million. From this amount, we incurred approximately $16.2 million in selling
commissions and dealer manager fees payable to our dealer manager and approximately $3.3 million in
acquisition fees payable to the advisor. We have used approximately
$102.5 million of the net
offering proceeds to acquire properties and reduce notes payable balance as of December 31, 2010.
As of December 31, 2010, the advisor and its affiliates had incurred on our behalf organizational
and offering costs totaling approximately $4.5 million, including approximately $0.1 million of
organizational costs that have been expensed, and approximately $4.4 million related to offering
costs which reduce net proceeds of our initial public offering.
Follow-on Public Offering
Our registration statement (SEC File No. 333-155640) for our follow-on public offering of up to
56,250,000 shares of our common stock at $8.00 per share and up to 21,100,000 additional shares at
$7.60 per share pursuant to our distribution reinvestment plan was declared effective on June 10,
2009. We also retained PCC to conduct our follow-on public offering on a best-efforts basis. The
aggregate offering amount of the shares registered for sale in our follow-on public offering is
$610.4 million. The offering commenced on June 10, 2009 and has not terminated. Effective November
23, 2010 we stopped accepting offers to purchase shares of our offering while our board of
directors evaluates strategic alternatives to maximize investors value.
As of December 31, 2010, excluding issuance of approximately 1.1 million shares under our
distribution reinvestment plan, we had sold approximately 0.4 million shares of common stock in our
follow-on offering, raising gross offering proceeds of approximately $3.4 million. From this
amount, we incurred approximately $0.3 million in selling commissions and dealer manager fees
payable to our dealer manager and approximately $67,000 in acquisition fees payable to the advisor.
As of December 31, 2010, the advisor and its affiliates had incurred on our behalf organizational
and offering costs totaling approximately $1.1 million which reduce net proceeds of our follow-on
public offering, provided, however, we will have no obligation to reimburse of advisor for
organizational and offering costs totaling in excess of 3.5% of the gross proceeds of our follow-on
offering at the conclusion of the offering.
Equity Compensation Plans
Information about securities authorized for issuance under our equity compensation plans required
for this Item is incorporated by reference from our definitive Proxy Statement to be filed in
connection with our 2010 annual meeting of stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following should be read with the sections titled Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and the
notes thereto.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
138,997,000 |
|
|
$ |
157,252,000 |
|
|
$ |
165,104,000 |
|
|
$ |
129,922,000 |
|
|
$ |
50,012,000 |
|
Investments in real estate, net |
|
$ |
123,261,000 |
|
|
$ |
127,079,000 |
|
|
$ |
132,955,000 |
|
|
$ |
120,994,000 |
|
|
$ |
36,057,000 |
|
Notes payable |
|
$ |
35,874,000 |
|
|
$ |
38,884,000 |
|
|
$ |
45,626,000 |
|
|
$ |
65,699,000 |
|
|
$ |
20,180,000 |
|
Stockholders equity |
|
$ |
100,853,000 |
|
|
$ |
115,024,000 |
|
|
$ |
116,333,000 |
|
|
$ |
60,248,000 |
|
|
$ |
26,719,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
10,298,000 |
|
|
$ |
11,130,000 |
|
|
$ |
10,793,000 |
|
|
$ |
5,865,000 |
|
|
$ |
404,000 |
|
Property operating and maintenance |
|
$ |
2,803,000 |
|
|
$ |
3,368,000 |
|
|
$ |
3,111,000 |
|
|
$ |
1,332,000 |
|
|
$ |
102,000 |
|
General and administrative expense |
|
$ |
2,163,000 |
|
|
$ |
1,608,000 |
|
|
$ |
1,421,000 |
|
|
$ |
2,359,000 |
|
|
$ |
1,294,000 |
|
Asset management fees and expenses |
|
$ |
1,654,000 |
|
|
$ |
1,822,000 |
|
|
$ |
1,328,000 |
|
|
$ |
707,000 |
|
|
$ |
38,000 |
|
Provisions for impairment |
|
$ |
2,020,000 |
|
|
$ |
6,986,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net loss attributable to common stockholders |
|
$ |
(3,131,000 |
) |
|
$ |
(8,103,000 |
) |
|
$ |
(1,455,000 |
) |
|
$ |
(2,601,000 |
) |
|
$ |
(1,306,000 |
) |
Noncontrolling interest |
|
$ |
(2,000 |
) |
|
$ |
(8,000 |
) |
|
$ |
3,000 |
|
|
$ |
(3,000 |
) |
|
$ |
(11,000 |
) |
Basic and diluted net loss per common share
attributable to common stockholders (1) |
|
$ |
(0.14 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.37 |
) |
|
$ |
(1.44 |
) |
Distributions declared |
|
$ |
10,211,000 |
|
|
$ |
10,644,000 |
|
|
$ |
7,269,000 |
|
|
$ |
3,196,000 |
|
|
$ |
586,000 |
|
Distributions per common share |
|
$ |
0.45 |
|
|
$ |
0.48 |
|
|
$ |
0.47 |
|
|
$ |
0.43 |
|
|
$ |
0.40 |
|
Weighted average number of shares
outstanding (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
22,921,142 |
|
|
|
21,806,219 |
|
|
|
14,241,215 |
|
|
|
7,070,155 |
|
|
|
909,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) operating
activities |
|
$ |
2,302,000 |
|
|
$ |
2,888,000 |
|
|
$ |
2,541,000 |
|
|
$ |
(1,156,000 |
) |
|
$ |
(139,000 |
) |
Cash flows used in investing activities |
|
$ |
(3,740,000 |
) |
|
$ |
(10,708,000 |
) |
|
$ |
(11,973,000 |
) |
|
$ |
(84,799,000 |
) |
|
$ |
(37,447,000 |
) |
Cash flows (used in) provided by financing
activities |
|
$ |
(15,221,000 |
) |
|
$ |
212,000 |
|
|
$ |
29,065,000 |
|
|
$ |
81,562,000 |
|
|
$ |
48,510,000 |
|
|
|
|
(1) |
|
Net loss per share is based upon the weighted average number of shares
of common stock outstanding. All per share computations have been
adjusted to reflect the common stock dividends for all periods
presented. |
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements
and notes appearing elsewhere in this Form 10-K. See also the Special Note about Forward-looking
Statements preceding Item 1 of this report.
Overview
We were incorporated on October 22, 2004 for the purpose of engaging in the business of investing
in and owning commercial real estate. On January 6, 2006, we commenced an initial public offering
of up to 55,400,000 shares of our common stock, consisting of 44,400,000 shares for sale pursuant
to a primary offering and 11,000,000 shares for sale pursuant to our distribution reinvestment
plan. We stopped making offers under our initial public offering on June 1, 2009 upon raising
gross offering proceeds of approximately $172.7 million from the sale of approximately 21.7 million
shares, including shares sold under the distribution reinvestment plan. On
June 10, 2009, we commenced a follow-on offering of up 77,350,000 shares of our common stock,
consisting of 56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares for
sale pursuant to our dividend reinvestment plan.
On November 23, 2010, management informed investors of several decisions made by our board of
directors. The first decision was to stop making or accepting offers to purchase our shares while
our board of directors evaluated strategic alternatives to maximize our investors value. The
second decision was to suspend our Distribution Reinvestment Plan. All distributions paid after
December 14, 2010 will be in cash. The third decision was to lower our distributions to an
annualized rate of $0.08 per share from the annualized rate of $0.48 per share. This decision was
made to preserve capital that may be needed for capital improvements, debt repayment or other
32
corporate purposes. The fourth decision was to suspend redemptions under the Stock Repurchase Plan,
which resulted in our board of directors approving an amendment to our stock repurchase program
effective December 31, 2010.
We used the net proceeds from our initial public offering to invest primarily in investment real
estate including multi-tenant industrial real estate located in major metropolitan markets in the
United States. We intend to use the net proceeds from our follow-on offering to acquire additional
real estate investments and pay down temporary acquisition financing on our existing asset.
As of December 31, 2010, we had raised approximately $167.1 million of gross proceeds from the sale
of approximately 20.9 million shares of our common stock in our initial public offering and
follow-on offering and had acquired thirteen properties.
Our revenues, which are comprised largely of rental income, include rents reported on a
straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability
to increase rental income and other earned income from leases by increasing rental rates and
occupancy levels and control operating and other expenses. Our operations are impacted by property
specific, market specific, general economic and other conditions.
Market Outlook Real Estate and Real Estate Finance Markets
During 2010, significant and widespread concerns about credit risk and access to capital
experienced during 2009 began to subside. Concerns of a double-dip recession have diminished as a
number of economic indicators have improved. Increased trade volume in 2010 spurred increased
leasing activity in many west coast industrial markets. However, if economic uncertainty persists,
we may continue to experience significant vacancies or be required to reduce rental rates on
occupied space.
Despite recent positive economic indicators, both the national and most global economies have
experienced continued volatility throughout 2010. These conditions, combined with stagnant business
activity and low consumer confidence, have resulted in a challenging operating environment.
As a result of the decline in general economic conditions, the U.S. commercial real estate industry
has also been experiencing deteriorating fundamentals across all major property types and most
geographic markets. These market conditions have and will likely continue to have a significant
impact on our real estate investments. In addition, these market conditions have impacted our
tenants businesses, which makes it more difficult for them to meet current lease obligations and
places pressure on them to negotiate favorable lease terms upon renewal in order for their
businesses to remain viable. Increases in rental concessions given to retain tenants and maintain
our occupancy level, which is vital to the continued success of our portfolio, has resulted in
lower current cash flow. Projected future declines in rental rates, slower or potentially negative
net absorption of leased space and expectations of future rental concessions, including free rent
to retain tenants who are up for renewal or to sign new tenants, are expected to result in
additional decreases in cash flows.
Until market conditions are more stable, we may limit capital expenditures during 2011 compared to
prior years by focusing on those capital expenditures that preserve value. However, if we
experience an increase in vacancies, we may incur costs to re-lease properties and pay leasing
commissions.
Results of Operations
As of December 31, 2010, we owned thirteen properties. These properties were acquired from June of
2006 through August 2010. During 2010, we owned twelve properties for a full year and one property
for four months. During 2009, we owned twelve properties for the full year, and during 2008, we
owned eleven properties for a full year, and one for eight and one-half months. Accordingly, the
results of our operations for the years ended December 31, 2010, 2009 and 2008 are for the most
part comparable.
In January 2009, we made a $14.0 million mortgage loan to Caruth Haven L.P, a wholly-owned
subsidiary of Cornerstone Healthcare Plus REIT, Inc., sponsored by affiliates of our sponsor. The
loan was to mature on January 21, 2010. On December 16, 2009, Caruth Haven L.P. fully repaid the
loan.
On December 14, 2009, we made a participating first mortgage loan commitment of $8.0 million to
Nantucket Acquisition LLC, a Delaware limited liability company managed by Cornerstone Ventures
Inc., an affiliate of our advisor, in connection with Nantucket Acquisitions purchase of a 60-unit
senior living community known as Sherburne Commons located on the island of Nantucket, MA. The
loan matures on January 1, 2015, with no option to extend and bears interest at a fixed rate of
8.0% for the term of the loan. Interest will be paid monthly with principal due at maturity. In
addition, under the terms of the loan, we are entitled to receive additional interest in the form
of a 40% participation in the shared appreciation of the property, which is calculated based on
the net sales proceeds if the property is sold, or the propertys appraised value, less ordinary
disposition costs, if the property has not been sold by the time the loan matures. Prepayment of
the loan is not permitted without our consent and the loan is not assumable.
33
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Rental revenue, tenant reimbursements and other income decreased to approximately $8.9 million for
the year ended December 31, 2010 from approximately $9.8 million for the year ended December 31,
2009. The decrease is due to a lower overall occupancy rate of 70.3% for the year ended December
31, 2010 as compared to 81.6% for the year ended December 31, 2009, lower average lease rental
rates and longer lease up periods for vacant units as a result of the current economic environment
partially offset by approximately $44,000 of revenue from the acquisition of the Santa Fe property
in the third quarter of 2010.
Interest income from note receivable increased to $1.4 million for the year ended December 31, 2010
from $1.3 million for the year ended December 31, 2009. The increase was largely due to Servant
Healthcare Investments, LLCs and Nantucket Acquisition, LLCs 2010 advances of $1.1 million each
resulting in a higher average outstanding balance compared to 2009. This translated to an
incremental interest income increase of $0.1 million and $0.6 million, respectively. Further
favorably impacting 2010 is the incremental interest income collected
for the Servant Investments, LLC loan of $0.3 million offset by
the absence of the Caruth Haven, L.P. loan interest income of $0.8 million and a
lower loan fee amortization of $0.1 million.
Property operating and maintenance costs decreased to approximately $2.8 million for the year ended
December 31, 2010 from approximately $3.4 million for the year ended December 31, 2009. The
decrease is primarily due to a $0.4 million decrease in bad debt expense and collection costs,
largely due to settlements collected from former tenants, and a $0.1 million decrease in property
taxes as a result of property tax appeals, partially offset by a $30,000 increase in costs
associated with property tax appeals.
Real estate acquisition costs decreased to less than $0.1 million for the year ended December 31,
2010 from $0.4 million for the year ended December 31, 2009 largely as a result of lower
acquisition fee reimbursement to the advisor due to lower amounts of equity raised.
Depreciation and amortization decreased to approximately $3.4 million for the year ended December
31, 2010 from approximately $3.6 million for the year ended December 31, 2009, largely as a result
of property impairments recorded during 2009.
General and administrative expenses increased to approximately $2.2 million for the year ended
December 31, 2010 from approximately $1.6 million for the year ended December 31, 2009. The
increase is primarily due to advisor cost reimbursements associated with executive management,
accounting and finance and investor relations services provided in 2010 and higher audit, tax,
legal fees and other professional fees.
Asset management fees and expenses decreased to approximately $1.7 million for the year ended
December 31, 2010 from approximately $1.8 million for the year ended December 31, 2009. The
decrease is due to a one-time charge related to real estate management fees recorded in the fourth
quarter of 2009.
A note receivable impairment reserve of approximately $4.6 million was recorded for the year ended
December 31, 2009 and is included in the provisions for
impairment of our consolidated statements of operations. There was no comparable reserve adjustment required in 2010. The 2009
impairment was based on our evaluation of collectability that involves judgment, estimates and a
review of the borrowers business models and their future operations. Changes in the economic
environment and market conditions have delayed the planned business initiatives of the borrower,
and we concluded that collectability cannot be reasonably assured.
Impairment of real estate decreased to approximately $2.0 million for the year ended December 31,
2010 from $2.4 million for the year ended December 31, 2009. The impairment charge represents
adjustments to reflect the decline in the market value of our real estate properties, based on
current occupancy and rental rates. In 2010 we recorded impairment charges at two properties
totaling $2.0 million while in 2009 we recorded one charge totaling $2.4 million.
Interest income is comparable to the prior year.
Interest expense decreased to approximately $1.3 million for the year ended December 31, 2010 from
approximately $1.4 million for the year ended December 31, 2009. The decrease is primarily due to
2009 principal debt reduction of $6.6 million during the fourth
quarter of 2009 on our Wells Fargo loan partially offset by loan fees paid in connection with the
extension of our credit agreement with HSH Nordbank credit facility.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Rental revenue, tenant reimbursements and other income decreased to approximately $9.8 million for
the year ended December 31, 2009 from approximately $10.6 million for the year ended December 31,
2008. The decrease is primarily due to lower occupancy rates, lower lease rental rates and longer
lease up periods for vacant units as a result of the current economic environment partially offset
by Monroe Norths additional one and a half months of revenue in 2009.
34
Interest income from a note receivable increased to approximately $1.3 million for the year ended
December 31, 2009 from $0.2 million for the year ended December 31, 2008. The increase is due to
higher notes receivable balances outstanding during 2009.
Property operating and maintenance costs increased to approximately $3.4 million for the year ended
December 31, 2009 from approximately $3.1 million for the year ended December 31, 2008. The
increase is primarily due to an increase in property taxes, bad debt expense and legal collection
costs as a result of current economic conditions partially offset by decrease in property
management fees.
Real estate acquisition costs increased to approximately $0.4 million for the year ended December
31, 2009 from $0 for the year ended December 31, 2008. The increase relates to the portion of the
acquisition fee paid to advisor on receipt of offering proceeds which the adoption of an accounting
provision in 2009 required us to expense.
Depreciation and amortization is comparable for year ended December 31, 2009 and 2008.
General
and administrative expenses increased to approximately $1.6 million for the year ended
December 31, 2009 from approximately $1.4 million for the year ended December 31, 2008. The
increase is primarily due to higher professional fees, reimbursement of operating costs to the
advisor related to the services on our behalf, and a one-time abandoned project refund received in
2008.
Asset
management fees increased to approximately $1.8 million for the year ended December 31, 2009
from approximately $1.3 million for the year ended December 31, 2008. The increase is due to higher
average assets under management in 2009.
A note receivable impairment reserve of approximately $4.6 million was recorded for the year ended
December 31, 2009. There was no impairment reserve recorded in the year ended December 31, 2008.
The 2009 impairment was based on our evaluation of collectability that involves judgment, estimates
and a review of the borrowers business models and their future operations. While we remain
confident of the borrowers ability to successfully execute its business plans, changes in the
economic environment and market conditions have delayed planned initiatives, and we concluded that
the collectability cannot be reasonably assured.
Impairment of real estate increased to approximately $2.4 million for the year ended December 31,
2009 from $0 for the year ended December 31, 2008. The 2009 impairment is due to adjustments to
reflect a decline in the market value of one of our real estate properties, based on current
occupancy and rental rates.
Interest income decreased to approximately $8,000 for the year ended December 31, 2009 from
approximately $0.3 million for the year ended December 31, 2008. The decrease is primarily due to
lower rates paid on short term investments combined with lower average cash balances available for
investment.
Interest expense decreased to approximately $1.4 million for the year ended December 31, 2009 from
approximately $3.1 million for the year ended December 31, 2008. The decrease is primarily due to
lower interest rates on our credit agreements with HSH Nordbank and Wachovia Bank and a lower debt
balance as a result of a $25.0 million principal reduction in the third quarter of 2008.
Liquidity and Capital Resources
On November 23, 2010, our board of directors made a decision to stop making or accepting offers to
purchase shares of our stock in our follow-on offering while they evaluate strategic alternatives
to maximize values and preserve the capital of our stockholders. During this time, we expect the
primary sources of cash to be rental revenues, tenant reimbursements and interest income. We also
expect our primary uses of cash to be for the (1) repayment of notes payable principal, (2) payment
of tenant improvements and leasing commissions, (3) operating expenses, (4) interest expense on any
outstanding indebtedness, and (5) cash distributions. To the extent cash flow from operations is
not enough to satisfy debt obligations and we are not able to refinance or obtain new financing, we
may have to raise cash by selling one or more properties.
On January 6, 2006, we commenced an initial public offering of up to 55,400,000 shares of our
common stock, consisting of 44,400,000 shares for sale pursuant to a primary offering and
11,000,000 shares for sale pursuant to our distribution reinvestment plan. We stopped making offers
under our initial public offering on June 1, 2009. On June 10, 2009, we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of 56,250,000 shares for sale
pursuant to a primary offering and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan. As of December 31, 2010, a total of approximately 20.9 million shares of our common stock had
been sold in our combined offerings for aggregate gross proceeds of approximately $167.1 million.
As of December 31, 2010, we sold 0.4 million shares in our follow-on offering for gross proceeds of
approximately $3.4 million. Our board of directors is currently evaluating strategic alternatives
for our follow-on offering, but we do not expect our follow-on offering to be a material source of
capital until such evaluation is completed.
35
As of December 31, 2010, we had approximately $2.0 million in cash and cash equivalents on hand.
Short Term Liquidity Requirements
In addition to the capital requirements for recurring capital expenditures, tenant improvements and
leasing commissions, we may have to incur expenditures for renovation of our properties such as
increasing the size of the properties by developing additional rentable square feet and or making
the space more appealing to potential industrial tenants.
On September 27, 2010, the United States Bankruptcy Court for the District of Delaware granted the
motion of debtor Universal Building Products, the parent company of the single tenant occupying
15172 Goldenwest Circle, to set aside the tenants lease of 15172 Goldenwest Circle. Rental income
from this tenant represented 6.76% of total revenue for the twelve months ended December 31, 2010.
The tenant vacated the property on October 1, 2010 and we have engaged an experienced broker to
re-lease the property.
Credit Facilities
We have total debt obligations of $29.0 million that mature in May and September of 2011. Of
this amount, $13.1 million is outstanding on a credit facility with HSH Nordbank and $15.9 million
is outstanding on a credit facility with Wells Fargo Bank. We are pursuing options for
restructuring this debt and other repayment alternatives, including asset sales, sourcing
additional equity capital and obtaining new financing that will reposition the assets. We expect to
repay HSH Nordbank loan upon maturity with proceeds from a sale of real estate or refinancing of
assets. We have extended the Wells Fargo Bank loan maturity date from November 13, 2010 to May
13, 2011 in two successive three-month extensions. During the extension, we are working with the
lender to implement a plan that may include one or a combination of further extension of the
loan, paying down a portion of the principal, sale of real estate assets and or pledging additional
properties as collateral in lieu of paying down any portion of the principal.
However,
there can be no assurance that we will be successful in executing such
restructuring or repayment to allow us to meet our debt obligations
during the twelve months ending
December 31, 2011. If we are unable to obtain alternative financing or sell properties in
order to repay the debt, this could result in the lenders foreclosing on properties. Based on the
various options available to us and ongoing discussions with its lenders, management
believes that we will be able to meet or successfully restructure our debt obligations.
Distributions
Our board of directors resolved to lower our distributions to a current annualized rate of $0.08
per share (1% based on a share price of $8.00) from the current annualized rate of $0.48 per share
(6% based on a share price of $8.00), effective December 1, 2010. We expect to pay these
distributions from cash flow from operations. The rate and frequency of distributions is subject to
the discretion of our board of directors and may change from time to time based on our operating
results and cash flow.
For the twelve months ended December 31, 2010, cash distributions to stockholders were paid from a
combination of cash flow from operations and net proceeds raised from our offerings.
Distributions paid to stockholders for the twelve months ended December 31, 2010 were approximately
$11.0 million. Of this amount, approximately $5.4 million was reinvested through our dividend
reinvestment plan and approximately $5.6 million was paid in cash to stockholders. Of the total
cash distributions paid for the twelve months ended December 31, 2010, 41.2% was funded from cash
flow from operations and 58.8% of the total cash amount distributed was funded from proceeds from
our offerings.
Organization and offering costs
As of December 31, 2010, our advisor and its affiliates had incurred on our behalf organizational
and offering costs totaling approximately $5.6 million, including approximately $0.1 million of
organizational costs that was expensed and approximately $5.5
million of offering costs which reduce net proceeds of our offerings. Of this amount, $4.5 million
reduced the net proceeds of our initial public offering and $1.1 million reduced the net proceeds
of our follow-on offering.
In no event will we have any obligation to reimburse the advisor for these costs totaling in excess
of 3.5% of the gross proceeds from our initial public offering and our follow-on public offering at
the conclusion of the offerings. As of December 31, 2010, we had reimbursed to our advisor a total
of $4.5 million for our initial public offering and $1.1 million for our follow-on offering.
At times during our offering stage, the amount of organization and offering expenses that we incur,
or that the advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering
proceeds then raised, but our advisor has agreed to reimburse us to the extent that our
organization and offering expenses exceed this 3.5% limitation at the conclusion of our offerings.
In addition, the
36
advisor will pay all of our organization and offering expenses that, when combined
with the sales commissions and dealer manager fees that we incur exceed 13.5% of the gross proceeds
from our public offerings.
We will not rely on advances from the advisor to acquire properties but the advisor and its
affiliates may loan funds to special purpose entities that may acquire properties on our behalf
pending our raising sufficient proceeds from our public offerings to purchase the properties from
the special purpose entity.
We will endeavor to repay any temporary acquisition debt financing promptly upon receipt of
proceeds in our offerings. To the extent sufficient proceeds from our offerings are unavailable to
repay such debt financing within a reasonable time as determined by our board of directors, we will
endeavor to raise additional equity or sell properties to repay such debt so that we will own our
properties with no permanent financing. Financial markets have recently experienced unusual
volatility and uncertainty. Liquidity has tightened in all financial markets, including the debt
and equity markets. Our ability to fund property acquisitions or development projects, as well as
our ability to repay or refinance debt maturities could be adversely affected by an inability to
secure financing at reasonable terms, if at all.
Other than the financial market conditions discussed above and market conditions discussed above
under the caption Market OutlookReal Estate and Real Estate Finance Markets, we are not aware
of any material trends or uncertainties, favorable or unfavorable, affecting real estate generally,
which we anticipate may have a material impact on either capital resources or the revenues or
income to be derived from the operation of real estate properties.
Election as a REIT
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for the year
ended December 31, 2006. Under the Internal Revenue Code of 1986, we are not subject to federal
income tax on income that we distribute to our stockholders. REITs are subject to numerous
organizational and operational requirements in order to avoid taxation as a regular corporation,
including a requirement that they generally distribute at least 90% of their annual ordinary
taxable income to their stockholders. 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. Our failure to
qualify as a REIT could result in us having a significant liability for taxes.
Other Liquidity Needs
Property Acquisitions
Our ability to purchase properties in the next twelve months is dependent on our ability to raise
additional equity capital or sell existing properties and our ability to obtain debt financing if
required. We expect to have expenditures for capital improvements, tenant improvements and lease
commissions in the next twelve months, however, those amounts cannot be estimated at this time and
we cannot assure that we will have sufficient funds to make capital expenditures at all.
Debt Service Requirements
HSH Nordbank AG
We amended our credit agreement with HSH Nordbank AG, New York Branch in September, October and
November 2010 extending the credit facility maturity date from September 20, 2010 to September 30,
2011. As a part of these amendments, we made a principal reduction payment of approximately $2.8
million and paid extension fees of $130,000. We may not draw additional funds under this credit
agreement. The other terms of the credit agreement remain in full force and effect. We made a
$200,000 principal reduction payment in 2010 and will make additional principal reduction payments
ranging from $200,000 to $250,000 between January 1, 2011 and September 30, 2011. In addition, the
amendment to the credit agreement requires us to use commercially reasonable efforts to pay
off the outstanding principal balance of the loan with proceeds from refinancing with an
unaffiliated lender or from the sale of one or more of our properties in one or more arms length
all-cash transactions. The borrowing rate is based on 30-day LIBOR plus a margin ranging from 350
to 375 basis points. The facility contains various covenants including financial covenants with
respect to consolidated interest and fixed charge coverage and secured debt to secured asset value.
As of December 31, 2010, we were in compliance with all these financial covenants. As of
December 31, 2010 and December 31, 2009, the outstanding principal amount of our obligations under
the credit agreement was approximately $13.1 million and $15.9 million, respectively.
37
Wells Fargo Bank, National Association
On November 13, 2007, we entered into a loan agreement with Wells Fargo Bank, National Association,
successor by merger to Wachovia Bank, N.A to facilitate the acquisition of properties during our
offering period. Pursuant to the terms of the loan agreement, we may borrow $22.4 million at an
interest rate of 140 basis points over 30-day LIBOR, secured by specified real estate properties.
The loan agreement had a maturity date of November 13, 2010, and may be prepaid without penalty. On
October 22, 2010, we amended the loan agreement to extend the maturity date from November 13, 2010
to February 13, 2011. Effective February 13, 2011, the lender further extended the loan to May 13,
2011. During this three month extension, we intend to work with the lender in implementing a plan
that may include one or a combination of further extension of the loan refinancing, paying down a
portion of the principal and or sale of real estate assets. The entire $22.4 million available
under the terms of the loan was used to finance an acquisition of properties that closed on
November 15, 2007. This loan agreement contains various reporting covenants including providing
periodic balance sheet, statements of income and expenses of borrower and each guarantor, statement
of income and expenses and changes in financial position of each secured property and cash flow
statements of borrower and each guarantor. As of December 31, 2010, we were in compliance with all
these reporting covenants. As of December 31, 2010 and December 31, 2009, we had net borrowings of
approximately $15.9 million and $15.9 million, respectively, under the loan agreement.
Transamerica Life Insurance Company
In connection with our acquisition of Monroe North CommerCenter, on April 17, 2008, we entered into
an assumption and amendment of note, mortgage and other loan documents (the Loan Assumption
Agreement) with Transamerica Life Insurance Company (Transamerica). Pursuant to the Loan
Assumption Agreement, we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan. The loan matures on November 1, 2014 and bears interest at a fixed
rate of 5.89% per annum. This Loan Assumption Agreement contains various reporting covenants
including annual income statement, rent roll, operating budget and narrative summary of leasing
prospects for vacant spaces. As of December 31, 2010, we were in compliance with all these
reporting covenants. As of December 31, 2010 and 2009, we have an outstanding balance of
approximately $6.9 million and $7.1 million, respectively, under this loan agreement. The monthly
payment on this loan is approximately $50,369.
Contractual Obligations
The following table reflects our contractual obligations as December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
1 year |
|
1-3 years |
|
3-5 years |
|
5 years |
Notes payable (1) |
|
$ |
35,874,000 |
|
|
$ |
29,193,000 |
|
|
$ |
6,681,000 |
|
|
$ |
|
|
|
$ |
|
|
Interest expense related to long term debt (2) |
|
$ |
1,879,000 |
|
|
$ |
786,000 |
|
|
$ |
1,093,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
This represents the sum of a credit agreement with HSH Nordbank, AG
and loan agreements with Wells Fargo Bank National Association and
Transamerica Life Insurance Company. |
|
(2) |
|
Interest expenses related to the credit agreement with HSH Nordbank,
AG and loan agreement with Wells Fargo National Association are
calculated based on the loan balances outstanding at December 31,
2010, one month LIBOR at December 31, 2010 plus appropriate margin
ranging from 1.40% and 3.75%. Interest expense related to loan
agreement with Transamerica Life Insurance Company is based on a fixed
rate of 5.89% per annum. |
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have, a current or future material effect on
our financial condition, changes in the financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Inflation
Although the real estate market has not been affected significantly by inflation in the recent
years due to the relatively low inflation rate, we expect that the majority of our tenant leases
will include provisions that would protect us to some extent from the impact of inflation. Where
possible, our leases will include provisions for rent escalations and partial reimbursement to us
of expenses. Our ability to include provisions in the leases that protect us against inflation is
subject to competitive conditions that vary from market to market.
38
Subsequent Event
Effective February 13, 2011, the term of our loan from Wells Fargo Bank, National Association was
extended to May 13, 2011. During this three month extension, we intend to work with the lender in
implementing a plan that may include one or a combination of further extension of the loan
refinancing, paying down a portion of the principal and or sale of real estate assets.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States of America, or GAAP, requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We believe that our critical accounting policies are those that
require significant judgments and estimates such as those related to real estate purchase price
allocation, evaluation of possible impairment of real property assets, revenue recognition and
valuation of receivables, income taxes, notes receivable and uncertain tax positions. These
estimates are made and evaluated on an on-going basis using information that is currently available
as well as various other assumptions believed to be reasonable under the circumstances. Actual
results could vary from those estimates, perhaps in material adverse ways, and those estimates
could be different under different assumptions or conditions. Our significant accounting policies
are described in more details in Note 3 to the consolidated financial statements.
Investments in Real Estate
Upon acquisition of a property, we allocate the purchase price of the property based upon the fair
value of the assets acquired, which generally consist of land, buildings, site improvements and
intangible lease assets or liabilities including in-place leases, above market and below market
leases. We allocated the purchase price to the fair value of the tangible assets of an acquired
property by valuing the property as if it were vacant. The value of the building is depreciated
over an estimated useful life of 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease and our overall relationship with the respective tenant.
Acquired above and below market leases is valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our consolidated statements of operations.
Our policy is to consider any bargain periods in its calculation of fair value of below-market
leases and to amortize its below-market leases over the remaining non-cancelable lease term plus
any bargain renewal periods in accordance with FASB ASC 840-20-20, as determined by the Companys
management at the time it acquires real property with an in-place lease. The renewal option rates
for our acquired leases do not include any fixed rate options and, instead, contain renewal options
that are based on fair value terms at the time of renewal. Accordingly, no fixed rate renewal
options were included in the fair value of below-market leases acquired and the amortization period
is based on the acquired non-cancelable lease term. Should a significant tenant terminate their
lease, the unamortized portion of intangible assets or liabilities is charged to revenue.
Impairment of Real Estate Assets
Rental properties, properties undergoing development and redevelopment, land held for development
and intangibles are individually evaluated for impairment when conditions exist which may indicate
that it is probable that the sum of expected future undiscounted cash flows is less than the
carrying amount.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification
(ASC) 360, Accounting for the Impairment or Disposal of Long-lived Assets, we assessed whether
there has been an impairment in the value of our investments in
real estate whenever events or changes in circumstances indicate the carrying amount of an asset
may not be recoverable. Our portfolio is evaluated for impairment on a property-by-property basis.
Indicators of potential impairment include the following:
|
|
|
Change in strategy resulting in a decreased holding period; |
|
|
|
|
Decreased occupancy levels; |
|
|
|
|
Deterioration of the rental market as evidenced by rent decreases over numerous quarters; |
|
|
|
|
Properties adjacent to or located in the same submarket as those with recent impairment issues; |
|
|
|
|
Significant decrease in market price; and/or |
|
|
|
|
Tenant financial problems. |
39
We assess the expected undiscounted cash flows based upon numerous factors, including, but not
limited to, appropriate capitalization rates, construction costs, available market information,
historical operating results, known trends and market/economic conditions that may affect the
property and our assumptions about the use of the asset, including, if necessary, a
probability-weighted approach if multiple outcomes are under consideration. Upon determination
that impairment has occurred and that the future undiscounted cash flows are less than the carrying
amount, a write-down will be recorded to reduce the carrying amount to its estimated fair value.
During 2010 we recorded impairment charges related to two of our investments in real estate
totaling approximately $2.0 million. During 2009 we recorded impairment charge related to one of
our investments in real estate totaling approximately $2.4 million. The impairments were primarily
driven by reduced estimates of net operating income, primarily due to the impact of declines in the
industrial rental market and credit conditions of certain tenants, which when combined with
increases in the capitalization rates assumptions, resulted in the decreases in values of such
properties.
The assessment as to whether our investments in real estate are impaired is highly subjective. The
calculations, which are primarily based on discounted cash flow analyses, involve managements
best estimate of the holding period, market comparables, future occupancy levels, rental rates,
capitalization rates, lease-up periods and capital requirements for each property. A change in any
one or more of these factors could materially impact whether a property is impaired as of any given
valuation date.
Fair Value Measurement
FASB ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value in GAAP and provides for expanded disclosure about fair value
measurements. ASC 820-10 applies prospectively to all other accounting pronouncements that require
or permit fair value measurements. The adoption of ASC 820-10 did not have a material impact on
our financial statements since we do not record our financial assets and liabilities in our
financial statements at fair value. We adopted ASC 820-10 with respect to our non-financial assets
and non-financial liabilities on January 1, 2009. The adoption of ASC 820-10 with respect to our
non-financial assets and liabilities did not have a material impact on our financial statements.
Fair value represents the estimate of the proceeds to be received, or paid in the case of a
liability, in a current transaction between willing parties. ASC 820 establishes a fair value
hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are
either observable or unobservable in the marketplace. Observable inputs are based on market data
from independent sources and unobservable inputs reflect the reporting entitys assumptions about
market participant assumptions used to value an asset or liability. Level 1 includes quoted prices
in active markets for identical instruments. Level 2 includes quoted prices for similar instruments
in active markets; quoted prices for identical or similar instruments in inactive markets; and
model-derived valuations using observable market information for significant inputs. Level 3
includes valuation techniques where one or more significant inputs are unobservable. Financial
instruments are classified according to the lowest level input that is significant to their
valuation. A financial instrument that has a significant unobservable input along with significant
observable inputs may still be classified Level 3.
Certain assets and liabilities were measured at fair value on a nonrecurring basis. This category
included the impairment of real estate. During 2010 and 2009, we recorded impairment charges to
reduce certain investments in real estate assets to estimated fair value. The fair values of
investment in real estate included inputs based on managements estimate of net operating income,
expected occupancy changes, expected rental rates, capitalization rates and discount rates based on
available market information using a discounted cash flow analysis with a ten year hold period.
Because one or more of significant inputs are unobservable, the fair values of investment in real
estate are classified as Level 3.
The following table summarizes the two properties that were measured at fair value on a
nonrecurring basis as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Losses |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
for the |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December |
|
December |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
31, 2010 |
|
31, 2010 |
2111 South Industrial Park |
|
$ |
1,139,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,139,000 |
|
|
$ |
(770,000 |
) |
|
$ |
(770,000 |
) |
Shoemaker Industrial Buildings |
|
$ |
1,074,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,074,000 |
|
|
$ |
(1,250,000 |
) |
|
$ |
(1,250,000 |
) |
40
The following table summarizes the one property that was measured at fair value on a nonrecurring
basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Losses |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
for the |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December |
|
December |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
31, 2009 |
|
31, 2009 |
Marathon Center |
|
$ |
1,972,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,972,000 |
|
|
$ |
(2,360,000 |
) |
|
$ |
(2,360,000 |
) |
Revenue Recognition and Valuation of Receivables
Our revenues, which are comprised largely of rental income, include rents reported on a
straight-line basis over the initial term of the lease. Since our leases may provide for free
rent, lease incentives or rental increases at specified intervals, we are required to straight-line
the recognition of revenue, which results in the recording of a receivable for rent not yet due
under the lease terms. Accordingly, our management is required to determine, in its judgment, to
what extent the unbilled rent receivable applicable to each specific tenant is collectible.
Management will review unbilled rent receivable on a quarterly basis and take into consideration
the tenants payment history, the financial condition of the tenant, business conditions in the
industry in which the tenant operates and economic conditions in the area in which the property is
located. In the event that the collectability of unbilled rent with respect to any given tenant is
in doubt, we record an increase in our allowance for doubtful accounts or record a direct write-off
of the specific rent receivable.
Income Taxes
We have elected to be taxed as a REIT for federal income tax purposes beginning with our taxable
year ended December 31, 2006. To qualify as a REIT, we must meet certain organizational and
operational requirements, including a requirement to currently distribute at least 90% of the
REITs ordinary taxable income to stockholders. As a REIT, we generally will not be subject to
federal income tax on taxable income that it distributes to its stockholders. If we fail to
qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our
taxable income at regular corporate rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year during which qualification
is lost unless the Internal Revenue Service granted us relief under certain statutory provisions.
Such an event could materially adversely affect our net income and net cash available for
distribution to stockholders. However, we believe that we are organized and operate in such a
manner as to qualify for treatment as a REIT, beginning with our taxable year ended December 31,
2006, and we intend to operate in the foreseeable future in such a manner so that we will remain
qualified as a REIT in subsequent tax years for federal income tax purposes. 100% of the
distributions declared during 2010 represented a return of capital for federal income tax purposes.
95.07% of the distributions declared during 2009 represented a return of capital for federal
income tax purposes.
Notes Receivable
In May 2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two real estate
operating companies, Servant Investments, LLC and Servant Healthcare Investments, LLC
(collectively, Servant). In May 2010, the loan commitments were reduced to $8.75 million. The
loans mature on May 19, 2013. Servant is party to an alliance with the managing member of our
Advisor.
On a quarterly basis, we evaluate the collectability of our notes receivable. Our evaluation of
collectability involves judgment, estimates, and a review of the underlying collateral and
borrowers business models and future. For the year ended December 31, 2009, we recorded an
impairment of $4.6 million on the note receivable.
The following table reconciles notes receivable from January 1, 2008 to December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
2,875,000 |
|
|
$ |
3,875,000 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to note receivable |
|
|
1,125,000 |
|
|
|
3,626,000 |
|
|
|
3,875,000 |
|
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable repayments |
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable impairments |
|
|
|
|
|
|
(4,626,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
4,000,000 |
|
|
$ |
2,875,000 |
|
|
$ |
3,875,000 |
|
|
|
|
|
|
|
|
|
|
|
41
Notes Receivable from Related Parties
On January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth Haven L.P, a
Delaware limited partnership that is a wholly-owned subsidiary of Cornerstone Healthcare Plus REIT,
Inc., a publicly offered, non-traded REIT sponsored by affiliates of our sponsor. The loan was to
mature on January 21, 2010 subject to the borrowers right to repay the loan, in whole or in part,
on or before January 21, 2010 without incurring any prepayment penalty. On December 16, 2009,
Caruth Haven L.P. repaid the full loan amount.
On December 14, 2009, we made a participating first mortgage loan commitment of $8.0 million to
Nantucket Acquisition LLC, a Delaware limited liability company managed by Cornerstone Ventures
Inc., an affiliate of our advisor, in connection with Nantucket Acquisitions purchase of a 60-unit
senior living community known as Sherburne Commons located on the exclusive island of Nantucket,
MA. The loan matures on January 1, 2015, with no option to extend and bears interest at a fixed
rate of 8.0% for the term of the loan. Interest will be paid monthly with principal due at
maturity. Prepayment of the loan is not permitted without our consent and the loan is not
assumable.
On a quarterly basis, we evaluate the collectability of our notes receivable from related parties.
Our evaluation of collectability involves judgment, estimates, and a review of the underlying
collateral and borrowers business models and future operations. For the years ended December 31,
2010, 2009 and 2008, we did not record any impairment on note receivable from related party.
The following table reconciles notes receivable from related parties from January 1, 2008 to
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
6,911,000 |
|
|
$ |
|
|
|
$ |
|
|
Addition: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to note receivable from related parties |
|
|
1,089,000 |
|
|
|
20,911,000 |
|
|
|
|
|
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of note receivable from related parties |
|
|
|
|
|
|
(14,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
8,000,000 |
|
|
$ |
6,911,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain Tax Positions
In accordance with the requirements of ASC 740-10, Income Taxes, favorable tax positions are
included in the calculation of tax liabilities if it is more likely than not that our adopted tax
position will prevail if challenged by tax authorities. As a result of our REIT status, we are able
to claim a dividends-paid deduction on our tax return to deduct the full amount of common dividends
paid to stockholders when computing our annual taxable income. A REIT is subject to a 100% tax on
the net income from prohibited transactions. A prohibited transaction is the sale or other
disposition of property held primarily for sale to customers in the ordinary course of a trade or
business. There is a safe harbor which, if met, expressly prevents the Internal Revenue Service
from asserting the prohibited transaction test. As we have not had any sales of properties to date,
the prohibited transaction tax is not applicable. We have no income tax expense, deferred tax
assets or deferred tax liabilities associated with any such uncertain tax positions for the
operations of any entity included in the consolidated results of operations.
Recently Issued Accounting Pronouncements
Please refer to Note 3 of the Notes to the Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. We are exposed to the effects of interest rate changes as a result of borrowings used
to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate
investment portfolio and operations. Our profitability and the value of our investment portfolio
may be adversely affected during any period as a result of interest rate changes. We invest our
cash and cash equivalents in government backed securities and FDIC insured savings account which,
by its nature, are subject to interest rate fluctuations. However, we believe that the primary
market risk to which we will be exposed is interest rate risk relating to our credit facilities.
We borrow funds and make investments at a combination of fixed and variable rates. Interest rate
fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or
fixed rate loans receivable unless such instruments mature or are otherwise
42
terminated. Conversely,
movements in interest rates on variable rate debt would change our future earnings and cash flows,
but not significantly affect the fair value of those instruments. However, changes in required risk
premiums would result in changes in the fair value of floating rate instruments.
As of December 31, 2010, we had borrowed approximately $29.0 million under our variable rate credit
facility and loan agreement. An increase in the variable interest rate on the facilities
constitutes a market risk as a change in rates would increase or decrease interest incurred and
therefore cash flows available for distribution to shareholders. Based on the debt outstanding as
of December 31, 2010, a 1% change in interest rates would result in a change in interest expense of
approximately $290,000 per year.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in the real estate capital markets, market rental rates for office space, local,
regional and national economic conditions and changes in the credit worthiness of tenants. All of
these factors may also affect our ability to refinance our debt if necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. Exhibits, Financial Statement Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports we file or submit under the Securities and Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to our senior
management, including our chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief
Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and
have concluded that the disclosure controls and procedures were effective as of the end of the
period covered by this report.
In designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on their evaluation as of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer have concluded that we maintained effective internal control
over financial reporting as of December 31, 2010.
There have been no changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding control over financial reporting. Managements report was not subject to
attestation by our independent registered public accounting firm pursuant to the Dodd-Frank Wall
Street and Consumer Protection Act, which exempts non-accelerated filers from the auditor
attestation requirement of Section 404 (b) of the Sarbanes-Oxley Act.
ITEM 9B. OTHER INFORMATION
None.
43
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference from our definitive Proxy
Statement to be filed with the Securities and Exchange Commission no later than April 30, 2011.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our definitive Proxy
Statement to be filed with the Securities and Exchange Commission no later than April 30, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference from our definitive Proxy
Statement to be filed with the Securities and Exchange Commission no later than April 30, 2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference from our definitive Proxy
Statement to be filed with the Securities and Exchange Commission no later than April 30, 2011.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from our definitive Proxy
Statement to be filed with the Securities and Exchange Commission no later than April 30, 2011.
44
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following financial statements are included in a separate section of this Annual Report on
Form 10-K commencing on the page numbers specified below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Equity for the Years Ended December 31, 2010, 2009, and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008
Notes to Financial Statements
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loan and Real Estate
(3) Exhibits
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this annual report
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cornerstone Core Properties REIT, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone Core Properties
REIT, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, equity and cash flows for each of the three years in the
period ended December 31, 2010. Our audit also included the financial statement schedules listed
in the Index at Item 15. These consolidated financial statements and the financial statement
schedules are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Cornerstone Core Properties REIT, Inc. and subsidiaries as of December
31, 2010 and 2009, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects, the information set
forth therein.
As discussed in
Note 10 to the financial statements, the Company continues to pursue options for restructuring debt
obligations totaling $29,005,000 scheduled to mature in the next twelve months. Managements plans
with respect to this are also in Note 10.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 16, 2011
F-2
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,014,000 |
|
|
$ |
18,673,000 |
|
Investments in real estate |
|
|
|
|
|
|
|
|
Land |
|
|
38,680,000 |
|
|
|
38,604,000 |
|
Buildings and improvements, net |
|
|
84,119,000 |
|
|
|
87,671,000 |
|
Intangible lease assets, net |
|
|
462,000 |
|
|
|
804,000 |
|
|
|
|
|
|
|
|
|
|
|
123,261,000 |
|
|
|
127,079,000 |
|
Notes receivable, net |
|
|
4,000,000 |
|
|
|
2,875,000 |
|
Notes receivable from related parties |
|
|
8,000,000 |
|
|
|
6,911,000 |
|
Deferred costs and deposits |
|
|
33,000 |
|
|
|
29,000 |
|
Deferred financing costs, net |
|
|
271,000 |
|
|
|
174,000 |
|
Tenant and other receivables, net |
|
|
748,000 |
|
|
|
863,000 |
|
Other assets, net |
|
|
670,000 |
|
|
|
648,000 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
138,997,000 |
|
|
$ |
157,252,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
35,874,000 |
|
|
$ |
38,884,000 |
|
Accounts payable and accrued liabilities |
|
|
925,000 |
|
|
|
698,000 |
|
Payable to related parties |
|
|
11,000 |
|
|
|
347,000 |
|
Prepaid rent, security deposits and deferred revenue |
|
|
933,000 |
|
|
|
1,010,000 |
|
Intangible lease liabilities, net |
|
|
127,000 |
|
|
|
217,000 |
|
Distributions payable |
|
|
157,000 |
|
|
|
941,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
38,027,000 |
|
|
|
42,097,000 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000
shares authorized; no shares were issued or
outstanding at December 31, 2010 and 2009 |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 290,000,000
shares authorized; 23,074,381 and 23,114,201
shares issued and outstanding at December 31,
2010 and 2009, respectively |
|
|
23,000 |
|
|
|
24,000 |
|
Additional paid-in capital |
|
|
117,520,000 |
|
|
|
128,559,000 |
|
Accumulated deficit |
|
|
(16,690,000 |
) |
|
|
(13,559,000 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
100,853,000 |
|
|
|
115,024,000 |
|
Noncontrolling interest |
|
|
117,000 |
|
|
|
131,000 |
|
|
|
|
|
|
|
|
Total equity |
|
|
100,970,000 |
|
|
|
115,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
138,997,000 |
|
|
$ |
157,252,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
7,036,000 |
|
|
$ |
7,829,000 |
|
|
$ |
8,376,000 |
|
Tenant reimbursements & other income |
|
|
1,873,000 |
|
|
|
1,993,000 |
|
|
|
2,243,000 |
|
Interest income from notes receivable |
|
|
1,389,000 |
|
|
|
1,308,000 |
|
|
|
174,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,298,000 |
|
|
|
11,130,000 |
|
|
|
10,793,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance |
|
|
2,803,000 |
|
|
|
3,368,000 |
|
|
|
3,111,000 |
|
General and administrative |
|
|
2,163,000 |
|
|
|
1,608,000 |
|
|
|
1,421,000 |
|
Asset management fees and expenses |
|
|
1,654,000 |
|
|
|
1,822,000 |
|
|
|
1,328,000 |
|
Real estate acquisition costs |
|
|
52,000 |
|
|
|
430,000 |
|
|
|
|
|
Depreciation and amortization |
|
|
3,406,000 |
|
|
|
3,641,000 |
|
|
|
3,575,000 |
|
Provisions for impairment |
|
|
2,020,000 |
|
|
|
6,986,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,098,000 |
|
|
|
17,855,000 |
|
|
|
9,435,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(1,800,000 |
) |
|
|
(6,725,000 |
) |
|
|
1,358,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4,000 |
|
|
|
8,000 |
|
|
|
250,000 |
|
Interest expense |
|
|
(1,337,000 |
) |
|
|
(1,394,000 |
) |
|
|
(3,060,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(3,133,000 |
) |
|
|
(8,111,000 |
) |
|
|
(1,452,000 |
) |
Less: Net (loss) income attributable to the noncontrolling interest |
|
|
(2,000 |
) |
|
|
(8,000 |
) |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(3,131,000 |
) |
|
$ |
(8,103,000 |
) |
|
$ |
(1,455,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share attributable to common stockholders |
|
$ |
(0.14 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
22,921,142 |
|
|
|
21,806,219 |
|
|
|
14,241,215 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Stockholders |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
BALANCE December
31, 2007 |
|
|
9,908,551 |
|
|
|
10,000 |
|
|
|
64,239,000 |
|
|
|
(4,001,000 |
) |
|
|
60,248,000 |
|
|
|
309,000 |
|
|
|
60,557,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock |
|
|
9,264,536 |
|
|
|
10,000 |
|
|
|
73,891,000 |
|
|
|
|
|
|
|
73,901,000 |
|
|
|
|
|
|
|
73,901,000 |
|
Redeemed shares |
|
|
(198,108 |
) |
|
|
|
|
|
|
(1,437,000 |
) |
|
|
|
|
|
|
(1,437,000 |
) |
|
|
|
|
|
|
(1,437,000 |
) |
Special stock dividend |
|
|
1,595,141 |
|
|
|
1,000 |
|
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs |
|
|
|
|
|
|
|
|
|
|
(7,655,000 |
) |
|
|
|
|
|
|
(7,655,000 |
) |
|
|
|
|
|
|
(7,655,000 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(7,269,000 |
) |
|
|
|
|
|
|
(7,269,000 |
) |
|
|
(16,000 |
) |
|
|
(7,285,000 |
) |
Noncontrolling
interest distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145,000 |
) |
|
|
(145,000 |
) |
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,455,000 |
) |
|
|
(1,455,000 |
) |
|
|
3,000 |
|
|
|
(1,452,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December
31, 2008 |
|
|
20,570,120 |
|
|
|
21,000 |
|
|
|
121,768,000 |
|
|
|
(5,456,000 |
) |
|
|
116,333,000 |
|
|
|
151,000 |
|
|
|
116,484,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock |
|
|
3,121,623 |
|
|
|
3,000 |
|
|
|
24,650,000 |
|
|
|
|
|
|
|
24,653,000 |
|
|
|
|
|
|
|
24,653,000 |
) |
Redeemed shares |
|
|
(577,542 |
) |
|
|
|
|
|
|
(4,413,000 |
) |
|
|
|
|
|
|
(4,413,000 |
) |
|
|
|
|
|
|
(4,413,000 |
) |
Offering costs |
|
|
|
|
|
|
|
|
|
|
(2,802,000 |
) |
|
|
|
|
|
|
(2,802,000 |
) |
|
|
|
|
|
|
(2,802,000 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(10,644,000 |
) |
|
|
|
|
|
|
(10,644,000 |
) |
|
|
(12,000 |
) |
|
|
(10,656,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,103,000 |
) |
|
|
(8,103,000 |
) |
|
|
(8,000 |
) |
|
|
(8,111,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December
31, 2009 |
|
|
23,114,201 |
|
|
$ |
24,000 |
|
|
$ |
128,559,000 |
|
|
$ |
(13,559,000 |
) |
|
$ |
115,024,000 |
|
|
$ |
131,000 |
|
|
$ |
115,155,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock |
|
|
855,094 |
|
|
|
1,000 |
|
|
|
6,542,000 |
|
|
|
|
|
|
|
6,543,000 |
|
|
|
|
|
|
|
6,543,000 |
|
Redeemed shares |
|
|
(894,914 |
) |
|
|
(2,000 |
) |
|
|
(6,872,000 |
) |
|
|
|
|
|
|
(6,874,000 |
) |
|
|
|
|
|
|
(6,874,000 |
) |
Offering costs |
|
|
|
|
|
|
|
|
|
|
(498,000 |
) |
|
|
|
|
|
|
(498,000 |
) |
|
|
|
|
|
|
(498,000 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(10,211,000 |
) |
|
|
|
|
|
|
(10,211,000 |
) |
|
|
(12,000 |
) |
|
|
(10,223,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,131,000 |
) |
|
|
(3,131,000 |
) |
|
|
(2,000 |
) |
|
|
(3,133,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December
31, 2010 |
|
|
23,074,381 |
|
|
$ |
23,000 |
|
|
$ |
117,520,000 |
|
|
$ |
(16,690,000 |
) |
|
$ |
100,853,000 |
|
|
$ |
117,000 |
|
|
$ |
100,970,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,133,000 |
) |
|
$ |
(8,111,000 |
) |
|
$ |
(1,452,000 |
) |
Adjustments to reconcile net loss to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
335,000 |
|
|
|
236,000 |
|
|
|
435,000 |
|
Depreciation and amortization |
|
|
3,406,000 |
|
|
|
3,641,000 |
|
|
|
3,575,000 |
|
Straight line rents and amortization of acquired
above/below market lease intangibles |
|
|
79,000 |
|
|
|
(27,000 |
) |
|
|
326,000 |
|
Provisions for bad debt |
|
|
10,000 |
|
|
|
409,000 |
|
|
|
323,000 |
|
Provisions for impairment |
|
|
2,020,000 |
|
|
|
6,986,000 |
|
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Tenant and other receivables |
|
|
66,000 |
|
|
|
(406,000 |
) |
|
|
(255,000 |
) |
Other assets |
|
|
(227,000 |
) |
|
|
(165,000 |
) |
|
|
(36,000 |
) |
Account payable and accrued liabilities |
|
|
168,000 |
|
|
|
15,000 |
|
|
|
(381,000 |
) |
Payable to related parties |
|
|
(345,000 |
) |
|
|
351,000 |
|
|
|
6,000 |
|
Prepaid rent, security deposits and deferred revenue |
|
|
(77,000 |
) |
|
|
(41,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,302,000 |
|
|
|
2,888,000 |
|
|
|
2,541,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquisitions |
|
|
(1,315,000 |
) |
|
|
|
|
|
|
(8,192,000 |
) |
Additions to real estate |
|
|
(211,000 |
) |
|
|
(171,000 |
) |
|
|
(56,000 |
) |
Notes receivable disbursements |
|
|
(1,125,000 |
) |
|
|
(3,626,000 |
) |
|
|
(3,875,000 |
) |
|
|
|
|
|
Notes receivable disbursements to related parties |
|
|
(1,089,000 |
) |
|
|
(20,911,000 |
) |
|
|
|
|
Note receivable proceeds from related party |
|
|
|
|
|
|
14,000,000 |
|
|
|
|
|
Escrow deposits |
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,740,000 |
) |
|
|
(10,708,000 |
) |
|
|
(11,973,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
1,136,000 |
|
|
|
18,596,000 |
|
|
|
69,791,000 |
|
Redeemed shares |
|
|
(6,874,000 |
) |
|
|
(4,413,000 |
) |
|
|
(1,437,000 |
) |
Repayment of notes payable |
|
|
(3,010,000 |
) |
|
|
(6,742,000 |
) |
|
|
(27,448,000 |
) |
Offering costs |
|
|
(491,000 |
) |
|
|
(2,544,000 |
) |
|
|
(8,462,000 |
) |
Deferred offering costs |
|
|
|
|
|
|
|
|
|
|
(285,000 |
) |
Distributions paid to stockholders |
|
|
(5,587,000 |
) |
|
|
(4,474,000 |
) |
|
|
(2,699,000 |
) |
Distributions paid to noncontrolling interest |
|
|
(12,000 |
) |
|
|
(12,000 |
) |
|
|
(161,000 |
) |
Deferred financing costs |
|
|
(383,000 |
) |
|
|
(199,000 |
) |
|
|
(234,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(15,221,000 |
) |
|
|
212,000 |
|
|
|
29,065,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(16,659,000 |
) |
|
|
(7,608,000 |
) |
|
|
19,633,000 |
|
Cash and cash equivalents beginning of period |
|
|
18,673,000 |
|
|
|
26,281,000 |
|
|
|
6,648,000 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
2,014,000 |
|
|
$ |
18,673,000 |
|
|
$ |
26,281,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
991,000 |
|
|
$ |
1,199,000 |
|
|
$ |
2,904,000 |
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared not paid |
|
$ |
157,000 |
|
|
$ |
941,000 |
|
|
$ |
827,000 |
|
Distributions reinvested |
|
$ |
5,407,000 |
|
|
$ |
6,057,000 |
|
|
$ |
4,110,000 |
|
Offering costs payable to related parties |
|
$ |
7,000 |
|
|
$ |
1,000 |
|
|
$ |
39,000 |
|
Accrued additions to real estate |
|
$ |
9,000 |
|
|
$ |
|
|
|
$ |
|
|
Deferred financing cost |
|
$ |
49,000 |
|
|
$ |
|
|
|
$ |
|
|
Assumption of loan in connection with property acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,375,000 |
|
Security deposits and other liabilities assumed upon
acquisition of real estate |
|
$ |
|
|
|
$ |
|
|
|
$ |
127,000 |
|
Loan origination fee receivable |
|
$ |
|
|
|
$ |
80,000 |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010, 2009 and 2008
1. Organization
Cornerstone Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22, 2004
under the General Corporation Law of Maryland for the purpose of engaging in the business of
investing in and owning commercial real estate. As used in this report, we, us and our refer
to Cornerstone Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. We are recently formed and are subject to the general risks associated
with offering stage enterprise, including the risk of business failure. Subject to certain
restrictions and limitations, our business is managed by an affiliate, Cornerstone Realty Advisors,
LLC, a Delaware limited liability company that was formed on November 30, 2004 (the advisor),
pursuant to an advisory agreement.
Cornerstone Operating Partnership, L.P., a Delaware limited partnership (the Operating
Partnership) was formed on November 30, 2004. At December 31, 2010, we owned a 99.88% general
partner interest in the Operating Partnership while the advisor owned a 0.12% limited partnership
interest. We anticipate that we will conduct all or a portion of our operations through the
Operating Partnership. Our financial statements and the financial statements of the Operating
Partnership are consolidated in the accompanying consolidated financial statements. All
intercompany accounts and transactions have been eliminated in consolidation.
2. Public Offerings
On January 6, 2006, we commenced a public offering of a minimum of 125,000 shares and a maximum of
55,400,000 shares of our common stock, consisting of 44,400,000 shares for sale to the public (the
Primary Offering) and 11,000,000 shares for sale pursuant to our distribution reinvestment plan.
We stopped making offers under our initial public offering on June 1, 2009 upon raising gross
offering proceeds of approximately $172.7 million from the sale of approximately 21.7 million
shares, including shares sold under the distribution reinvestment plan. On June 10, 2009, SEC
declared our follow-on offering effective and we commenced a follow-on offering of up to 77,350,000
shares of our common stock, consisting of 56,250,000 shares for sale to the public (the Follow-On
Offering) and 21,100,000 shares for sale pursuant to our dividend reinvestment plan. The Primary
Offering and Follow-On Offering are collectively referred to as the Offerings. We retained
Pacific Cornerstone Capital, Inc. (PCC), an affiliate of our advisor, to serve as the dealer
manager for the Offerings. PCC is responsible for marketing our shares being offered pursuant to
the Offerings.
On November 23, 2010 we informed our investors of several decisions made by the board of directors
for the health of our REIT.
|
|
The Offering. Effective November 23, 2010, we stopped making and or accepting offers to
purchase shares of our stock while our board of directors evaluates strategic alternatives to
maximize value. |
|
|
Suspension of Distribution Reinvestment Plan. Our offerings included a distribution
reinvestment plan under which our stockholders could elect to have all or a portion of their
distributions reinvested in additional shares of our common stock. Consistent with the above
decision with respect to the offering, we have suspended our distribution reinvestment plan
effective on December 14, 2010. All distributions paid after December 14, 2010 had been and
will be made in cash. |
|
|
Distributions. Our board of directors has resolved to lower our distributions to a current
annualized rate of $0.08 per share (1% based on a share price of $8.00) from the current
annualized rate of $0.48 per share (6% based on a share price of $8.00), effective December
1, 2010. The rate and frequency of distributions is subject to the discretion of our board
of directors and may change from time to time based on our operating results and cash flow. |
|
|
Stock Repurchase Plan. After careful consideration of the proceeds that will be available
from our distribution reinvestment plan in 2010, and an assessment of our expected capital
expenditures, tenant improvement costs and other costs and obligations related to our
investments, our board of directors concluded that we will not have sufficient funds
available to us to prudently fund any redemptions during 2011. Accordingly, our board of
directors approved an amendment to our stock repurchase program to suspend redemptions under
the program, effective December 31, 2010. We can make no assurances as to when redemptions
will resume. The share redemption program may be amended, resumed, suspended again, or
terminated at any time based in part on our cash and debt position. |
As of December 31, 2010, approximately 20.9 million shares of our common stock had been sold in our
initial and follow-on public offering for aggregate gross proceeds of approximately $167.1 million.
This excludes shares issued under our distribution reinvestment plan.
F-7
3. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our consolidated financial statements. Such financial statements and accompanying
notes are the representations of our management, who is responsible for their integrity and
objectivity. These accounting policies conform to accounting principles generally accepted in the
United States of America, or GAAP, in all material respects, and have been consistently applied in
preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Financial Accounting Standards Board (FASB) issued Accounting Standard Codification (ASC)
810-10, Consolidation, which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and accordingly should
consolidate the entity. Before concluding that it is appropriate to apply the voting interest
consolidation model to an entity, an enterprise must first determine that the entity is not a
variable interest entity. We evaluate, as appropriate, our interests, if any, in joint ventures and
other arrangements to determine if consolidation is appropriate.
Use of Estimates
The preparation of our financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of the assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for the reporting period. Actual results could
materially differ from those estimates.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a
maturity of three months or less at the time of purchase to be cash equivalents.
Investments in Real Estate
In December 2007, the FASB issued ASC 805-10, Business Combinations. In summary, ASC 805-10
requires the acquirer of a business combination to measure at fair value the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with
limited exceptions. In addition, this standard requires acquisition costs to be expensed as
incurred. The standard became effective for fiscal years beginning after December 15, 2008, and
was to be applied prospectively, with no earlier adoption permitted. We adopted this standard on
January 1, 2009 and have expensed acquisition costs accordingly.
We allocate the purchase price of our properties in accordance with ASC 805-10. Upon acquisition of
a property, we allocate the purchase price of the property based upon the fair value of the assets
acquired, which generally consist of land, buildings, site improvements and intangible lease assets
or liabilities including in-place leases, above market and below market leases. We allocated the
purchase price to the fair value of the tangible assets of an acquired property by valuing the
property as if it were vacant. We are required to make subjective assessments as to the useful
lives of our depreciable assets. We consider the period of future benefit of the asset to
determine the appropriate useful lives. Depreciation of our assets is being charged to expense on a
straight-line basis over the assigned useful lives. The value of the building and improvements are
depreciated over an estimated useful life of 15 to 39 years.
In-place lease values are calculated based on managements evaluation of the specific
characteristics of each tenants lease and our overall relationship with the respective tenant.
Acquired above and below market leases is valued based on the present value of the difference
between prevailing market rates and the in-place rates over the remaining lease term. The value of
acquired above and below market leases is amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our consolidated statements of operations.
Our policy is to consider any bargain periods in its calculation of fair value of below-market
leases and to amortize its below-market leases over the remaining non-cancelable lease term plus
any bargain renewal periods in accordance with FASB ASC 840-20-20, as determined by the Companys
management at the time it acquires real property with an in-place lease. The renewal option rates
for our acquired leases do not include any fixed rate options and, instead, contain renewal options
that are based on fair value terms at the time of renewal. Accordingly, no fixed rate renewal
options were included in the fair value of below-market leases acquired and the amortization period
is based on the acquired non-cancelable lease term.
F-8
We amortize the value of in-place leases and above and below market leases over the initial term of
the respective leases. Should a tenant terminate its lease, the unamortized portion of the above or
below market lease value will be charged to revenue. If a lease is terminated prior to its
expiration, the unamortized portion of the tenant improvements, intangible lease assets or
liabilities and the in-place lease value will be immediately charged to expense. Should a
significant tenant terminate their lease, the unamortized portion of intangible assets or
liabilities of above and below market leases will be charged to revenue.
Depreciation of Real Property Assets
We are required to make subjective assessments as to the useful lives of our depreciable assets.
We consider the period of future benefit of the asset to determine the appropriate useful lives.
Depreciation of our assets is being charged to expense on a straight-line basis over the assigned
useful lives.
Impairment of Real Estate Assets
In accordance with FASB ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets,
we assessed whether there has been an impairment in the value of our investments in real estate
whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Our portfolio is evaluated for impairment on a property-by-property basis. Indicators
of potential impairment include the following:
|
|
|
Change in strategy resulting in a decreased holding period; |
|
|
|
|
Decreased occupancy levels; |
|
|
|
|
Deterioration of the rental market as evidenced by rent decreases over numerous quarters; |
|
|
|
|
Properties adjacent to or located in the same submarket as those with recent impairment issues; |
|
|
|
|
Significant decrease in market price; and/or |
|
|
|
|
Tenant financial problems. |
During 2010 we recorded an impairment charges related to two of our investments in real estate
totaling $2.0 million. During 2009 we recorded impairment charge related to one of our investments
in real estate totaling $2.4 million. The impairments were primarily driven by reduced estimates of
net operating income, primarily due to the impact of declines in the industrial rental market and
credit conditions of certain tenants, which when combined with increases in the capitalization
rates assumptions, resulted in the decreases in values of such properties.
The assessment as to whether our investments in real estate are impaired is highly subjective. The
calculations, which are primarily based on discounted cash flow analyses, involve managements
best estimate of the holding period, market comparables, future occupancy levels, rental rates,
capitalization rates, lease-up periods and capital requirements for each property. A change in any
one or more of these factors could materially impact whether a property is impaired as of any given
valuation date.
Fair Value Measurement
FASB ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value in GAAP and provides for expanded disclosure about fair value
measurements. ASC 820-10 applies prospectively to all other accounting pronouncements that require
or permit fair value measurements.
Fair value represents the estimate of the proceeds to be received, or paid in the case of a
liability, in a current transaction between willing parties. ASC 820 establishes a fair value
hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are
either observable or unobservable in the marketplace. Observable inputs are based on market data
from independent sources and unobservable inputs reflect the reporting entitys assumptions about
market participant assumptions used to value an asset or liability. Level 1 includes quoted prices
in active markets for identical instruments. Level 2 includes quoted prices for similar instruments
in active markets; quoted prices for identical or similar instruments in inactive markets; and
model-derived valuations using observable market information for significant inputs. Level 3
includes valuation techniques where one or more significant inputs are unobservable. Financial
instruments are classified according to the lowest level input that is significant to their
valuation. A financial instrument that has a significant unobservable input along with significant
observable inputs may still be classified Level 3.
F-9
Certain assets and liabilities were measured at fair value on a nonrecurring basis. This category
included the impairment of real estate. During 2010 and 2009, we recorded impairment charges to
reduce certain investments in real estate assets to estimated fair value. The fair values of
investment in real estate included inputs based on managements estimate of net operating income,
expected occupancy changes, expected rental rates, capitalization rates and discount rates based on
available market information using a discounted cash flow analysis with a ten year hold period.
Because one or more of significant inputs are unobservable, the fair values of investment in real
estate are classified as Level 3.
The following table summarizes the two properties that were measured at fair value on a
nonrecurring basis as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Losses |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
for the |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December |
|
December |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
31, 2010 |
|
31, 2010 |
2111 South Industrial Park |
|
$ |
1,139,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,139,000 |
|
|
$ |
(770,000 |
) |
|
$ |
(770,000 |
) |
Shoemaker Industrial Buildings |
|
$ |
1,074,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,074,000 |
|
|
$ |
(1,250,000 |
) |
|
$ |
(1,250,000 |
) |
The following table summarizes the one property that was measured at fair value on a nonrecurring
basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Prices |
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
|
|
Active |
|
|
|
|
|
|
|
|
|
Losses |
|
Losses |
|
|
|
|
|
|
Markets |
|
Significant |
|
|
|
|
|
Three |
|
for the |
|
|
|
|
|
|
for |
|
Other |
|
Significant |
|
Months |
|
Year |
|
|
Total Fair |
|
Identical |
|
Observable |
|
Unobservable |
|
Ended |
|
Ended |
|
|
Value |
|
Assets |
|
Inputs |
|
Inputs |
|
December |
|
December |
|
|
Measurement |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
31, 2009 |
|
31, 2009 |
Marathon Center |
|
$ |
1,972,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,972,000 |
|
|
$ |
(2,360,000 |
) |
|
$ |
(2,360,000 |
) |
Notes Receivable
In May 2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two real estate
operating companies, Servant Investments, LLC and Servant Healthcare Investments, LLC
(collectively, Servant). In May 2010, the loan commitments were reduced to $8.75 million. The
loans mature on May 19, 2013. Servant is party to an alliance with the managing member of our
Advisor.
On a quarterly basis, we evaluate the collectability of our notes receivable. Our evaluation of
collectability involves judgment, estimates, and a review of the underlying collateral and
borrowers business models and future. For the years ended December 31, 2009, we recorded an
impairment of $4.6 million on the note receivable.
The following table reconciles notes receivable from January 1, 2008 to December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
2,875,000 |
|
|
$ |
3,875,000 |
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to note receivable |
|
|
1,125,000 |
|
|
|
3,626,000 |
|
|
|
3,875,000 |
|
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable repayments |
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable impairments |
|
|
|
|
|
|
(4,626,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
4,000,000 |
|
|
$ |
2,875,000 |
|
|
$ |
3,875,000 |
|
|
|
|
|
|
|
|
|
|
|
F-10
Notes Receivable from Related Parties
On January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth Haven L.P, a
Delaware limited partnership that is a wholly-owned subsidiary of Cornerstone Healthcare Plus REIT,
Inc., a publicly offered, non-traded REIT sponsored by affiliates of our sponsor. The loan was to
mature on January 21, 2010 subject to the borrowers right to repay the loan, in whole or in part,
on or before January 21, 2010 without incurring any prepayment penalty. On December 16, 2009,
Caruth Haven L.P. repaid the full loan amount.
On December 14, 2009, we made a participating first mortgage loan commitment of $8.0 million to
Nantucket Acquisition LLC, a Delaware limited liability company managed by Cornerstone Ventures
Inc., an affiliate of our advisor, in connection with Nantucket Acquisitions purchase of a 60-unit
senior living community known as Sherburne Commons located on the exclusive island of Nantucket,
MA. The loan matures on January 1, 2015, with no option to extend and bears interest at a fixed
rate of 8.0% for the term of the loan. Interest will be paid monthly with principal due at
maturity. Prepayment of the loan is not permitted without our consent and the loan is not
assumable.
On a quarterly basis, we evaluate the collectability of our notes receivable from related parties.
Our evaluation of collectability involves judgment, estimates, and a review of the underlying
collateral and borrowers business models and future. For the years ended December 31, 2010, 2009
and 2008, we did not record any impairment on note receivable from related parties.
The following table reconciles notes receivable from related parties from January 1, 2008 to December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
6,911,000 |
|
|
$ |
|
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to note receivable from related parties |
|
|
1,089,000 |
|
|
|
20,911,000 |
|
|
|
|
|
Deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of note receivable from related parties |
|
|
|
|
|
|
(14,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
8,000,000 |
|
|
$ |
6,911,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Tenant and Other Receivables, net
Tenant and other receivables are comprised of rental and reimbursement billings due from tenants
and the cumulative amount of future adjustments necessary to present rental income on a
straight-line basis. Tenant receivables are recorded at the original amount earned, less an
allowance for any doubtful accounts, which approximates fair value. Management assesses the
realizability of tenant receivables on an ongoing basis and provides for allowances as such
balances, or portions thereof, that become uncollectible. For the years ended December 31, 2010,
2009 and 2008, provisions for bad debt amounted to approximately $10,000, $409,000, and $323,000,
respectively, which are included in property operating and maintenance expenses in the accompanying
consolidated statements of operations.
Other Assets, net
Other assets consist primarily of leasing commissions net of amortization and prepaid insurance.
Additionally, other assets will be amortized to expense over their future service periods.
Balances without future economic benefit are expensed as they are identified.
Deposits
Deposits primarily consist of utility deposits.
Deferred Financing Costs
Costs incurred in connection with debt financing are recorded as deferred financing costs. Deferred
financing costs are amortized using the straight-line basis which approximates the effective
interest rate method, over the contractual terms of the respective financings.
F-11
Revenue Recognition and Valuation of Receivables
Revenue is recorded in accordance with ASC 840-10, Leases, and SEC Staff Accounting Bulletin No.
104, Revenue Recognition in Financial Statements, as amended (SAB 104). Such accounting
provisions require that revenue be recognized after four basic criteria are met. These four
criteria include persuasive evidence of an arrangement, the rendering of service, fixed and
determinable income and reasonably assured collectability. Leases with fixed annual rental
escalators are recognized on a straight-line basis over the initial lease period, subject to a
collectability assessment. Rental income related to leases with contingent rental escalators is
generally recorded based on the contractual cash rental payments due for the period. Because our
leases provide for free rent, lease incentives, or other rental increases at specified intervals,
we straight-line the recognition of revenue, which results in the recording of a receivable for
rent not yet due under the lease terms. Our revenues are comprised largely of rental income and
other income collected from tenants. Tenant receivables are recorded at the original amount earned,
less an allowance for any doubtful accounts. Management assesses the realizability of tenant
receivables on an ongoing basis and provides for allowances as such balances, or portions thereof,
become uncollectible.
Organizational and Offering Costs
We are required to reimburse the advisor for such organization and offering costs up to 3.5% of the
cumulative capital raised in our public offerings. Organization and offering costs include items
such as legal and accounting fees, marketing, due diligence, promotional and printing costs and
amounts to reimburse our advisor for all costs and expenses such as salaries and direct expenses of
employees of our advisor and its affiliates in connection with registering and marketing our
shares. Our public offerings costs are recorded as an offset to additional paid-in capital, and
all organization costs are recorded as an expense at the time we become liable for the payment of
these amounts.
Noncontrolling Interest in Consolidated Subsidiary
Noncontrolling interest relates to the interest in the consolidated entities that are not
wholly-owned by us.
On January 1, 2009, we adopted ASC 810-10-65, Consolidation, which clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. ASC 810-10-65 also requires
consolidated net income to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest and requires disclosure, on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to the parent and to
the noncontrolling interest.
ASC 810-10-65 was required to be applied prospectively after adoption, with the exception of the
presentation and disclosure requirements, which were applied retrospectively for all periods
presented. As a result of the adoption of ASC 810-10-65, we reclassified the noncontrolling
interests proportionate share of losses and income to be in included in net loss for the years
ended December 31, 2008. We will periodically evaluate individual noncontrolling interests for
the ability to continue to recognize the noncontrolling interest as permanent equity in the
consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity
will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or
(b) its redemption value as of the end of the period in which the determination is made.
Income Taxes
We have 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 our taxable year ending December 31, 2006. To
qualify as a REIT, we must meet certain organizational and operational requirements, including a
requirement to currently distribute at least 90% of the REITs ordinary taxable income to
stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income
that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we
will then be subject to federal income taxes on our taxable income at regular corporate rates and
will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost unless the Internal Revenue Service
granted us relief under certain statutory provisions. Such an event could materially adversely
affect our net income and net cash available for distribution to stockholders. However, we believe
that we will be organized and operate in such a manner as to qualify for treatment as a REIT and
intend to operate in the foreseeable future in such a manner so that we will remain qualified as a
REIT for federal income tax purposes.
Uncertain Tax Positions
In accordance with the requirements of ASC 740-10, Income Taxes, favorable tax positions are
included in the calculation of tax liabilities if it is more likely than not that our adopted tax
position will prevail if challenged by tax authorities. As a result of our REIT status, we are able
to claim a dividends-paid deduction on our tax return to deduct the full amount of common dividends
paid to stockholders when computing our annual taxable income, which results in our taxable income
being passed through to our stockholders. A REIT is subject to a 100% tax on the net income from
prohibited transactions. A prohibited transaction is the sale or other disposition of property
held primarily for sale to customers in the ordinary course of a trade or business. There is a safe
harbor
F-12
which, if met, expressly prevents the Internal Revenue Service from asserting the prohibited
transaction test. We have not had any sales of properties to date. We have no income tax expense,
deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions
for the operations of any entity included in the consolidated results of operations.
Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are primarily
cash investments; cash is generally invested in investment-grade short-term instruments. On July
21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the
Dodd-Frank Wall Street Reform and Consumer Protection Act that implements far-reaching changes to
the regulation of the financial services industry, including provisions that made permanent the
$250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor
Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit
insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all
insured depository institutions. As of December 31, 2010 we had cash accounts in excess of FDIC
insured limits. We believe this risk is not significant.
As of December 31, 2010, we owned four properties in the state of California, three properties in
the state of Arizona and six properties in the state of Florida. Accordingly, there is a
geographic concentration of risk subject to fluctuations in each States economy.
Fair Value of Financial Instruments
FASB ASC 825-10, Financial Instruments, requires the disclosure of fair value information about
financial instruments whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value.
We generally determine or calculate the fair value of financial instruments using quoted market
prices in active markets when such information is available or using appropriate present value or
other valuation techniques, such as discounted cash flow analyses, incorporating available market
discount rate information for similar types of instruments and our estimates for non-performance
and liquidity risk. These techniques are significantly affected by the assumptions used, including
the discount rate, credit spreads, and estimates of future cash flow.
Our condensed consolidated balance sheets include the following financial instruments: cash and
cash equivalents, note receivable from related party, tenant and other receivables, other assets,
deferred costs and deposits, deferred financing costs, payable to related parties, prepaid rent,
security deposits and deferred revenue, accounts payable and accrued liabilities, and distributions
payable. We consider the carrying values to approximate fair value for these financial instruments
because of the short period of time between origination of the instruments and their expected
payment. The fair value of the note payable to related party is not determinable due to the related
party nature of the note payable.
The fair value of notes payable is estimated using lending rates available to us for financial
instruments with similar terms and maturities. As of December 31, 2010 and December 31, 2009, the
fair value of notes payable was approximately $35.9 million and $38.9 million, compared to the
carrying value of approximately $35.9 million and $38.9 million, respectively.
The fair value of note receivable is estimated using current rates at which management believes
similar loans would be made with similar terms and maturities. As of December 31, 2010 and December
31, 2009, the fair value of notes receivable was approximately $3.9 million and $3.0 million,
compared to the carrying value of approximately $4.0 million and $2.9 million, respectively.
The fair value of note receivable from related party is estimated using current rates at which
management believes similar loans would be made with similar terms and maturities. As of December
31, 2010 and December 31, 2009, the fair value of notes receivable was approximately $8.0 million
and $3.0 million, compared to the carrying value of approximately $8.0 million and $2.9 million,
respectively.
Basic and Diluted Net Loss per Common Share Attributable to Common Stockholders
Basic net loss per common share attributable to common stockholders per share is computed by
dividing net loss attributable to common stockholder by the weighted-average number of common
shares outstanding for the period. For the years ended December 31, 2010, 2009 and 2008, stock
options of 65,000, 65,000, and 65,000, respectively have been excluded from weighted-average number
of common shares outstanding since their effect was anti-dilutive.
Basic and diluted net loss per share is calculated as follows:
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net loss attributable to common stockholders |
|
$ |
(3,131,000 |
) |
|
$ |
(8,103,000 |
) |
|
$ |
(1,455,000 |
) |
Basic and diluted net loss per common share attributable to
common stockholders |
|
$ |
(0.14 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.10 |
) |
Weighted average number of shares outstanding basic and diluted |
|
|
22,921,142 |
|
|
|
21,806,219 |
|
|
|
14,241,215 |
|
Segment Disclosure
ASC 280-10, Segment Reporting, establishes standards for reporting financial and descriptive
information about an enterprises reportable segments. Our current business consists of acquiring
and operating real estate assets. Management evaluates operating performance on an individual
property level. However, as each of our properties has similar economic characteristics, our
properties have been aggregated into one reportable segment.
Reclassification
Certain reclassifications have been made to the consolidated statement of operations for the year
ended December 31, 2009 to be consistent with the 2009 presentation. Specifically, $0.3 million of
asset management expense reimbursed to the Advisor for the year ended December 31, 2009 has been
reclassified from general and administrative expenses to asset management fees and expenses. For the
year ended December 31, 2008, no such expenses have been incurred or reimbursed to our Advisor.
Management believes this change in presentation provides a comprehensive view of all expenses
related to asset management.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued an Accounting Standards Update (ASU) 2010-02, Consolidation
Accounting and Reporting for Decreases in Ownership of a Subsidiary A Scope Clarification, to
address implementation issues associated with the accounting for decreases in the ownership of a
subsidiary. The new guidance clarified the scope of the entities covered by the guidance related
to accounting for decreases in the ownership of a subsidiary and specifically excluded in-substance
real estate or conveyances of oil and gas mineral rights from the scope. Additionally, the new
guidance expands the disclosures required for a business combination achieved in stages and
deconsolidation of a business or nonprofit activity. The new guidance became effective for interim
and annual periods ending on or after December 31, 2009 and must be applied on a retrospective
basis to the first period that an entity adopted the new guidance related to noncontrolling
interests. We adopted this guidance on January 1, 2010 and it did not have a material impact on
our consolidated financial statements and disclosures.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 specifies that, for
material business combinations when comparative financial statements are presented, revenue and
earnings of the combined entity should be disclosed as though the business combination had occurred
as of the beginning of the comparable prior annual reporting period. ASU 2010-09 also expands the
supplemental pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. ASU 2010-09 is effective prospectively for business
combinations with an acquisition date on or after the beginning of the first annual reporting
period after December 15, 2010. Early adoption is permitted. We adopted this guidance on January
1, 2010 and it did not have a material impact on our consolidated financial statements and
disclosures.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 requires enhanced disclosures
regarding the nature of credit risk inherent in an entitys portfolio of financing receivables, how
that risk is analyzed, and the changes and reasons for those changes in the allowance for credit
losses. It requires an entity to provide a greater level of disaggregated information about the
credit quality of its financing receivables and its allowance for credit losses. ASU 2010-20 will
only impact disclosures. Disclosures related to information as of the end of a reporting period are
effective for interim and annual reporting periods ending on or after December 15, 2010. We adopted
this guidance on January 1, 2010 and it did not have a material impact on our consolidated
financial statements and disclosures.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition
and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09
clarifies that subsequent events should be evaluated through the date the financial statements are
issued. In addition, this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective upon issuance. We adopted this
guidance during the quarter ended March 31, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and
Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring
measurements. The guidance requires new disclosures regarding the transfer of assets and
liabilities between Level 1 (quoted prices in active market for identical assets or liabilities)
and Level 2 (significant other observable inputs) of the fair value measurement hierarchy,
including the reasons and the timing of the transfers. Additionally, the
F-14
guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of
the assets and liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance is effective for interim and annual periods beginning after December
15, 2009. We adopted this guidance on January 1, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.
4. Investments in Real Estate
As of December 31, 2010, cost and accumulated depreciation and amortization related to real estate
assets and related lease intangibles were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
|
|
|
|
|
Above- |
|
|
|
|
|
|
Below- |
|
|
|
|
|
|
|
Buildings and |
|
|
Market |
|
|
In-Place |
|
|
Market |
|
|
|
Land |
|
|
Improvements |
|
|
Leases |
|
|
Lease Value |
|
|
Leases |
|
Investment in real estate |
|
$ |
38,680,000 |
|
|
$ |
93,534,000 |
|
|
$ |
1,700,000 |
|
|
$ |
1,992,000 |
|
|
$ |
(823,000 |
) |
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(9,415,000 |
) |
|
|
(1,549,000 |
) |
|
|
(1,681,000 |
) |
|
|
696,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate and related
lease intangibles |
|
$ |
38,680,000 |
|
|
$ |
84,119,000 |
|
|
$ |
151,000 |
|
|
$ |
311,000 |
|
|
$ |
(127,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, cost and accumulated depreciation and amortization related to real estate
assets and related lease intangibles were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
Acquired |
|
|
|
|
|
|
|
|
|
|
|
Above- |
|
|
|
|
|
|
Below- |
|
|
|
|
|
|
|
Buildings and |
|
|
Market |
|
|
In-Place |
|
|
Market |
|
|
|
Land |
|
|
Improvements |
|
|
Leases |
|
|
Lease Value |
|
|
Leases |
|
Investment in real estate |
|
$ |
38,604,000 |
|
|
$ |
94,513,000 |
|
|
$ |
1,666,000 |
|
|
$ |
1,971,000 |
|
|
$ |
(824,000 |
) |
Less: accumulated depreciation and amortization |
|
|
|
|
|
|
(6,842,000 |
) |
|
|
(1,419,000 |
) |
|
|
(1,414,000 |
) |
|
|
607,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate and related
lease intangibles |
|
$ |
38,604,000 |
|
|
$ |
87,671,000 |
|
|
$ |
247,000 |
|
|
$ |
557,000 |
|
|
$ |
(217,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense associated with buildings and improvements for the years ended December 31,
2010, 2009 and 2008 was $2.9 million, $3.0 million, and $2.8 million, respectively.
The estimated useful lives for lease intangibles range from 1 month to 10 years. The
weighted-average amortization period for in-place lease, acquired above market leases and acquired
below market leases are 4.1 years, 4.7 years and 3.5 years, respectively.
Amortization associated with the lease intangible assets and liabilities for the years ended
December 31, 2010, 2009 and 2008 were $0.3 million, $0.5 million, and $1.3 million, respectively.
Anticipated amortization for each of the five following years ended December 31 is as follows:
|
|
|
|
|
|
|
Lease |
|
|
Intangibles |
2011 |
|
$ |
180,000 |
|
2012 |
|
$ |
82,000 |
|
2013 |
|
$ |
51,000 |
|
2014 |
|
$ |
12,000 |
|
2015 |
|
$ |
9,000 |
|
2016 and thereafter |
|
$ |
1,000 |
|
Future Minimum Lease Payments
The future minimum lease payments to be received under existing operating leases for properties
owned as of December 31, 2010 are as follows:
F-15
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
5,110,000 |
|
2012 |
|
|
3,190,000 |
|
2013 |
|
|
1,802,000 |
|
2014 |
|
|
450,000 |
|
2015 |
|
|
153,000 |
|
2016 and thereafter |
|
|
349,000 |
|
|
|
|
|
|
|
$ |
11,054,000 |
|
|
|
|
|
The schedule does not reflect future rental revenues from the potential renewal or replacement of
existing and future leases and excludes property operating expense reimbursements. Additionally,
leases where the tenant can terminate the lease with short-term notice are not included. Industrial
space in the properties is generally leased to tenants under lease terms that provide for the
tenants to pay increases in operating expenses in excess of specified amounts.
5. Notes Receivable
In May 2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two real estate
operating companies, Servant Investments, LLC and Servant Healthcare Investments, LLC
(collectively, Servant). In May 2010, the loan commitments were reduced to $8.75 million. The
loans mature on May 19, 2013. Servant is party to an alliance with the managing member of our
Advisor. As of December 31, 2010, our aggregate advances to Servant under the loan commitment were
approximately $8.75 million. On a quarterly basis, we evaluate the collectability of our notes
receivable. Our evaluation of collectability involves judgment, estimates and a review of the
Servant business plans and their operating projections. During the quarter ended September 30,
2009, we concluded that the collectability of one note cannot be reasonably assured and therefore,
we recorded a note receivable reserve of approximately $4.8 million against the balance of that
note. The amount of this reserve has been included in our consolidated statements of operations
under impairment of note receivable, which was recorded for the quarter ended September 30, 2009.
As of December 31, 2010 and December 31, 2009, the impaired notes receivable had a net zero
balance. It is our policy to recognize interest income on the reserved loan advances on a cash
basis. We continue to explore repayment alternatives with the borrower. For the years ended
December, 2010, 2009, and 2008, interest income related to the impaired note receivable was
approximately $0.4 million, $0.3 million and $0, respectively. As of December 31, 2010 and December
31, 2009, the other note receivable had a balance of approximately $4.0 million and $2.9 million,
respectively. Interest income related to the other note receivable for the years ended December 31,
2010, 2009, and 2008, was approximately $0.3 million, $0.2 million and $0.2 million, respectively.
6. Notes Receivable from Related Parties
On January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth Haven L.P, a
Delaware limited partnership that is a wholly-owned subsidiary of Cornerstone Healthcare Plus REIT,
Inc., a publicly offered, non-traded REIT sponsored by affiliates of our sponsor. The loan was to
mature on January 21, 2010 subject to the borrowers right to repay the loan, in whole or in part,
on or before January 21, 2010 without incurring any prepayment penalty. On December 16, 2009,
Caruth Haven L.P. repaid the full loan amount. For the year ended December 31, 2010 and 2009, we
earned interest income of approximately $0.0 million and $0.8 million, respectively.
On December 14, 2009, we made a participating first mortgage loan commitment of $8.0 million to
Nantucket Acquisition LLC, a Delaware limited liability company managed by Cornerstone Ventures
Inc., an affiliate of our advisor, in connection with Nantucket Acquisitions purchase of a 60-unit
senior living community known as Sherburne Commons located on the exclusive island of Nantucket,
MA. The loan matures on January 1, 2015, with no option to extend and bears interest at a fixed
rate of 8.0% for the term of the loan. Interest will be paid monthly with principal due at
maturity. In addition, under the terms of the loan, we are entitled to receive additional interest
in the form of a 40% participation in the shared appreciation of the property, which is
calculated based on the net sales proceeds if the property is sold, or the propertys appraised
value, less ordinary disposition costs, if the property has not been sold by the time the loan
matures. Prepayment of the loan is not permitted without our consent and the loan is not assumable.
As of December 31, 2010 and 2009, the loan balance was approximately $8.0 million and $6.9 million,
respectively. For the years ended December 31, 2010 and 2009, we earned interest income of
approximately $0.6 million and $31,000.
Nantucket Acquisition LLC is considered a variable interest entity because the equity owners of the
Nantucket Acquisition LLC do not have sufficient equity at risk, and our mortgage loan commitment
was determined to be a variable interest. We have determined that we are not the primary
beneficiary of this Variable Interest Entity (VIE) since we do not have the power to direct the
activities of this VIE.
F-16
7. Payable to Related Parties
Payable to related parties at December 31, 2010 and December 31, 2009 consists of acquisition fees,
expense reimbursement payable, sales commissions and dealer manager fees to the advisor and PCC.
8. Equity
Common Stock
Our articles of incorporation authorize 290,000,000 shares of common stock with a par value of
$0.001 and 10,000,000 shares of preferred stock with a par value of $0.001. As of December 31,
2010, we had cumulatively issued approximately 20.9 million shares of common stock for a total of
approximately $167.1 million of gross proceeds, exclusive of shares issued under our distribution
reinvestment plan. As of December 31, 2009, we had issued approximately 20.8 million shares of
common stock for a total of approximately $165.9 million of gross proceeds, exclusive of shares
issued under our distribution reinvestment plan. On November 23, 2010, we stopped making and
accepting offers to purchase shares of our stock.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan that allows our stockholders to have distributions
and other distributions otherwise distributable to them invested in additional shares of our common
stock. On November 23, 2010, our board of directors approved to amend our operating agreement to
terminate the distribution reinvestment plan effective December 14, 2010. Any subsequent
distribution will be paid in cash. We have registered 21,100,000 shares of our common stock for
sale pursuant to the distribution reinvestment plan. The purchase price per share is 95% of the
price paid by the purchaser for our common stock, but not less than $7.60 per share. As of
December 31, 2010, approximately 2.3 million shares had been issued under the distribution
reinvestment plan. As of December 31, 2009, approximately 1.59 million shares had been issued
under the distribution reinvestment plan. We cannot assure when we will resume or restart our
distribution reinvestment plan We may amend or terminate the distribution reinvestment plan for
any reason at any time upon 10 days prior written notice to participants.
Stock Repurchase Program
On November 23, 2010, our board of directors concluded that we would not have sufficient funds
available to us to fund any redemptions during 2011. Accordingly, our board of directors approved
an amendment to our stock repurchase program to suspend redemptions under the program effective
December 31, 2010. We can make no assurance as to when and on what terms redemptions will resume.
The share redemption program may be amended, resumed, suspended again, or terminated at any time
based in part on our cash and debt position. Our board has the authority to terminate the program
at any time upon 30 days written notice to our stockholders.
During the years ended December 31, 2010 and 2009, we redeemed shares pursuant to our stock
repurchase program follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Available That |
|
|
|
|
|
|
|
|
|
|
May Yet Be |
|
|
Total |
|
|
|
|
|
Redeemed |
|
|
Number of Shares |
|
Average Price |
|
Under the |
Period |
|
Redeemed |
|
Paid per Share |
|
Program |
January 2009 |
|
|
40,873 |
|
|
$ |
6.77 |
|
|
$ |
3,805,000 |
|
February 2009 |
|
|
137,395 |
|
|
$ |
7.51 |
|
|
$ |
2,773,000 |
|
March 2009 |
|
|
152,984 |
|
|
$ |
7.61 |
|
|
$ |
1,608,000 |
|
April 2009 |
|
|
83,284 |
|
|
$ |
7.55 |
|
|
$ |
979,000 |
|
May 2009 |
|
|
43,057 |
|
|
$ |
7.51 |
|
|
$ |
655,000 |
|
June 2009 (1) |
|
|
65,454 |
|
|
$ |
7.67 |
|
|
$ |
152,000 |
|
July 2009 |
|
|
23,079 |
|
|
$ |
7.39 |
|
|
$ |
|
|
August 2009 |
|
|
8,113 |
|
|
$ |
7.99 |
|
|
$ |
|
|
September 2009 |
|
|
8,178 |
|
|
$ |
7.98 |
|
|
$ |
|
|
October 2009 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
November 2009 |
|
|
3,560 |
|
|
$ |
7.96 |
|
|
$ |
|
|
December 2009 |
|
|
11,565 |
|
|
$ |
7.97 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In June 30, 2009, the shares repurchases equaled the funds
available for repurchase in 2009, accordingly, we made no further
ordinary redemptions (other than redemptions due to death of a
stockholder) for the remainder of 2009. |
F-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Available That |
|
|
Total |
|
|
|
|
|
May Yet Be |
|
|
Number of Shares |
|
Average Price |
|
Redeemed Under the |
Period |
|
Redeemed |
|
Paid per Share |
|
Program |
January 2010 |
|
|
249,146 |
|
|
$ |
7.46 |
|
|
$ |
6,057,000 |
|
February 2010 |
|
|
100,999 |
|
|
$ |
7.63 |
|
|
$ |
4,198,000 |
|
March 2010 |
|
|
159,479 |
|
|
$ |
7.76 |
|
|
$ |
2,190,000 |
|
April 2010 |
|
|
161,356 |
|
|
$ |
7.82 |
|
|
$ |
928,000 |
|
May 2010 (1) |
|
|
123,562 |
|
|
$ |
7.64 |
|
|
$ |
|
|
June 2010 |
|
|
39,822 |
|
|
$ |
7.98 |
|
|
$ |
|
|
July 2010 |
|
|
13,750 |
|
|
$ |
8.00 |
|
|
$ |
|
|
August 2010 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
September 2010 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
October 2010 |
|
|
5,225 |
|
|
$ |
7.98 |
|
|
$ |
|
|
November 2010 |
|
|
25,228 |
|
|
$ |
7.98 |
|
|
$ |
|
|
December 2010 |
|
|
16,348 |
|
|
$ |
7.96 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In May 2010, stock repurchase equaled the funds available for
repurchased in 2010, accordingly, we made no further ordinary
redemptions (other than redemptions due to death of a stockholder) for
the remainder of 2010. On November 23, 2010 our board of directors
approved an amendment to our stock repurchase program to suspend any
redemptions, include redemptions due to death of a stockholder, under
the program, effective December 31, 2010. |
Our board of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other sources. We have no
obligations to repurchase our stockholders shares of stock.
Employee and Director Incentive Stock Plan
We have adopted an Employee and Director Incentive Stock Plan (the Plan) which provides for the
grant of awards to our directors and full-time employees, as well as other eligible participants
that provide services to us. We have no employees, and we do not intend to grant awards under the
Plan to persons who are not directors of ours. Awards granted under the Plan may consist of
nonqualified stock options, incentive stock options, restricted stock, share appreciation rights,
and distribution equivalent rights. The term of the Plan is 10 years. The total number of shares
of common stock reserved for issuance under the Plan is equal to 10% of our outstanding shares of
stock at any time.
As of December 31, 2010, we had granted our nonemployee directors nonqualified stock options to
purchase an aggregate of 80,000 shares of common stock, at an exercise price of $8.00 per share.
Of these options, 15,000 shares lapsed and were canceled on November 8, 2008 due to the resignation
of one director from the board of directors on August 6, 2008.
Outstanding stock options became immediately exercisable in full on the grant date, expire in ten
years after the grant date, and have no intrinsic value as of December 31, 2010. We did not incur
any non-cash compensation expense for the years ended December 31, 2010, 2009 and 2008,
respectively. No stock options were exercised or canceled during the twelve months ended December
31, 2010 and 2009, respectively. We record compensation expense for non-employee stock options
based on the estimated fair value of the options on the date of grant using the Black-Scholes
option-pricing model. These assumptions include the risk-free interest rate, the expected life of
the options, the expected stock price volatility over the expected life of the options, and the
expected distribution yield. Compensation expense for employee stock options is recognized ratably
over the vesting term.
The expected life of the options is based on evaluations of expected future exercise behavior. The
risk free interest rate is based on the U.S. Treasury yield curve at the date of grant with
maturity dates approximately equal to the expected term of the options at the date of the grant.
Volatility is based on historical volatility of our stock. The valuation model applied in this
calculation utilizes highly subjective assumptions that could potentially change over time,
including the expected stock price volatility and the expected life of an option. Therefore, the
estimated fair value of an option does not necessarily represent the value that will ultimately be
realized by a non-employee director.
F-18
Equity Compensation Plan Information
Our equity compensation plan information as of December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Securities to be |
|
|
|
|
|
|
Issued Upon |
|
Weighted Average |
|
|
|
|
Exercise of |
|
Exercise Price of |
|
Number of Securities |
|
|
Outstanding Options, |
|
Outstanding Options, |
|
Remaining Available |
Plan Category |
|
Warrants and Rights |
|
Warrants and Rights |
|
for Future Issuance |
Equity compensation plans approved by security holders |
|
|
65,000 |
|
|
|
$ 8.00 |
|
|
See footnote (1) |
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,000 |
|
|
|
$ 8.00 |
|
|
See footnote (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our Employee and Director Incentive Stock Plan was approved by our
security holders and provides that the total number of shares issuable
under the plan is a number of shares equal to ten percent (10%) of our
outstanding common stock. The maximum number of shares that may be
granted under the plan with respect to incentive stock options
within the meaning of Section 422 of the Internal Revenue Code is
5,000,000. As of December 31, 2010 and 2009, there were approximately
23.1 million and 23.1 million shares of our common stock issued and
outstanding, respectively. |
Tax Treatment of Distributions
The income tax treatment for the distributions per share to common stockholders reportable for the
years ended December 31, 2010, 2009, and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Shares |
|
2010 |
|
2009 |
|
2008 |
Ordinary income |
|
$ |
|
|
|
|
|
% |
|
$ |
0.02 |
|
|
|
4.93 |
% |
|
$ |
|
|
|
|
|
% |
Return of capital |
|
$ |
0.45 |
|
|
|
100 |
% |
|
$ |
0.46 |
|
|
|
95.07 |
% |
|
$ |
0.47 |
|
|
|
100.00 |
% |
9. Related Party Transactions
Our company has no employees. Our advisor is primarily responsible for managing our business
affairs and carrying out the directives of our board of directors. We have an advisory agreement
with the advisor and a dealer manager agreement with PCC which entitle the advisor and PCC to
specified fees upon the provision of certain services with regard to the Offering and investment of
funds in real estate projects, among other services, as well as reimbursement for organizational
and offering costs incurred by the advisor and PCC on our behalf and reimbursement of certain costs
and expenses incurred by the advisor in providing services to us.
Advisory Agreement
Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to
present to us investment opportunities to provide a continuing and suitable investment program
consistent with the investment policies and objectives adopted by our board of directors. The
advisory agreement calls for our advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of directors, and to
perform other duties.
The fees and expense reimbursements payable to our advisor under the advisory agreement are
described below.
Organizational and Offering Costs. Costs of the offerings had been paid by the advisor on
our behalf and had been reimbursed to the advisor from the proceeds of the offering.
Organizational and offering costs consist of all expenses (other than sales commissions and the
dealer manager fee) to be paid by us in connection with the offering, including our legal,
accounting, printing, mailing and filing
fees, charges of our escrow holder and other accountable offering expenses, including, but not
limited to, (i) amounts to reimburse our advisor for all marketing related costs and expenses such
as salaries and direct expenses of employees of or advisor and its affiliates in connection with
registering and marketing our shares (ii) technology costs associated with the offering of our
shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of
attending retail seminars conducted by participating broker-dealers; and (v) payment or
reimbursement of bona fide due diligence expenses. At times during our offering stage, before the
maximum amount of gross proceeds has been raised, the amount of organization and offering expenses
that we incur, or that our advisor and its affiliates incur on our behalf, may exceed 3.5% of the
gross offering proceeds then raised. In no event will we have any obligation to
F-19
reimburse the
advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from
our public offerings at the conclusion of our offerings.
As of December 31, 2010, the advisor and its affiliates had incurred on our behalf organizational
and offering costs totaling approximately $5.6 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.5 million of offering costs which
reduce net proceeds of our offerings. Of this amount $4.4 million reduced the net proceeds of our
primary offering and $1.1 million reduced the net proceeds of our follow-on offering. As of
December 31, 2009, the advisor and its affiliates had incurred on our behalf organizational and
offering costs totaling approximately $5.2 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.1 million of offering costs which
reduce net proceeds of our offerings. Of this amount $4.4 million reduced the net proceeds of our
primary offering and $0.7 million reduced the net proceeds of our Follow-on Offering.
Acquisition Fees and Expenses. The advisory agreement requires us to pay the advisor
acquisition fees in an amount equal to 2% of the gross proceeds of our public offerings. We will
pay the acquisition fees upon receipt of the gross proceeds from our offerings. However, if the
advisory agreement is terminated or not renewed, the advisor must return acquisition fees not yet
allocated to one of our investments. In addition, we are required to reimburse the advisor for
direct costs the advisor incurs and amounts the advisor pays to third parties in connection with
the selection and acquisition of a property, whether or not ultimately acquired. For the years
ended December 31, 2010, 2009 and 2008, the advisor earned approximately $23,000, $0.4 million, and
$1.4 million of acquisition fees, respectively, and are included in the real estate acquisition
costs of our consolidated statement of operations.
Management Fees and Expenses. The advisory agreement requires us to pay the advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis book carrying
values of our assets invested, directly or indirectly, in equity interests in and loans secured by
real estate before reserves for depreciation or bad debts or other similar non-cash reserves,
calculated in accordance with GAAP. In addition, we will reimburse the advisor for the direct
costs and expenses incurred by the advisor in providing asset management services to us. These
fees and expenses are in addition to management fees that we expect to pay to third party property
managers. For the years ended 2010, 2009 and 2008, the advisor earned approximately $1.5 million,
$1.5 million, and $1.3 million, of asset management fees, respectively, which were expensed. For
the years ended 2010, 2009 and 2008, we reimbursed approximately $0.2 million, $0.3 million, and
$0.0 million of asset management services, respectively, which were expensed.
Operating Expenses. The advisory agreement provides for reimbursement of our advisors
direct and indirect costs of providing administrative and management services to us. For years
ended December 31, 2010, 2009 and 2008, approximately $875,000, $639,000, and $798,000 of such
costs, respectively, were reimbursed. The advisor must pay or reimburse us the amount by which our
aggregate annual operating expenses exceed the greater of 2% of our average invested assets or 25%
of our net income unless a majority of our independent directors determine that such excess
expenses were justified based on unusual and non-recurring factors.
Disposition Fee. The advisory agreement provides that if the advisor or its affiliate
provides a substantial amount of the services (as determined by a majority of our directors,
including a majority of our independent directors) in connection with the sale of one or more
properties, we will pay the advisor or such affiliate shall receive at closing a disposition fee up
to 3% of the sales price of such property or properties. This disposition fee may be paid in
addition to real estate commissions paid to non-affiliates, provided that the total real estate
commissions (including such disposition fee) paid to all persons by us for each property shall not
exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each
property or (ii) the competitive real estate commission for each property. We will pay the
disposition fees for a property at the time the property is sold. For the years ended 2010, 2009
and 2008, we did not incur any of such fees.
Subordinated Participation Provisions. The advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or termination of the
advisor, as follows:
|
|
|
After stockholders have received cumulative distributions equal to
$8 per share (less any returns of capital) plus cumulative,
non-compounded annual returns on net invested capital, the advisor
will be paid a subordinated participation in net sale proceeds
ranging from a low of 5% of net sales provided investors have
earned annualized returns of 6% to a high of 15% of net sales
proceeds if investors have earned annualized returns of 10% or
more. |
|
|
|
|
Upon termination of the advisory agreement, the advisor will
receive the subordinated performance fee due upon termination.
This fee ranges from a low of 5% of the amount by which the sum of
the appraised value of our assets minus our liabilities on the
date the advisory agreement is terminated plus total distributions
(other than stock distributions) paid prior to termination of the
advisory agreement exceeds the amount of invested capital plus
annualized returns of 6%, to a high of 15% of the amount by which
the sum of the appraised value of our assets minus its liabilities
plus all prior distributions (other than stock distributions)
exceeds the amount of invested capital plus annualized returns of
10% or more. |
|
|
|
|
In the event we list our stock for trading, the advisor will
receive a subordinated incentive listing fee instead of a
subordinated |
F-20
|
|
|
participation in net sales proceeds. This fee ranges
from a low of 5% of the amount by which the market value of our
common stock plus all prior distributions (other than stock
distributions) exceeds the amount of invested capital plus
annualized returns of 6%, to a high of 15% of the amount by which
the sum of the market value of our stock plus all prior
distributions (other than stock distributions) exceeds the amount
of invested capital plus annualized returns of 10% or more. |
For the years ended 2010, 2009 and 2008, we did not incur any of such fees.
Dealer Manager Agreement
PCC, as dealer manager, is entitled to receive a sales commission of up to 7% of gross proceeds
from sales in our primary offerings. PCC, as Dealer Manager, is also entitled to receive a dealer
manager fee equal to up to 3% of gross proceeds from sales in the Offerings. The Dealer Manager is
also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the
gross proceeds from sales in the Offerings. The advisory agreement requires the advisor to
reimburse us to the extent that offering expenses including sales commissions, dealer manager fees
and organization and offering expenses (but excluding acquisition fees and acquisition expenses
discussed above) are in excess of 13.5% of gross proceeds from the Offerings when combined with the
shares sold under the related distribution reinvestment plan. For the years ended December 31,
2010, 2009 and 2008, we incurred approximately $0.1 million, $1.8 million, and $7.0 million,
respectively, payable to PCC for dealer manager fees and sales commissions. Much of this amount
was reallowed by PCC to third party broker dealers. Dealer manager fees and sales commissions paid
to PCC are a cost of capital raised and, as such, are included as a reduction of additional paid in
capital in the accompanying consolidated balance sheets.
10. Notes Payable
We have
total
debt obligations of $29.0 million that will mature in May and
September of 2011. We are
pursuing options for restructuring these debts and other repayment alternatives, including asset
sales, sourcing additional equity capital and obtaining new financing that will reposition the
assets. However, there can be no assurance that we will be successful
in executing such debt
restructuring or repayment options. If we are unable to obtain alternative financing or sell properties in
order to repay the debt, this could result in the lenders foreclosing on properties. Based on the
various options available to us and ongoing discussions with our lenders, management
believes that we will be able to meet or successfully restructure our debt obligations.
HSH Nordbank AG
We amended our credit agreement with HSH Nordbank AG, New York Branch in September, October and
November 2010, extending the credit facility maturity date from September 20, 2010 to September
30, 2011. As a part of these amendments, we made a principal reduction payment of approximately
$2.8 million and paid extension fees of $130,000. We may not draw additional funds under this
credit agreement. The other terms of the credit agreement remain in full force and effect. We made
a $200,000 principal reduction payment in 2010 and will make additional principal reduction
payments ranging from $200,000 to $250,000 between January 1, 2011 and September 30, 2011. In
addition, the amendment to the credit agreement requires us to use commercially reasonable efforts
to pay off the outstanding principal balance of the loan with proceeds from refinancing with an
unaffiliated lender or from the sale of one or more of our properties in one or more arms length
all-cash transactions. The borrowing rate is based on 30-day LIBOR plus a margin ranging from 350
to 375 basis points. As of December 31, 2010 and 2009, the outstanding principal amount of our
obligations under the credit agreement was approximately $13.1 million and $15.9 million,
respectively. The facility contains various covenants including financial covenants with respect to
consolidated interest and fixed charge coverage and secured debt to secured asset value. As of
December 31, 2010, we were in compliance with all these financial covenants. An increase in the
variable interest rate on the facilities constitutes a market risk as a change in rates would
increase or decrease interest incurred and therefore cash flows available for distribution to
shareholders. Based on the debt outstanding as of December 31, 2010, a 1% change in interest rates
would result in a change in interest expense of approximately $131,000 per year.
Wells Fargo Bank, National Association
On November 13, 2007, we entered into a loan agreement with Wells Fargo Bank, National Association,
successor by merger to Wachovia Bank, N.A to facilitate the acquisition of properties during our
offering period. Pursuant to the terms of the secured loan agreement, we may borrow $22.4 million
at an interest rate of 140 basis points over 30-day LIBOR, secured by specified real estate
properties. The loan agreement had a maturity date of November 13, 2010, and may be prepaid
without penalty. On October 22, 2010, we amended the loan agreement to extend the maturity date
from November 13, 2010 to February 13, 2011. Effective February 13, 2011, the lender further
extended the loan to May 13, 2011. During this three month extension, we intend to work with the
lender in implementing a plan that may include one or a combination of further extension of the
loan refinancing, paying down a portion of the principal and or sale of real estate assets. The
entire $22.4 million available under the terms of the loan was used to finance an acquisition of
properties that closed on November 15, 2007. As of December 31, 2010 and December 31, 2009, we had
net borrowings of approximately $15.9 and $15.9 million, respectively under the credit agreement.
This loan agreement contains various reporting
F-21
covenants including providing periodic balance
sheet, statements of income and expenses of borrower and each guarantor, statement of income and
expenses and changes in financial position of each secured property and cash flow statements of
borrower and each guarantor. As of December 31, 2010, we were in compliance with all these
reporting covenants. An increase in the variable interest rate on the facilities constitutes a
market risk as a change in rates would increase or decrease interest incurred and therefore cash
flows available for distribution to shareholders. Based on the debt outstanding as of December 31,
2010, a 1% change in interest rates would result in a change in interest expense of approximately
$159,000 per year.
Transamerica Life Insurance Company
In connection with our acquisition of Monroe North CommerCenter, on April 17, 2008, we entered into
an assumption and amendment of note, mortgage and other loan documents (the Loan Assumption
Agreement) with Transamerica Life Insurance Company (Transamerica). Pursuant to the Loan
Assumption Agreement, we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica secured mortgage loan. The loan matures on November 1, 2014 and bears interest at
a fixed rate of 5.89% per annum. As of December 31, 2010 and 2009, we have an outstanding balance
of approximately $6.9 million and $7.1 million, respectively, under this loan agreement. This Loan
Assumption Agreement contains various reporting covenants including annual income statement, rent
roll, operating budget and narrative summary of leasing prospects for vacant spaces. As of
December 31, 2010, we were in compliance with all these reporting covenants. The monthly payment on
this loan is approximately $50,369. During the years ended December 31, 2010, 2009 and 2008, we
incurred $411,000, $422,000 and $304,000 of interest expense, respectively, related this loan.
The principal payments due on Monroe North CommerCenter mortgage loan as of December 31, 2010 for
each of the next five years are as follows:
|
|
|
|
|
|
|
Principal |
Year |
|
amount |
2011 |
|
$ |
204,000 |
|
2012 |
|
$ |
217,000 |
|
2013 |
|
$ |
230,000 |
|
2014 |
|
$ |
6,234,000 |
|
2015 |
|
$ |
|
|
In connection with our notes payable, we had incurred financing costs totaling approximately $2.0
million and $1.6 million, as of December 31, 2010 and December 31, 2009, respectively. These
financing costs have been capitalized and are being amortized over the life of the agreements.
During the years ended December 31, 2010, 2009 and 2008, approximately $335,000, $236,000, and
$435,000, respectively, of deferred financing costs were amortized and included in interest expense
in the consolidated statements of operations.
11. Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no
assurance that a material environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a material effect on our
financial condition, results of operations and cash flows. Further, we are not aware of any
environmental liability or any unasserted claim or assessment with respect to an environmental
liability that we believe would require additional disclosure or the recording of a loss
contingency.
Our commitments and contingencies include the usual obligations of real estate owners and operators
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our consolidated financial position, results of operations, and cash
flows. We are not presently subject to any material litigation nor, to our knowledge, is any
material litigation threatened against us which if determined unfavorably to us would have a
material adverse effect on our cash flows, financial condition or results of operations.
12. Business Combinations
On August 5, 2010, we completed the purchase of the 1830 Santa Fe property. The following summary
provides the preliminary allocation of the assets acquired and liabilities assumed as of the dates
of acquisition. We have accounted for all 2010 acquisitions as a business combination under U.S.
GAAP. Under business combination accounting, the assets and liabilities of acquisitions were
recorded as of the acquisition date, at their respective fair values, and consolidated in our
condensed consolidated financial statements. The break-down of the purchase prices of our 2010
acquisitions are as follows:
F-22
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended |
|
|
|
December 3, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
825,000 |
|
|
$ |
|
|
Buildings & improvements |
|
|
370,000 |
|
|
|
|
|
Site improvements |
|
|
36,000 |
|
|
|
|
|
Tenant improvements |
|
|
29,000 |
|
|
|
|
|
In place lease value |
|
|
21,000 |
|
|
|
|
|
Above market value |
|
|
34,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquisition |
|
$ |
1,315,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition expenses |
|
$ |
39,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The following unaudited pro forma information for twelve months ended December 31, 2009 has been
prepared to reflect the incremental effect of the acquisitions as if such transaction had occurred
on January 1, 2009. As this acquisition is assumed to have been made on January 1, 2009, the
shares raised during our offering needed to purchase the property are assumed to have been sold and
outstanding as of January 1, 2009 for purposes of calculating per share data.
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended December 31, |
|
|
2010 |
|
2009 |
Revenues |
|
$ |
10,368,000 |
|
|
$ |
11,250,000 |
|
Net loss attributable to common stockholders |
|
$ |
(3,100,000 |
) |
|
$ |
(8,049,000 |
) |
Basic and diluted net loss per common share
attributable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.37 |
) |
13. Selected Quarterly Data (unaudited)
Set forth below is certain unaudited quarterly financial information. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly, and in accordance with generally accepted accounting
principles, the selected quarterly information when read in conjunction with the consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
Revenues |
|
$ |
2,190,000 |
|
|
$ |
2,479,000 |
|
|
$ |
2,764,000 |
|
|
$ |
2,865,000 |
|
Expenses |
|
|
4,502,000 |
(3) |
|
|
2,702,000 |
|
|
|
2,349,000 |
|
|
|
2,545,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(2,312,000 |
) |
|
|
(223,000 |
) |
|
|
415,000 |
|
|
|
320,000 |
|
Net (loss) income |
|
$ |
(2,691,000 |
) |
|
$ |
(569,000 |
) |
|
$ |
107,000 |
|
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(2,689,000 |
) |
|
$ |
(569,000 |
) |
|
$ |
107,000 |
|
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted net loss per common share
attributable to common stockholders |
|
$ |
(0.12 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
23,049,975 |
|
|
|
22,880,212 |
|
|
|
23,003,752 |
|
|
|
23,003,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Revenues |
|
$ |
2,624,000 |
|
|
$ |
2,657,000 |
|
|
$ |
2,903,000 |
|
|
$ |
2,946,000 |
|
Expenses |
|
|
5,071,000 |
(2) |
|
|
7,387,000 |
(1) |
|
|
2,591,000 |
|
|
|
2,806,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(2,447,000 |
) |
|
|
(4,730,000 |
) |
|
|
312,000 |
|
|
|
140,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,771,000 |
) |
|
$ |
(5,068,000 |
) |
|
$ |
(47,000 |
) |
|
$ |
(225,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(2,768,000 |
) |
|
$ |
(5,063,000 |
) |
|
$ |
(47,000 |
) |
|
$ |
(225,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted net loss per common share
attributable to common stockholders |
|
$ |
(0.12 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
22,907,170 |
|
|
|
22,584,321 |
|
|
|
22,020,217 |
|
|
|
20,931,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in expenses for the three months ended September 30,
2009 is approximately $4.6 million of notes receivable impairment
provision. |
|
(2) |
|
Included in expenses for the three months ended December 31, 2009 is
approximately $2.4 million of real estate impairment provision. |
|
(3) |
|
Included in expenses for the three months ended December 31, 2010 is
approximately $2.0 million of real estate impairment provision. |
14. Subsequent Event
Wells Fargo Bank, National Association loan agreement
On February 13, 2011, we received an extension letter from Well Fargo Bank, National Association to
further extend our maturity date from February 13, 2011 to May 13, 2011. All other terms of the
loan agreement remain in full force and effect. During this three month extension, we intend to
work with the lender in implementing a plan that may include one or a combination of further
extension of the loan refinancing, paying down a portion of the principal and or sale of real
estate assets.
F-24
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
|
|
|
|
End of |
|
Description |
|
Period |
|
|
Expenses |
|
|
Deductions |
|
|
Period |
|
Year Ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
|
|
|
$ |
323,000 |
|
|
$ |
(7,000 |
) |
|
$ |
316,000 |
|
Allowance for notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
323,000 |
|
|
$ |
(7,000 |
) |
|
$ |
316,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
316,000 |
|
|
$ |
409,000 |
|
|
$ |
(234,000 |
) |
|
$ |
491,000 |
|
Allowance for notes receivable |
|
|
|
|
|
|
4,626,000 |
|
|
|
|
|
|
|
4,626,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
316,000 |
|
|
$ |
5,035,000 |
|
|
$ |
(234,000 |
) |
|
$ |
5,117,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
491,000 |
|
|
$ |
10,000 |
|
|
$ |
(90,000 |
) |
|
$ |
411,000 |
|
Allowance for notes receivable |
|
|
4,626,000 |
|
|
|
|
|
|
|
|
|
|
|
4,626,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,117,000 |
|
|
$ |
10,000 |
|
|
$ |
(90,000 |
) |
|
$ |
5,037,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum |
|
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
|
Initial Cost |
|
|
Subsequent |
|
|
|
|
|
|
Gross Amount Invested |
|
|
ulated |
|
|
Date |
|
|
|
|
|
|
Statement |
|
|
|
Emcumbr |
|
|
|
|
|
|
Building |
|
|
to |
|
|
|
|
|
|
|
|
|
|
Building |
|
|
|
|
|
|
Deprec |
|
|
of |
|
|
Date |
|
|
is |
|
Description |
|
ance |
|
|
Land |
|
|
& Improv. |
|
|
Acquisition |
|
|
Impairment |
|
|
Land |
|
|
and Improv. |
|
|
Total |
|
|
iation |
|
|
Construct |
|
|
Acquired |
|
|
Computed |
|
2111 S. Industrial Park,
Tempe, AZ |
|
$ |
|
|
|
$ |
589,000 |
|
|
$ |
1,479,000 |
|
|
$ |
39,000 |
|
|
$ |
770,000 |
|
|
$ |
351,000 |
|
|
$ |
800,000 |
|
|
$ |
1,151,000 |
|
|
$ |
12,000 |
|
|
|
1974 |
|
|
|
06/01/06 |
|
|
34 years |
Shoemaker Industrial
Building Santa Fe Spring,
CA |
|
|
|
|
|
|
952,000 |
|
|
|
1,521,000 |
|
|
|
39,000 |
|
|
|
1,250,000 |
|
|
|
440,000 |
|
|
|
644,000 |
|
|
|
1,084,000 |
|
|
|
5,000 |
|
|
|
2001 |
|
|
|
06/30/06 |
|
|
34 years |
15172 Goldenwest Circle
Westminister, CA |
|
|
(1 |
) |
|
|
7,186,000 |
|
|
|
4,335,000 |
|
|
|
95,000 |
|
|
|
|
|
|
|
7,186,000 |
|
|
|
4,430,000 |
|
|
|
11,616,000 |
|
|
|
467,000 |
|
|
|
1968 |
|
|
|
12/01/06 |
|
|
39 years |
20100 Western Avenue
Torrance, CA |
|
|
(1 |
) |
|
|
7,775,000 |
|
|
|
11,265,000 |
|
|
|
157,000 |
|
|
|
|
|
|
|
7,775,000 |
|
|
|
11,422,000 |
|
|
|
19,197,000 |
|
|
|
1,310,000 |
|
|
|
2001 |
|
|
|
12/01/06 |
|
|
39 years |
Mack Deer Valley Phoenix, AZ |
|
|
(1 |
) |
|
|
6,305,000 |
|
|
|
17,056,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
6,305,000 |
|
|
|
17,155,000 |
|
|
|
23,460,000 |
|
|
|
1,801,000 |
|
|
|
2005 |
|
|
|
01/21/07 |
|
|
39 years |
Marathon Tampa Bay, FL |
|
|
|
|
|
|
979,000 |
|
|
|
3,562,000 |
|
|
|
80,000 |
|
|
|
2,360,000 |
|
|
|
445,000 |
|
|
|
1,552,000 |
|
|
|
1,997,000 |
|
|
|
50,000 |
|
|
|
1989-1994 |
|
|
|
04/02/07 |
|
|
36 years |
Pinnacle Peak Phoenix, AZ |
|
|
(1 |
) |
|
|
6,766,000 |
|
|
|
13,301,000 |
|
|
|
|
|
|
|
|
|
|
|
6,766,000 |
|
|
|
13,301,000 |
|
|
|
20,067,000 |
|
|
|
1,208,000 |
|
|
|
2006 |
|
|
|
10/02/07 |
|
|
39 years |
Orlando Small Bay Portfolio
Orlando, FL |
|
|
(2 |
) |
|
|
6,612,000 |
|
|
|
30,957,000 |
|
|
|
144,000 |
|
|
|
|
|
|
|
6,613,000 |
|
|
|
31,101,000 |
|
|
|
37,714,000 |
|
|
|
3,425,000 |
|
|
|
2002-2005 |
|
|
|
11/15/07 |
|
|
39 years |
Monroe North
CommerCenter
Sanford, FL |
|
|
6,869,000 |
|
|
|
1,974,000 |
|
|
|
12,675,000 |
|
|
|
16,000 |
|
|
|
|
|
|
|
1,974,000 |
|
|
|
12,692,000 |
|
|
|
14,666,000 |
|
|
|
1,128,000 |
|
|
|
2002-2005 |
|
|
|
04/17/08 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1830 S. Santa Fe, Santa
Ana, CA |
|
|
|
|
|
|
825,000 |
|
|
|
435,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
825,000 |
|
|
|
437,000 |
|
|
|
1,262,000 |
|
|
|
9,000 |
|
|
|
2010 |
|
|
|
08/05/10 |
|
|
39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
6,869,000 |
|
|
$ |
39,963,000 |
|
|
$ |
96,586,000 |
|
|
$ |
671,000 |
|
|
$ |
4,380,000 |
|
|
$ |
38,680,000 |
|
|
$ |
93,534,000 |
|
|
$ |
132,214,000 |
|
|
$ |
9,415,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The credit agreement with HSH Nordbank AG is secured by these properties as of December 31,
2010, the balance related to this credit agreement was $13.1 million. |
|
(2) |
|
The loan agreement with Wachovia Bank is secured by this portfolio. as of December 31, 2010,
the balance related to this loan agreement was $15.9 million. |
F-26
|
|
|
(a) |
|
The changes in total real estate for the years ended December 31, 2010, 2009 and 2008 are
as follows. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Depreciation |
|
Balance at December 31, 2007 |
|
$ |
119,476,000 |
|
|
$ |
(1,273,000 |
) |
|
|
|
|
|
|
|
|
|
2008 Acquisitions |
|
|
15,972,000 |
|
|
|
(2,831,000 |
) |
2008 Additions |
|
|
121,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
135,569,000 |
|
|
$ |
(4,104,000 |
) |
|
|
|
|
|
|
|
|
|
2009 Impairment of real estate |
|
|
(2,623,000 |
) |
|
|
263,000 |
|
2009 Additions |
|
|
171,000 |
|
|
|
(3,001,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
133,117,000 |
|
|
$ |
(6,842,000 |
) |
2010 Acquisitions |
|
|
1,260,000 |
|
|
|
|
|
2010 Impairment of real estate |
|
|
(2,383,000 |
) |
|
|
363,000 |
|
2010 Additions |
|
|
220,000 |
|
|
|
(2,936,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
132,214,000 |
|
|
$ |
(9,415,000 |
) |
|
|
|
|
|
|
|
|
|
|
(b) |
|
For federal income tax purposes, the aggregate cost of our 13 properties is approximately
$139.8 million. |
F-27
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
SCHEDULE IV MORTGAGE LOAN ON REAL ESTATE
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Subject |
|
|
|
|
|
|
|
|
|
|
|
Periodic |
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
to Delinquent |
|
|
|
Interest |
|
|
Maturity |
|
|
Payment |
|
|
Prior |
|
|
Face Amount |
|
|
Amount of |
|
|
Principal or |
|
Description |
|
Rate |
|
|
Date |
|
|
Terms |
|
|
Liens |
|
|
of Mortgages |
|
|
Mortgages |
|
|
Interest |
|
First mortgage on property: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sherburne Commons Mortgage
Loan Nantucket,
Massachusetts |
|
|
8.0 |
% |
|
|
1/1/2015 |
|
|
|
(3 |
) |
|
|
|
|
|
$ |
8,000,000 |
(1) |
|
$ |
8,000,000 |
|
|
$ |
8,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,000,000 |
|
|
$ |
8,000,000 |
(2) |
|
$ |
8,000,000 |
|
|
|
|
(1) |
|
The loan commitment is for $8.0 million. As of December 31, 2010, we have funded $8.0 million. |
|
(2) |
|
The following shows the changes in the carrying amounts of mortgage loans during the year: |
|
|
|
|
|
|
|
2010 |
|
Balance at beginning of year |
|
$ |
6,911,000 |
|
Mortgage loan funded |
|
|
1,089,000 |
|
Deductions during the year: |
|
|
|
|
Collections of principal |
|
|
|
|
Foreclosures |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the close of year |
|
$ |
8,000,000 |
|
|
|
|
|
|
|
|
(3) |
|
Interest only payments are due monthly. Principal is due at maturity. |
F-28
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
CORNERSTONE CORE PROPERTIES REIT, INC.
|
|
Date: March 16, 2011 |
By: |
/s/ Terry G. Roussel
|
|
|
|
TERRY G. ROUSSEL |
|
|
|
Chief Executive Officer, President and
Chairman of the Board of Directors |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on March
16, 2011.
|
|
|
Name |
|
Title |
|
|
Chief Executive Officer and Director |
/s/ Terry G. Roussel
Terry G. Roussel
|
|
(Principal Executive Officer) |
|
|
|
|
|
Chief Financial Officer (Principal |
/s/ Sharon C. Kaiser
Sharon C. Kaiser
|
|
Financial and Accounting Officer) |
|
|
|
/s/ Paul Danchik
Paul Danchik
|
|
Director |
|
|
|
/s/ Jody J. Fouch
Jody J. Fouch
|
|
Director |
|
|
|
/s/ Daniel L. Johnson
Daniel L. Johnson
|
|
Director |
|
|
|
/s/ Lee Powell Stedman
Lee Powell Stedman
|
|
Director |
F-29
EXHIBIT INDEX
|
|
|
Ex. |
|
Description |
3.1
|
|
Amendment and Restatement of Articles of Incorporation (incorporated
by reference to Exhibit 3.2 to the Registrants Annual Report on Form
10-K filed on March 24, 2006) |
|
|
|
3.2
|
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3
to Post-Effective Amendment No. 1 to the Registration Statement on
Form S-11 (No. 333-121238) filed on December 23, 2005
(Post-Effective Amendment No. 1)) |
|
|
|
4.1
|
|
Subscription Agreement (incorporated by reference to Appendix A to
the prospectus included on Post-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-155640) filed on April
16, 2010 (Post-Effective Amendment No. 2)) |
|
|
|
4.2
|
|
Statement regarding restrictions on transferability of shares of
common stock (to appear on stock certificate or to be sent upon
request and without charge to stockholders issued shares without
certificates) (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-11 (No. 333-121238) filed on
December 14, 2004) |
|
|
|
4.3
|
|
Amended and Restated Distribution Reinvestment Plan (incorporated by
reference to Appendix B to the prospectus dated April 16, 2010
included on Post-Effective Amendment No. 2) |
|
|
|
10.1
|
|
Amended and Restated Advisory Agreement (incorporated by reference to
Exhibit 10.1 to Post-Effective Amendment No. 1) |
|
|
|
10.2
|
|
First Amendment to the Amended and Restated Advisory Agreement dated
as of March 10, 2009 (incorporated by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K filed on March 16, 2009) |
|
|
|
10.3
|
|
Agreement of Limited Partnership of Cornerstone Operating
Partnership, L.P. (incorporated by reference to Exhibit 10.2 to
Pre-Effective Amendment No. 4 to the Registration Statement on Form
S-11 (No. 333-121238) filed on August 30, 2005) |
|
|
|
10.4
|
|
Form of Employee and Director Stock Incentive Plan (incorporated by
reference to Exhibit 10.3 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-121238) filed on May 25,
2005) |
|
|
|
10.5
|
|
Purchase and Sale Agreement, dated April 28, 2006, by and between
Cornerstone Operating Partnership, L.P. and Mack Deer Valley Phase
II, LLC (incorporated by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on May 18, 2006) |
|
|
|
10.6
|
|
Purchase and Sale Agreement, dated April 6, 2006, as amended as of
May 23, 2006, by and between Cornerstone Operating Partnership, L.P.,
Squamar Limited Partnership and IPM, Inc. (incorporated by reference
to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed
on May 26, 2006) |
|
|
|
10.7
|
|
Purchase and Sale Agreement, dated June 16, 2006, by and between
Cornerstone Operating Partnership, L.P. and First Industrial
Harrisburg, LP (incorporated by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on June 29, 2006) |
|
|
|
10.8
|
|
Amendment to Agreement of Purchase and Sale, dated June 19, 2006, by
and between Cornerstone Operating Partnership, L.P. and First
Industrial Harrisburg, LP (incorporated by reference to Exhibit 99.2
to the Registrants Current Report on Form 8-K filed on June 29,
2006) |
F-30
|
|
|
Ex. |
|
Description |
10.9
|
|
Credit Agreement, dated as of June 30, 2006, among
Cornerstone Operating Partnership, L.P., Cornerstone
Core Properties REIT, Inc., Cornerstone Realty
Advisors, LLC, and HSH Nordbank AG, New York Branch
(Credit Agreement with HSH Nordbank AG, New York
Branch) (incorporated by reference to Exhibit 99.1
to the Registrants Current Report on Form 8-K filed
on July 7, 2006) |
|
|
|
10.10
|
|
Purchase and Sale Agreement by and between
Cornerstone Operating Partnership, L.P. and See Myin
& Ock Ja Kymm Family Trust dated August 17, 2006
(incorporated by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on
October 13, 2006) |
|
|
|
10.11
|
|
Amendment to Agreement of Purchase and Sale by and
between Cornerstone Operating Partnership, L.P. and
Myin & Ock Ja Kymm Family Trust, dated September 18,
2006 (incorporated by reference to Exhibit 99.2 to
the Registrants Current Report on Form 8-K filed on
October 13, 2006) |
|
|
|
10.12
|
|
Purchase and Sale Agreement by and between the
registrant and WESCO Harbor Gateway, L.P. dated
November 1, 2006 (incorporated by reference to
Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on November 21, 2006) |
|
|
|
10.13
|
|
15172 Goldenwest Circle Lease (incorporated by
reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on December 1,
2006) |
|
|
|
10.14
|
|
Purchase and Sale Agreement, as amended, by and
between Cornerstone Operating Partnership, L.P. and
CP 215 Business Park, LLC dated March 16, 2007
(incorporated by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on May
7, 2007) |
|
|
|
10.15
|
|
Purchase and Sale Agreement (Building M-1) by and
between Cornerstone Operating Partnership, L.P. and
CP 215 Business Park, LLC, a California limited
Liability company, dated May 2, 2007 (incorporated
by reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on May 23, 2007). |
|
|
|
10.16
|
|
Purchase and Sale Agreement (Buildings W-4, W-5 and
W-6) by and between Cornerstone Operating
Partnership, L.P. and CP 215 Business Park, LLC, a
California limited Liability company, dated May 2,
2007 (incorporated by reference to Exhibit 99.2 to
the Registrants Current Report on Form 8-K filed on
May 23, 2007). |
|
|
|
10.17
|
|
Purchase and Sale Agreement, as amended, by and
between Cornerstone Operating Partnership, L.P. and
LaPour Deer Valley North, LLC, an Arizona limited
liability company dated August 10, 2007
(incorporated by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on
September 14, 2007) |
|
|
|
10.18
|
|
Agreement of Purchase and Sale between Cornerstone
Operating Partnership and Small Bay Partners, LLC
dated September 14, 2007 (incorporated by reference
to Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on November 21, 2007) |
|
|
|
10.19
|
|
Second Amendment to Agreement of Purchase and Sale
between Cornerstone Operating Partnership and Small
Bay Partners, LLC dated October 24, 2007
(incorporated by reference to Exhibit 99.2 to the
Registrants Current Report on Form 8-K filed on
November 21, 2007) |
|
|
|
10.20
|
|
Loan Agreement, dated November 13 2007, by and among
COP-Monroe, LLC, COP-Carter, LLC, COP-Hanging Moss,
LLC and COP-Goldenrod, LLC, as borrower, and
Wachovia Bank, National Association, as Lender
(incorporated by reference to Exhibit 99.3 to the
Registrants Current Report on Form 8-K filed on
November 21, 2007) |
|
|
|
10.21
|
|
Purchase and Sale Agreement, by and between
Cornerstone Operating Partnership, L.P. and
Realvest-Monroe Commercenter LLC, a Florida limited
liability company, dated November 29, 2007
(incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on
April 23, 2008) |
|
|
|
10.22
|
|
First Amendment to Purchase and Sale Agreement, by
and between Cornerstone Operating Partnership, L.P.
and Realvest-Monroe Commercenter LLC, a Florida
limited liability company, dated January 15, 2008
(incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on
April 23, 2008) |
|
|
|
10.23
|
|
Second Amendment to Purchase and Sale Agreement, as amended, by and
between Cornerstone Operating Partnership, L.P. and Realvest-Monroe
Commercenter LLC, a Florida limited liability company, dated January
28, 2008 (incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K filed on April 23, 2008) |
|
|
|
10.24
|
|
Third Amendment to Purchase and Sale Agreement, as amended, by and
between Cornerstone Operating Partnership, L.P. |
F-31
|
|
|
Ex. |
|
Description |
|
|
and Realvest-Monroe
Commercenter LLC, a Florida limited liability company, dated
February 20, 2008 (incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K filed on April 23, 2008) |
|
|
|
10.25
|
|
Fourth Amendment to Purchase and Sale Agreement, as amended, by and
between Cornerstone Operating Partnership, L.P. and Realvest-Monroe
Commercenter LLC, a Florida limited liability company, dated April
1, 2008 (incorporated by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K filed on April 23, 2008) |
|
|
|
10.26
|
|
Assumption and Amendment of Note, Mortgage and Other Loan Documents,
by and between Cornerstone Operating Partnership, L.P. and
TransAmerica Life Insurance Company, an Iowa corporation, dated
April 17, 2008 (incorporated by reference to Exhibit 10.6 to the
Registrants Current Report on Form 8-K filed on April 23, 2008) |
|
|
|
10.27
|
|
Promissory Note in the amount of $6,640,000.00 made as of December
14, 2009 by NANTUCKET ACQUISITION LLC, to and in favor of
CORNERSTONE OPERATING PARTNERSHIP, L.P. (incorporated by reference
to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
on December 17, 2009) |
|
|
|
10.28
|
|
Promissory Note (with Shared Appreciation) in the amount of
$1,360,000.00 made as of December 14, 2009 by NANTUCKET ACQUISITION
LLC, to and in favor of CORNERSTONE OPERATING PARTNERSHIP, L.P.
(incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on December 17, 2009) |
|
|
|
10.29
|
|
Leasehold Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing made as of December 14, 2009, by
NANTUCKET ACQUISITION LLC, as Borrower to CORNERSTONE OPERATING
PARTNERSHIP, L.P., as Lender (incorporated by reference to Exhibit
10.3 to the Registrants Current Report on Form 8-K filed on
December 17, 2009) |
|
|
|
10.30
|
|
Operating Agreement for Nantucket Acquisition LLC dated as of
December 14, 2009 (incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K filed on December 17, 2009) |
|
|
|
10.31
|
|
Amendment No. 3 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of June 30, 2008 (incorporated by reference to
Exhibit 10 to the Registrants Quarterly Report on Form 10-Q filed
on November 12, 2008) |
|
|
|
10.32
|
|
Amendment No. 4 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of June 30, 2010 (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed
on August 16, 2010) |
|
|
|
10.33
|
|
Amendment No. 5 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of September 2, 2010 (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed
on November 15, 2010) |
|
|
|
10.34
|
|
Amendment No. 6 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of September 30, 2010 (incorporated by reference to
Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed
on November 15, 2010) |
|
|
|
10.35
|
|
Amendment No. 7 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of October 29, 2010 (incorporated by reference to
Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q filed
on November 15, 2010) |
|
|
|
10.36
|
|
Amendment No. 8 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of November 12, 2010 (incorporated by reference to
Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q filed
on November 15, 2010) |
|
|
|
10.37
|
|
Amendment No. 9 to Credit Agreement with HSH Nordbank AG, New York
Branch dated as of November 30, 2010 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on
December 6, 2010) |
F-32
|
|
|
Ex. |
|
Description |
14.1
|
|
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Registrants Annual Report on
Form 10-K filed on March 24, 2006) |
|
|
|
21.1
|
|
List of Subsidiaries (filed herewith) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
F-33