UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| for the fiscal year ended December 31, 2011 |
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| Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| Commission File Number 000-53912 |
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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
(Exact name of registrant as specified in its charter)
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| Maryland |
| 26-3455189 |
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| 2909 Hillcroft, Suite 420 Houston, Texas |
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| 77057 | |
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(713) 467-2222
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No
Indicate by check mark whether the registrant 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 x No
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.:
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| Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
There is no established market for the registrant's shares of common stock. The registrant is currently conducting an ongoing initial public offering of its shares of common stock pursuant to a Registration Statement on Form S-11, which shares are being sold at $10.00 per share, with discounts available for certain categories of purchasers. There were 675,588 shares of common stock held by non-affiliates at June 30, 2011; the last business day of the registrant's most recently completed second fiscal quarter.
As of April 10, 2012, there were 2,225,540 shares of the Registrant’s common shares issued and outstanding.
Hartman Short Term Income Properties XX, Inc.
Table of Contents
| PART I |
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| Item 1. | Business | 2 |
| Item 1A. | Risk Factors | 4 |
| Item 1B. | Unresolved Staff Comments | 7 |
| Item 2. | Properties | 7 |
| Item 3. | Legal Proceedings | 9 |
| Item 4. | Mining Safety Disclosure | 9 |
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| PART II |
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| Item 5. | Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | 9 |
| Item 6. | Selected Financial Data | 13 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 15 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risks | 21 |
| Item 8. | Financial Statements and Supplementary Data | 21 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 21 |
| Item 9A(T). | Controls and Procedures | 22 |
| Item 9B. | Other Information | 23 |
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| PART III |
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| Item 10. | Directors, Executive Officers and Corporate Governance | 23 |
| Item 11. | Executive Compensation | 26 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 27 |
| Item 13. | Certain Relationships and Related Transactions and Director Independence | 27 |
| Item 14. | Principal Accounting Fees and Services | 30 |
| PART IV |
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| Item 15. | Exhibits, Financial Statement Schedules | 32 |
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| SIGNATURES |
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Unless the context otherwise requires or clearly indicates otherwise, all references in this report to “we,” “us” or “our” are to Hartman Short Term Income Properties XX, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
This Form 10-K contains forward-looking statements, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-K include:
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| ● | the imposition of federal taxes if we fail to qualify as a REIT in any taxable year or forego an opportunity to ensure REIT status; |
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| ● | uncertainties related to the national economy, the real estate industry in general and in our specific markets; |
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| ● | legislative or regulatory changes, including changes to laws governing REITS; |
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| ● | construction costs that may exceed estimates or construction delays; |
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| ● | increases in interest rates; |
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| ● | availability of credit or significant disruption in the credit markets; |
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| ● | litigation risks; |
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| ● | lease-up risks; |
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| ● | inability to obtain new tenants upon the expiration of existing leases; |
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| ● | inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws; and |
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| ● | the potential need to fund tenant improvements or other capital expenditures out of operating cash flow. |
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of this Form 10-K.
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PART I
Item 1. Business
General
We are a Maryland corporation formed on February 5, 2009, to acquire and invest in income-producing commercial properties, including office buildings, shopping centers, other retail and commercial properties, some of which may be actively leased to a number of tenants having relatively short (1-3) year leases and others may be net leased to a single tenant. We expect to make our investments in or in respect of real estate assets located in the United States based on our view of existing market conditions. We have elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2011.
We are externally managed by Hartman Advisors, LLC, which we refer to as our “advisor,” pursuant to an advisory agreement by and among us and the advisor, the “Advisory Agreement.” Subject to certain restrictions and limitations, our advisor manages our day-to-day operations and our portfolio of properties and real estate related assets. Our advisor sources and presents investment opportunities to our board of directors. Our advisor also provides investment management, marketing, investor relations and other administrative services on our behalf.
We do not currently intend to list our common shares on a stock exchange. Our offices are located at 2909 Hillcroft, Suite 420, Houston, Texas 77057. Our telephone number is 713-467-2222. Information regarding the Company is available via the internet at www.hi-reit.com.
Business Objectives
Our primary investment objectives are to:
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| · | realize growth in the value of our investments within five to ten years of the termination of this offering; |
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| · | to preserve, protect and return your capital contribution; |
| · | to grow net cash from operations such that more cash is available for distributions to you; and | |
| · | to enable you to realize a return of your investment by beginning the process of liquidating and distributing cash to you or by listing our shares for trading on a national securities exchange within ten (10) years after termination of this offering. |
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We intend to begin the process of liquidating our assets or listing our shares within ten years of the termination of this primary offering, unless we obtain the approval of a majority of our shareholders to defer the liquidation or to approve an alternate strategy.
Competition
We anticipate that there will be competing properties in areas where we may acquire properties. The amount of competition in a particular area could impact our ability to acquire commercial real estate, lease space and impact the amount of rent we are able to charge. We may be competing with owners, including but not limited to, other REITs, insurance companies and pension funds, with access to greater resources than those available to us.
Management and Advisory Agreements
We operate under the direction of our board of directors, the members of which are accountable to us and our shareholders. Our external advisor is Hartman Advisors, LLC (“Hartman Advisors” or the “Advisor”) which is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. The key personnel of Hartman Advisors will be involved in the selection, acquisition, financing and disposition of
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our properties, and raising the capital to purchase. The key personnel of our advisor have extensive experience in selecting and operating commercial real estate and in operating investment entities that acquire commercial real estate. Our property manager is Hartman Income REIT Management, Inc. (“HIR Management” or the “Property Manager”) which is responsible for maintaining and operating our properties. HIR Management is the wholly owned second tier subsidiary of Hartman Income REIT, Inc. (“HIREIT”), a real estate investment trust that has investment objectives that in many material respects are similar to those that we intend to employ.
Employees
Although we have executive officers who will manage our operations, we do not have any paid employees. Substantially all of the paid services performed for us are rendered through the advisor or the property manager, with respect to the operation and maintenance of our properties.
Environmental Matters
Under various federal and state environmental laws and regulations, as an owner or operator of real estate, we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at our properties. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contaminations at any of our properties may adversely affect our ability to sell or lease the properties or to borrow using the properties as collateral.
We will not purchase any property unless and until we obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, groundwater or building materials from the property. Certain properties that we have acquired contain, or contained, dry-cleaning establishments utilizing solvents. Where believed to be warranted, samplings of building materials or subsurface investigations were undertaken with respect to these and other properties.
Website
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as Reports on Forms 3, 4 and 5 regarding our officers, directors or 10% beneficial owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website (www.hi-reit.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We have also made available on our website copies of our Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter. In the event of any changes to these charters or the code or guidelines, changed copies will also be made available on our website. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Materials on our website are not part of our Annual Report on Form 10-K.
Recent Developments
As of November 1, 2011 we have acquired 100% interest in Hartman Richardson Heights Properties, LLC (the “Joint Venture”). On December 28, 2010 the Company made an initial capital contribution to the Joint Venture of $1.915 million representing a 10% interest in the Joint Venture. Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”), the other member of the Joint Venture, is a REIT that is managed by affiliates of the Company’s advisor and real property manager. Hartman XIX made capital contributions totaling $17.235 million to the Joint Venture representing a 90%
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interest therein. Between April 19, 2011 and October 31, 2011, the Company acquired all the interest of Hartman XIX in the Joint Venture. Effective November 1, 2011 Hartman Richardson Heights Properties LLC is a wholly owned subsidiary of the Company.
Item 1A. Risk Factors
The following describes risk factors which we believe are applicable to the Company:
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There is no public trading market for our shares, and we cannot assure you that one will ever develop. Until our shares are listed, if ever, you may not sell your shares unless the buyer meets the applicable suitability and minimum purchase standards. Furthermore, if we do not achieve our goal of commencing a liquidation or listing within five to ten years after the termination of this offering, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment into cash easily with minimum loss. In addition, our charter prohibits the ownership of more than 9.8% of our outstanding shares of common or preferred stock, unless exempted by our board of directors. Until our shares are publicly traded, you will have difficulty selling your shares, and even if you are able to sell your shares, you will likely have to sell them at a substantial discount.
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Our board of directors arbitrarily set the offering price of our shares of common stock, and this price bears no relationship to the book or net value of our assets or to our expected operating income. Pursuant to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the rules of the Financial Industry Regulatory Authority (FINRA), we will provide annual estimates of the current value of a share of our common stock. Until eighteen months after this offering of our shares (unless a subsequent offering is underway within eighteen months of the close of this offering, in which case the price at which our shares are then being offered will apply), we intend to use the offering price of shares in our most recent primary offering as the estimated value of a share of our common stock (unless we have sold assets and made special distributions to stockholders of net proceeds from such sales, in which case the estimated value of a share of our common stock will equal the offering price less the amount of those special distributions constituting a return of capital). This valuation method may not result in an estimated per share value that accurately reflects the proceeds you would receive upon liquidation or upon the sale of your shares. Thereafter our board will determine the value of our common stock based on the latest data concerning our properties’ then current fair market value, as estimated by our board, and based on the amount and terms of any debt that we may issue and any classes of senior preferred stock that we may issue. The board may but need not employ an independent appraiser to assist with the valuation of the properties. If we engage in a subsequent offering of our shares, we will rely on the offering price of our shares to value our shares during that offering.
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We have limited operating history nor established financing sources, and the prior performance of real estate investment programs sponsored by affiliates of our advisor may not be an indication of our future results.
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This is a “blind pool” offering. We currently own only one property. Except as disclosed in this report, we may not identify any additional assets to acquire with proceeds from this offering. You will not have the opportunity to evaluate our investments prior to our making them. You must rely totally upon our advisor’s ability to select our investments.
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Our ability to acquire, develop and operate our properties could be impacted by the current slowing or recession in the U.S. economy. Because the U.S. economy has slowed and has been in recession, demand for our properties could be adversely impacted. If the U.S. economy continues to operate at the present rates or if it declines further, our strategy to acquire, develop, lease, finance and sell our properties could be impacted.
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Acquisition and ownership of real estate is subject to risks associated with environmental hazards. We may be liable for environmental hazards at our properties, including those created by prior owners or occupants, existing tenants, abutters or other persons. Some of the properties that we plan to develop or acquire may include facilities and tanks for the storage of petroleum products and other hazardous substances, all of which create the potential for environmental damages. As a result, we may be expected to regularly incur environmental clean up costs. We intend to include in the leases that we enter with future tenants, an agreement for such tenants to indemnify us
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from all environmental liabilities arising from their activities at such property during the term of the lease. Despite this indemnity, various federal and state laws impose environmental liabilities upon property owners, such as us, for any environmental damages arising on properties they own or occupy, and we cannot be assured that we will not be held liable for environmental clean up at our properties, including environmental damages at sites we own and lease. As an owner or previous owner of properties which contain environmental hazards, we also may be liable to pay damages to governmental agencies or third parties for costs and damages they incur arising from environmental hazards at the properties. Moreover, the costs and damages which may arise from environmental hazards are often difficult to project and our future tenants may not have sufficient resources to pay its environmental liabilities.
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The number of investments that we will make and the diversification of those investments will be reduced to the extent that we sell less than the maximum offering of 25,000,000 shares. If we do not sell substantially more than the minimum offering amount of 200,000 shares, we may make only one acquisition and the value of your investment may fluctuate more widely with the performance of that specific investment. There is a greater risk that you will lose money in your investment if we cannot diversify our portfolio.
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Our ability to achieve our investment objectives and to make distributions depends on the performance of our advisor for the day-to-day management of our business and the selection of our real estate properties, loans and other investments.
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Our property acquisition strategy may involve the acquisition of properties in markets that are depressed or overbuilt, and/or those with high growth potential in real estate lease rates and sale prices. As a result of our investment in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. Our intended approach to acquiring and operating income-producing properties involves more risk than comparable real estate programs that have a targeted holding period for investments longer than ours, utilize leverage to a lesser degree and/or employ more conservative investment strategies.
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Until the proceeds from this offering are invested and generating operating cash flow sufficient to make distributions to our stockholders, some or all of our distributions will be paid from other sources, such as from the proceeds of this or other offerings, cash advances to us by our advisor, cash resulting from a deferral of asset management fees, and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow, which may reduce the amount of capital we ultimately invest in assets, and negatively impact the return on your investment and the value of your investment. There is no limit on the amount of offering proceeds we may use to fund distributions.
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We expect to have little, if any, cash flow from operations available for distribution until we make substantial investments and until we have leased any properties developed by us. To the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.
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We will pay significant fees to our advisor and its affiliates, some of which are payable based upon factors other than the quality of services provided to us. These fees could influence our advisor’s advice to us as well as the judgment of affiliates of our advisor performing services for us.
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Our advisor and its affiliates will face various conflicts of interest resulting from their activities, such as conflicts related to allocating the purchase and leasing of properties and other assets between us and other Hartman-sponsored programs, conflicts related to any joint ventures, or other co-ownership arrangements between us and any such other programs and conflicts arising from time demands placed on our advisor and its executive officers in serving other Hartman-sponsored programs.
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We have issued to Hartman Advisors, our advisor, 1,000 shares of our convertible preferred stock at a purchase price of $10.00 per share. Our convertible preferred stock will convert to shares of common stock if (1) we have made total distributions on then outstanding shares of our common stock equal to the “issue price” of those shares,
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i.e., the gross amount originally paid to us for those shares, plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) we list our common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common stock (based on the 30-day average closing price) meets the same 6% performance threshold, or (3) our advisory agreement with Hartman Advisors expires without renewal or is terminated (other than because of a material breach by our advisor), and at the time of such expiration or termination we are deemed to have met the foregoing 6% performance threshold based on our enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, our convertible preferred stock will convert into shares of common stock with a value equal to 15% of the excess of our enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of our common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later or not at all.
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We may incur substantial debt. For the most part, loans we incur will be secured by one or more of our properties, which will put those properties at risk of forfeiture if we are unable to pay our debts and could hinder our ability to make distributions to our stockholders or could decrease the return on your investment and the value of your investment in the event income on such properties, or their value, falls. Principal and interest payments on these loans reduce the amount of money available to make distributions to you.
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To ensure that we continue to qualify as a REIT, our charter contains certain protective provisions, including a provision that prohibits any stockholder from owning more than 9.8% of our outstanding shares of common or preferred stock during any time that we are qualified as a REIT. However, our charter also allows our board to waive compliance with certain of these protective provisions, which may have the effect of jeopardizing our REIT status. Furthermore, this limitation does not apply to the holder of our convertible preferred stock or shares of common stock issued upon conversion of our convertible preferred stock.
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We may not qualify or remain qualified as a REIT for federal income tax purposes, which would subject us to the payment of tax on our income at corporate rates and reduce the amount of funds available for payment of distributions to our stockholders.
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If we hold and sell one or more properties through taxable REIT subsidiaries (“TRSs”), our return to stockholders would be diminished because the gain from any such sale would be subject to a corporate-level tax, thereby reducing the net proceeds from such sale available for distribution to our stockholders. Moreover, if the ownership and sale of one or more of our properties by a TRS causes the value of our non-mortgage securities in our TRSs to exceed 20% of the value of all of our assets at the end of any calendar quarter, we may lose our status as a REIT.
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Real estate investments are subject to general downturns in the industry as well as downturns in specific geographic areas. We cannot predict what the occupancy level will be in a particular building or that any tenant or mortgage or other real estate-related loan borrower will remain solvent. We also cannot predict the future value of our properties. Accordingly, we cannot guarantee that you will receive cash distributions or appreciation of your investment.
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You will not have preemptive rights as a stockholder; thus, any shares we issue in the future may dilute your interest in us.
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We may invest some of the offering proceeds to acquire vacant land on which a building will be constructed in the future. Additionally, we may acquire property for redevelopment. These types of investments involve risks relating to the construction company’s ability to control construction costs, failure to perform, or failure to build or redevelop in conformity with plan specifications and timetables. We will be subject to potential cost overruns and time delays for properties under construction or redevelopment. Increased costs of newly constructed or redeveloped properties may reduce our returns to you, while construction delays may delay our ability to distribute cash to you.
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Each of our executive officers, including Allen R. Hartman, who also serves as the chairman of our board of directors, also serve as officers of our advisor and other entities affiliated with our advisor, including the advisors to other Hartman-sponsored real estate programs, and as a result they will face conflicts of interest relating from their duties to these other entities.
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Because federal income tax laws may restrict us as a REIT from operating certain of our properties, we have determined not to manage our properties. Instead, we have retained a manager to manage our properties pursuant to the Property Management Agreement. Our income from our properties may be adversely affected if our property manager fails to provide quality services and amenities to our tenants. While we monitor our property manager’s performance, we have limited recourse under our property management agreement if we believe that the property manager is not performing adequately. Failure by our property manager to fully perform the duties agreed to in our property management agreement could adversely affect our results of operations.
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We may be unable to access the capital necessary to grow. To retain our status as a REIT, we are required to distribute 90% of our taxable income to shareholders and we generally cannot retain sufficient income from operations to develop or invest in our properties or fund our acquisitions. Accordingly, our business and growth strategy depend, in part, upon our ability to raise additional capital at reasonable costs to repay our debt maturities and to fund new investments. However, the U.S. capital markets are currently experiencing severe liquidity constraints and our ability to raise reasonably priced capital is not guaranteed; we may be unable to raise reasonably priced capital because of reasons related to our business or for reasons beyond our control, such as the current restrictive market conditions in the debt capital market.
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We believe the deteriorating business conditions which have recently affected the locations which we operate, including the impact of the slowing U.S. economy, the weak U.S. dollar and the high and volatile fuel prices, could adversely affect our tenants and may make it difficult for our tenants to pay the rent due to us. A failure by our tenants to pay rents to us may cause us to continue to experience losses or cause our losses to increase.
Lack of Separate Representation
Irvine Venture Law Firm LLP and James H. Stokes, Jr., our General Counsel, each act, and may in the future act, as counsel to us, Hartman Advisors, Hartman Income REIT Management, Inc. and their affiliates in connection with the Offering. There is a possibility that in the future the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the legal profession, Irvine Venture Law Firm, LLP or James H. Stokes, Jr. may be precluded from representing any one or all of such parties. In the event that a dispute were to arise between us, Hartman Advisors, Hartman Income REIT Management, Inc. or any of our respective affiliates, separate counsel for such matters will be retained as and when appropriate.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
General
We intend to acquire, develop and own commercial, retail, industrial, and warehouse real estate and real estate-related assets. Our properties may be existing, income-producing properties developed by an affiliate of our advisor, newly constructed properties or properties under development or construction.
We may invest in a wide variety of light commercial properties, including, without limitation, office buildings, business and industrial parks, manufacturing facilities, single-tenant properties, warehouses and distribution facilities. We may purchase properties that have been constructed and have operating histories, are newly constructed, are under development or construction, or are not yet developed. Additionally, as a property reaches what we believe to be its optimum value, we will consider disposing of the property and may do so for the purpose of either distributing the net sale
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proceeds to our stockholders or investing the proceeds in other properties that we believe may produce a higher overall future return to our investors. We anticipate that such dispositions typically would occur during the period from three to six years after the termination of this offering. However, we may consider investing in properties with a different anticipated holding period in the event such properties provide an opportunity for an attractive overall return.
We may enter into one or more joint ventures or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or certain affiliates of our advisor, including other present and future REITs and real estate limited partnerships sponsored by affiliates of our advisor. We may also serve as lender to these joint ventures or other Hartman-sponsored programs. The Company will not make or invest in mortgage loans, including construction loans, on any one Property if the aggregate amount of all mortgage loans outstanding on the Property, including our loans, would exceed an amount equal to 85% of the appraised value of the Property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria.
We will not directly manage our properties. The management of our properties will be through Hartman Income REIT Management, Inc. (“Property Manager”). Effective February 1, 2012, D.H. Hill Securities, LLLP serves as the dealer manager of our public offering. Prior to February 1, 2012, Allied Beacon Partners, Inc. (formerly American Beacon Partners, Inc., the “Dealer Manager”) served as the dealer manager of the offering. These parties receive compensation and fees for services related to the offering and for the investment and management of our assets. These entities will receive fees during the offering, acquisition, operational and liquidation stages.
On December 28, 2010, the same day we entered into the Joint Venture, the Joint Venture acquired a retail shopping center located in Richardson, Texas for an aggregate purchase price of $19.15 million on an all cash basis from the seller, LNR Partners, LLC. The property is located at 100 South Central Expressway, Richardson, Texas and commonly known as Richardson Heights Shopping Center. The property consists of 201,433 square feet and was 57.6% occupied at the acquisition date. Richardson is a suburb of Dallas, Texas. Between April 19, 2011 and October 31, 2011, the Company acquired all the interest of Hartman XIX in the Joint Venture. Effective November 1, 2011 Hartman Richardson Heights Properties LLC is a wholly owned subsidiary of the Company.
Location of Property
The Richardson Heights Shopping Center is located in the northeast quadrant of the Dallas metropolitan statistical area (“MSA”). Richardson, a residential and electronic manufacturing suburb of Dallas, is ten miles north of downtown Dallas in northern Dallas and southern Collin counties.
We believe the Dallas-Fort Worth-Arlington MSA’s long-term outlook remains positive, although economic growth has suffered through 2011. While its cost advantages are slowly eroding and competition has increased with other regional centers such as Houston and Atlanta, the Dallas market’s skilled labor force, high per capita income, affordable housing and strong demographic trends will help maintain its position as one of the nation’s top performers.
General Physical and Economic Attributes
The Richardson Heights Shopping Center was built in 1958 and was renovated in 2008. As of December 31, 2011 the property had 30 tenants which occupied 102,124 square feet. The average rent for the occupied space was $13.94 per square foot, with the total annual rent revenue being $1,728,020.
Significant Tenants
The following table sets forth information about our five largest tenants as of December 31, 2011:
| Tenant | 2011 Annualized Base Rent | Rentable Square Feet | Initial Lease Date | Year Expiring |
| TJ Maxx – discount retail | $ 265,554 | 27,593 | 02/1988 | 2015 |
| Party City – specialty retail | 220,100 | 12,400 | 09/1993 | 2013 |
| Jack In The Box – restaurant | 150,000 | Pad site | 07/1985 | 2012 |
| Taj Mahal Imports – specialty retail | 129,744 | 15,817 | 07/2000 | 2016 |
| McDonald’s – restaurant | 95,148 | Pad site | 03/2002 | 2022 |
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| $ 860,546 |
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Item 3. Legal Proceedings
We are not presently subject to any material litigation nor, to our knowledge, is any litigation threatened against us or any of our properties, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our business or financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Common Shares
There is currently no established public market in which our common shares are traded. As of December 31, 2011, we had 1,813,513 common shares issued and outstanding. Hartman XX Holdings, Inc., our parent company, held 19,000 common shares and the remainder was held by approximately 320 shareholders.
Distribution Reinvestment Plan
You may participate in our distribution reinvestment plan pursuant to which you may have the distributions you receive reinvested in shares of our common stock. Regardless of whether you participate in our distribution reinvestment plan, you will be taxed on your distributions to the extent they constitute taxable income. If you elect to participate in the distribution reinvestment plan and are subject to federal income taxation, you will incur a tax liability for distributions allocated to you even though you have elected not to receive the distributions in cash but rather to have the distributions withheld and reinvested pursuant to the distribution reinvestment plan. Specifically, you will be treated as if you have received the distribution from us in cash and then applied such distribution to the purchase of additional shares. In addition, to the extent you purchase shares through our distribution reinvestment plan at a discount to their fair market value, you will be treated for tax purposes as receiving an additional distribution equal to the amount of the discount. In other words, based on the current offering price, participants in our distribution reinvestment plan will be treated as having received a distribution of $10.00 for each $9.50 reinvested by them under our distribution reinvestment plan. You will be taxed on the amount of such distribution as a dividend to the extent such distribution is from current or accumulated earnings and profits, unless we have designated all or a portion of the distribution as a capital gain dividend.
We may terminate the distribution reinvestment plan in our discretion at any time upon ten days’ notice to plan participants. See the “Summary of Distribution Reinvestment Plan and Automatic Purchase Plan” for further explanation of our distribution reinvestment plan. A complete copy of our distribution reinvestment plan and automatic purchase plan are located at pages C-1 and D-1 of the prospectus.
Our board of directors declared our first dividend distribution as of December 31, 2010 which was paid in January 2011. We issued 56.6 distribution reinvestment plan shares in January 2011 with respect to the 2010 distribution declaration. In 2011 we issued 25,405.1 distribution reinvestment plan shares with respect to 2011 declared distributions with 4,859.6 such shares to be issued in January 2012.
Share Redemption Program
Our board of directors has adopted a share redemption program that permits you to sell your shares back to us after you have held them for at least one year, subject to the significant conditions and limitations described below. Our board of directors can amend the provisions of our share redemption program without the approval of our stockholders. The purchase price for shares redeemed under the redemption program will be as set forth below. Our board of directors will
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periodically value our properties and our other assets to determine the value of our shares. Except for redemptions sought upon a stockholder’s death or qualifying disability or redemptions sought upon a stockholder’s confinement to a long-term care facility, the purchase price for shares redeemed under the redemption program will equal:
| • | in the first year, the amount by which (a) the lesser of (1) 90% of the average gross price per share the original purchaser or purchasers of your shares paid to us, which we refer to as the “issue price,” for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our shares of common stock) or (2) 90% of the offering price of shares in our most recent primary offering exceeds (b) the aggregate amount of net sale proceeds per share, if any, distributed to investors prior to the redemption date as a result of the sale of one or more of our investments, or |
| • | in the second year, the amount by which (a) the lesser of (1) 92.5% of the average gross price per share the original purchaser or purchasers of your shares paid to us, which we refer to as the “issue price,” for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our shares of common stock) or (2) 92.5% of the offering price of shares in our most recent primary offering exceeds (b) the aggregate amount of net sale proceeds per share, if any, distributed to investors prior to the redemption date as a result of the sale of one or more of our investments, or |
| • | in the third year, the amount by which (a) the lesser of (1) 95% of the average gross price per share the original purchaser or purchasers of your shares paid to us, which we refer to as the “issue price,” for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our shares of common stock) or (2) 95% of the offering price of shares in our most recent primary offering exceeds (b) the aggregate amount of net sale proceeds per share, if any, distributed to investors prior to the redemption date as a result of the sale of one or more of our investments, or |
| • | in the fourth year, the amount by which (a) the lesser of (1) 97.5% of the average gross price per share the original purchaser or purchasers of your shares paid to us, which we refer to as the “issue price,” for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our shares of common stock) or (2) 97.5% of the offering price of shares in our most recent primary offering exceeds (b) the aggregate amount of net sale proceeds per share, if any, distributed to investors prior to the redemption date as a result of the sale of one or more of our investments, or |
| • | thereafter the lesser of (1) 100% of the average issue price per share for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our shares of common stock) or (2) 90% of the net asset value per share, as determined by the board of directors. |
Our board of directors reserves the right in its sole discretion at any time to (1) waive the one-year holding period in the event of other exigent circumstances affecting a stockholder such as bankruptcy or a mandatory distribution requirement under a stockholder’s IRA, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) otherwise amend the terms of our redemption program.
Subject to the limitations described in this supplement and provided that the redemption request is made within 270 days of the event giving rise to the following special circumstances, we will waive the one-year holding requirement (a) upon the request of the estate, heir or beneficiary of a deceased stockholder or (b) upon the disability of a stockholder or upon a stockholder’s confinement to a long-term care facility, provided that the condition causing such disability or need for long-term care was not preexisting on the date that such person became a stockholder
The purchase price per share for shares redeemed upon the death or disability of the stockholder or upon such stockholder’s confinement to a long-term care facility will be equal to the amount by which (a) the average issue price per share for all of your shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the shares of common stock) exceeds (b) the aggregate amount of net sale proceeds per share, if any, distributed to investors prior to the redemption date as a result of the sale of one or more of our investments.
We intend to redeem shares quarterly under the program. We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the date of redemption. Generally, the cash available for redemption will be limited to proceeds from our distribution reinvestment plan plus, if we had
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positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year. These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility. If those limitations prevent us from redeeming shares, those shares will remain in line to be redeemed with priority based on the date that the redemption is first requested. The redemption price will be the value of the shares as of the date of redemption. You may withdraw a request for redemption by submitting written instructions withdrawing your redemption request at any time prior to the date that we redeem your shares submitted. You will have no right to request redemption of your shares if the shares are listed for trading on a national securities exchange.
A request for redemption may be withdrawn in whole or in part by a stockholder in writing at any time prior to redemption. We cannot guarantee that the funds set aside for the share redemption program will be sufficient to accommodate all requests made in any particular redemption period. If we cannot accommodate a redemption request due to the foregoing limitations, the stockholder or his or her estate, heir or beneficiary can (1) withdraw the request for redemption, or (2) ask that we honor the request at such time, if any, when the limitations no longer prevent redemption. Such pending requests will be honored among all requests for redemptions in any given redemption period, as follows: first, pro rata as to redemptions sought upon a stockholder’s death or disability or sought upon a stockholder’s confinement to a long-term care facility; next, pro rata as to redemptions to stockholders who demonstrate, in the discretion of our board of directors, another involuntary, exigent circumstance, such as bankruptcy; next, pro rata as to redemptions to stockholders subject to a mandatory distribution requirement under their IRAs; and, finally, pro rata as to other redemption requests.
In general, a stockholder or his or her estate, heir or beneficiary may present to us fewer than all of the shares then owned for redemption, except that the minimum number of shares that must be presented for redemption shall be at least 25% of the holder’s shares. However, as little as 10% of a stockholder’s shares may be presented for redemption if the holder’s redemption request is made within 270 days of the event giving rise to the special circumstances described in this sentence, where redemption is being requested (1) on behalf of a deceased stockholder; (2) by a stockholder with a qualifying disability, who is deemed by our board of directors to be permanently disabled or who is seeking redemption upon confinement to a long-term care facility; (3) by a stockholder due to other involuntary, exigent circumstances, such as bankruptcy; or (4) by a stockholder due to a mandatory distribution under such stockholder’s IRA; provided, however, that any future redemption request by such stockholder must present for redemption at least 25% of such stockholder’s remaining shares. In the case of stockholders who undertake a series of partial redemptions, appropriate adjustments in the purchase price for the redeemed shares will be made so that the blended price per share for all redeemed shares is reflective of the issue price per share of all shares owned by such stockholder through the date of each redemption.
In connection with a request for redemption, the stockholder or his estate, heir or beneficiary will be required to certify to us that the stockholder acquired the shares to be repurchased either (1) directly from us or (2) from the original investor by way of (i) a bona fide gift not for value to, or for the benefit of, a member of the investor’s immediate or extended family (including the investor’s spouse, parents, siblings, children or grandchildren and including relatives by marriage), (ii) a transfer to a custodian, trustee or other fiduciary for the account of the investor or members of the investor’s immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or (iii) operation of law.
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Distribution Policy
In order to qualify as a REIT, we are required to distribute 90% of our annual REIT taxable income to our stockholders.
We expect to have little, if any, cash flow from operations available for distribution until we make substantial investments. Distributions may be funded from proceeds from this or other offerings until we have sufficient cash flow from real estate operations to fund distributions. There is no limit on the amount of offering proceeds we may use to fund distributions. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation. As development projects are completed and begin to generate income, we expect to have additional funds available to distribute to you. Therefore, until such time as we have sufficient cash flow from operations to fund fully the payment of distributions therefrom, some or all of our distributions will be paid from other sources, such as from the proceeds of this or other offerings, cash advances to us by our advisor, cash resulting from a waiver of asset management fees, and borrowings, whether or not secured by our assets, in anticipation of future operating cash flow.
On December 17, 2010, the Company’s Board of Directors also authorized the payment of cash distributions to the Company’s shareholders, contingent upon the acquisition of the joint venture interest. Distributions will (i) accrue daily to the Company’s shareholders of record as of the close of business each day commencing one day following the close of the acquisition of the joint venture interest and the property acquisition by the joint venture, (ii) be payable in cumulative amounts on or before the 20th day of each calendar month and (iii) be calculated at a rate of $0.001918 per share of common stock per day, a rate which, if paid each day over a 365-day period, is equivalent to a 7.0% annualized distribution rate based on a purchase price of $10.00 per share of common stock.
The authorization to pay monthly cash distributions to the Company’s common shareholders at a rate of $0.001918 per share of common stock per day was affirmed at each quarterly meeting of the Board of Directors subsequent to the initial distribution declaration.
2009 Omnibus Stock Incentive Plan
The Hartman Short Term Income Properties XX, Inc. 2009 Omnibus Stock Incentive Plan, our stock incentive plan, was adopted by our board of directors and approved by our stockholders prior to the consummation of this offering. The stock incentive plan permits us to make grants of "incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards" within the meaning of Section 422 of the Code, or any combination of the foregoing. We have initially reserved 5,000,000 shares of our common stock for the issuance of awards under our stock incentive plan, but in no event more than ten (10%) percent of our issued and outstanding shares. The number of shares reserved under our stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under our stock incentive plan also will be available for future awards.
Our stock incentive plan is administered by the compensation committee of our board of directors. The compensation committee may interpret the stock incentive plan and may make all determinations necessary or desirable for the administration of the stock incentive plan and has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of our stock incentive plan. All full-time and part-time officers, employees, directors and other key persons (including consultants and prospective employees) are eligible to participate in our stock incentive plan.
We may issue incentive stock options or non-qualified stock options under the stock incentive plan. The incentive stock options granted under the stock incentive plan are intended to qualify as incentive stock options. The exercise price of stock options awarded under our stock incentive plan may not be less than 100% of the fair market value of our common stock on the date of the option grant. The compensation committee will determine at what time or times each option may be exercised (provided that in no event may it exceed ten years from the date of grant) and the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.
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Stock appreciation rights may be granted under our stock incentive plan. Stock appreciation rights allow the participant to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant in the form of shares of our common stock. The exercise price of stock appreciation rights awarded under our stock incentive plan may not be less than 100% of the fair market value of our common stock on the date of grant. The compensation committee determines the terms of stock appreciation rights, including when such rights become exercisable and the period of time, if any, after retirement, death, disability or other termination of employment during which stock appreciation rights may be granted.
Restricted stock and deferred stock awards may also be granted under our stock incentive plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee may impose whatever conditions to vesting it determines to be appropriate, including attainment of performance goals. Shares of restricted stock that do not satisfy the vesting conditions are subject to our right of repurchase or forfeiture. Deferred stock awards are stock units entitling the participant to receive shares of stock paid out on a deferred basis and subject to such restrictions and conditions as the compensation committee shall determine. The compensation committee may impose whatever conditions to vesting it determines to be appropriate, including attainment of performance goals. Deferred stock awards that do not satisfy the vesting conditions are subject to forfeiture.
Dividend equivalent rights may also be granted under our stock incentive plan. These rights entitle the participant to receive credits for dividends that would be paid if the participant had held specified shares of our common stock. Dividend equivalent rights may be granted as a component of another award or as a freestanding award.
Other stock-based awards under our stock incentive plan will include awards that are valued in whole or in part by reference to shares of our common stock, other convertible or exchangeable securities, partnership interests in a subsidiary or our operating partnership (if formed), awards valued by reference to book value, fair value or performance of a subsidiary, and any class of profits interest or limited liability company membership interest.
Unless the compensation committee provides otherwise, our stock incentive plan does not generally allow for the transfer of awards, and only the participant may exercise an award during his or her lifetime. In the event of a change-in-control of the company, our board of directors and the board of directors of the surviving or acquiring entity shall, as to outstanding awards under our stock incentive plan, make appropriate provision for the continuation or assumption of such awards and may provide for the acceleration of vesting with respect to existing awards.
The terms of the stock incentive plan provide that we may amend, suspend or terminate the stock incentive plan at any time, but stockholder approval of any such action will be obtained if required to comply with applicable law. Further, no action may be taken that adversely affects any rights under outstanding awards without the holder's consent. The stock incentive plan will terminate on the tenth anniversary of the date on which stockholder approval was received.
Item 6. Selected Financial Data
The following table sets forth selected financial data for the years ended December 31, 2011 and 2010. Certain information in the table has been derived from the Company’s audited financial statements and notes thereto. This data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 15, the Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. During the period from the Company’s date of inception on February 5, 2009 to December 28, 2010, the Company owned no properties, had no revenue exclusive of interest income, and was primarily engaged in offering and organizational activities. The Company made its initial real estate related investment on December 28, 2010. During 2011 the Company acquired additional interest in the Richardson Heights Shopping Center from Hartman XIX and, effective November 1, 2011 owned 100% of the property.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
We were formed as a Maryland corporation on February 5, 2009 to invest in and operate real estate and real estate-related assets on an opportunistic basis. We may acquire a wide variety of commercial properties, including office, industrial, retail, and other real properties. These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction. In particular, we will focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning or those located in markets with high growth potential. We also may invest in real estate-related securities and, to the extent that our advisor determines that it is advantageous, we may invest in mortgage loans. We expect to make our investments in or in respect of real estate assets located in the United States and other countries. The net proceeds of this offering will provide funds to enable us to purchase properties and other real estate-related investments. As of the date of this Form 10-K, we have acquired all of Hartman Richardson Heights Properties LLC and we have entered into a contract to acquire a second retail shopping center. We do not consider a contract to acquire a property to be a material definitive contract until such time as any earnest money deposit becomes at risk. The number of assets we acquire will depend upon the number of shares sold in this offering and the resulting amount of the net proceeds available for investment in properties. See “Risk Factors.”
We will make an election under Section 856(c) of the Internal Revenue Code to be taxed as a REIT, beginning with the taxable year ending December 31, 2011. Once qualified as a REIT for federal income tax purposes; we will not generally be subject to federal income tax. Once having made an election to be taxed as a REIT should we later fail to qualify as a REIT in any taxable year, we will be subject to federal income tax 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 in which our qualification is denied. Such an event could materially and adversely affect our net income. However, we believe that we are organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to operate so as to remain, thereafter qualified as a REIT for federal income tax purposes.
The following discussion and analysis should be read in conjunction with the accompanying balance sheet and the notes thereto.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related notes, require us to make estimates and assumptions that are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors related to the ongoing viability of our customers. With different estimates or assumptions, materially different amounts could be reported in our financial statements. We believe the following are our more critical accounting policies due to the significance, subjectivity and judgment used in determining our estimates included in the preparation of our consolidated financial statements. See also Note 2 of the Notes to Consolidated Financial Statements for a discussion of the application of these and other accounting policies. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate based upon the circumstances.
Revenue Recognition
Our leases are accounted for as operating leases. Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases. Revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space. When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in tenant and accounts receivable, net. In accordance with ASC 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred.
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Investment in Unconsolidated Joint Venture
The investment in unconsolidated joint venture consisted of our interest in a joint venture that owns one multi-tenant property (the “Unconsolidated Joint Venture”). For the period from January 1, 2011 through October 31, 2011, consolidation of this investment was not required as the entity did not qualify as a variable interest entity and did not meet the control requirements for consolidation, as defined in ASC 810, Consolidation. Both the Company and the Unconsolidated Joint Venture partner were required to approve significant decisions about the Unconsolidated Joint Venture’s activities.
The Company accounted for the Unconsolidated Joint Venture using the equity method of accounting pursuant to guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires this investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint venture’s earnings and distributions. The Company evaluated the carrying amount of this investment for impairment in accordance with ASC 323. The Unconsolidated Joint Venture was reviewed for potential impairment if the carrying amount of the investment exceeded its fair value. To determine whether impairment was other-than-temporary, the Company considered whether it had the ability and intent to hold the investment until the carrying value is fully recovered. The evaluation of an investment in a joint venture for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the Unconsolidated Joint Venture for the ten months ended October 31, 2011 or the year ended December 31, 2010.
Real Estate
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).
The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.
The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles will be included in intangible lease assets in the balance sheet and are amortized to expense over the remaining term of the respective leases.
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.
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Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements. Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease.
Impairment
We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2011.
Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.
Accrued Rent and Accounts Receivable
Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. As of December 31, 2011 and 2010, we had an allowance for uncollectible accounts of $36,791 and $0, respectively. For the period from November 1, 2011 to December 31, 2011 we recorded bad debt expense in the amount of $36,791 related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness. Bad debt expenses and any related recoveries are included in property operating expenses.
Deferred Loan Costs
Loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method.
Goodwill
Generally accepted accounting principles in the United States require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired. The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test. In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. For the year ended December 31, 2011 no goodwill impairment was recognized.
RESULTS OF OPERATIONS
On December 28, 2010, we entered into the limited liability company operating agreement of Hartman Richardson Heights Properties LLC (the “Joint Venture”). The Company made an initial capital contribution to the Joint Venture of $1.915 million representing a 10% interest in the Joint Venture. Hartman Short Term Income Properties XIX, Inc.
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(“Hartman XIX”), the other member of the Joint Venture, is a REIT that is managed by affiliates of the Company’s manager and real property manager. Hartman XIX has made capital contributions totaling $17.235 million to the Joint Venture representing a 90% interest therein. Our equity in earnings of the Joint Venture was $(39,678) and $1,719 for the period January 1, 2011 to October 31, 2011 and for the period from December 28, 2010 to December 31, 2010, respectively.
As of December 31, 2011, we owned 1 retail commercial property comprising approximately 201,000 square feet plus 3 pad sites.
Net loss – We incurred net losses of $520,394 and $247,191 for the years ended December 31, 2011 and 2010, respectively. The net loss for the year ended December 31, 2011 is primarily attributable to (i) acquisition fees incurred with the acquisition of the Richardson Heights property; (ii) depreciation and amortization expense related to the Richardson Heights property; and, (iii) organization and offering costs incurred in connection with our public offering. As of November 1, 2011 we own 100% of the Richardson Heights property.
Revenues – The primary source of our revenue is rental revenues and tenant reimbursements. For the year ended December 31, 2011 we had total rental revenues and tenant reimbursements of $354,048 from the Richardson Heights property which we fully owned as of November 1, 2011. We had no rental revenues and tenant reimbursements for the year ended December 31, 2010.
Operating expenses – Operating expenses consist of property operating expenses (contract services, repairs and maintenance, utilities and management fees); real estate taxes and insurance; depreciation and amortization expense; and, general and administrative expenses.
Fees to affiliates – We pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of the Company. We pay property management and leasing commissions to our property manager in connection with the management and leasing of our properties.
General and administrative expense - General and administrative expenses were $162,104 and $99,548 for the years ended December 31, 2011and 2010, respectively. General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, and independent director compensation. We expect general and administrative expenses to increase only modestly in future periods as we acquire additional real estate and real estate related assets. We expect general and administrative expenses to decrease substantially as a percentage of total revenue.
Acquisition Costs
Acquisition costs were $430,875 and $47,875 for the years ended December 31, 2011 and 2010, respectively, related to the acquisition of the Richardson Heights joint venture.
The Company has incurred certain expenses in connection with organizing the Company and registering to sell common shares. These costs principally relate to professional and filing fees. As of December 31, 2011, such costs totaled $485,372 and has been expensed as incurred since February 5, 2009, date of inception. For the years ending December 31, 2011 and 2010 organization and offering costs were $51,806 and $101,580, respectively.
We are dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock and preferred stock available for issue; the identification, evaluation, negotiation, purchase and disposition of properties, management of the daily operations of the Company’s 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 providers.
Funds From Operations and Modified Funds From Operations
Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company. The FFO calculation begins with net income (loss) and excludes items such as real estate depreciation and amortization, and gains and losses on the sale of real estate assets. Depreciation and
18
amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the GAAP basis alone is insufficient. In addition, FFO excludes gains and losses from the sale of real estate, which we believe provides management and investors with a helpful additional measure of the performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs.
In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio. MFFO, as defined by our company, excludes from FFO acquisition related costs and real estate impairment charges, which are required to be expensed in accordance with GAAP. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after the company ceases to acquire properties on a frequent and regular basis. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.
Additionally, impairment charges are items that management does not include in its evaluation of the operating performance of its real estate investments, as management believes that the impact of these items will be reflected over time through changes in rental income or other related costs. As many other non-traded REITs exclude impairments in reporting their MFFO, we believe that our calculation and reporting of MFFO will assist investors and analysts in comparing our performance versus other non-traded REITs.
For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered as alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.
MFFO may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy. However, because MFFO excludes acquisition expenses, which are an important component in an analysis of the historical performance of a property, MFFO should not be construed as a historic performance measure. Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP financial performance measure.
Our calculation of FFO and MFFO, and reconciliation to net loss, which is the most directly comparable GAAP financial measure, is presented in the table below for the years ended December 31, 2011 and 2010. FFO and MFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments.
|
|
|
| Year Ending December 31, | |||
|
|
|
| 2011 |
|
| 2010 |
| Net loss |
| $ | (520,394) |
| $ | (247,191) |
| Depreciation and amortization of real estate assets |
|
| 655,185 |
|
| 323 |
| Gain on re-measurement |
|
| (508,047) |
|
| - |
| Funds from operations (FFO) |
|
| (373,256) |
|
| (246,868) |
|
|
|
|
|
|
|
|
| Acquisition related expenses |
|
| 430,875 |
|
| 47,875 |
| Modified funds from operations (MFFO) |
| $ | 57,619 |
| $ | (198,993) |
19
Liquidity and Capital Resources
Subscription proceeds were held in an escrow account until we had received and accepted subscriptions to purchase at least $2.0 million of shares of common stock, which the Company reached in December 2010. As of December 31, 2011, the Company had issued 1,756,927 shares of common stock in its public offering, resulting in gross proceeds to the Company of $17,441,203.
Our principal demands for funds will be for real estate and real estate-related acquisitions, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations, and we expect to meet cash needs for acquisitions from the net proceeds of this offering and from financings.
There may be a delay between the sale of our shares and the purchase of properties or other investments, which could result in a delay in our ability to make distributions to our stockholders. Some or all of our distributions will be paid from other sources, such as from the proceeds of this offerings, cash advances to us by our advisor, cash resulting from a waiver of asset management fees and borrowings secured by our assets in anticipation of future operating cash flow until such time as we have sufficient cash flow from operations to fund fully the payment of distributions. We expect to have little, if any, cash flow from operations available for distribution until we make substantial investments. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.
We intend to borrow money to acquire properties and make other investments. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. We do not expect that the maximum amount of our indebtedness will exceed 300% of our “net assets” (as defined by the NASAA REIT Guidelines) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings. Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets and only will apply once we have ceased raising capital under this or any subsequent offering and invested substantially all of our capital. As a result, we expect to borrow more than 50% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent. Our policy of limiting the aggregate debt to equity ratio to 50% relates primarily to mortgage loans and other debt that will be secured by our properties. The NASAA guideline limitation of 300% of our net assets includes secured and unsecured indebtedness that we may issue. We do not anticipate issuing significant amounts of unsecured and therefore we intend to limit the balance of our borrowings to 50% of the purchase prices, in the aggregate, of our property portfolio.
Our advisor may, but is not required to, establish capital reserves from gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may require its own formula for escrow of capital reserves.
Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.
Cash Flows from Operating Activities
As of December 31, 2011 we owned one real estate property through our wholly owned subsidiary, Hartman Richardson Heights Properties, LLC. During the year ended December 31, 2011, net cash used in operating activities was ($153,830) versus $78,404 cash provided by operating activities for the year ended December 31, 2010. The decrease in cash flow from operating activities is attributable to acquisition costs related to our increased ownership interest in and ultimately complete ownership of the Richardson Heights property. We expect cash flows from operating activities to increase in future periods as a result of anticipated future acquisitions of real estate and real estate related investments.
20
Cash Flows from Investing Activities
During the year ended December 31, 2011, net cash used in investing activities was $6,654,339 versus $1,915,000 for the year ended December 31, 2010 and consisted primarily of cash used for the step acquisition of ownership of the Richardson Heights property.
Cash Flows from Financing Activities
Cash flows from financing activities consisted primarily of proceeds from our ongoing public offering and distributions paid to our common shareholders. Net cash provided by financing activities for the years ending December 31, 2011 and 2010, respectively, were $13,612,008 and $2,472,019 and consisted of the following:
·
$13,867,669 and $2,473,486, respectively of cash provided by offering proceeds related to our public offering, net of payments of commissions on sales of common stock and related dealer manager fees of $1,000,356 and $99,692, respectively; and,
·
$252,207 and $1,467, respectively of net cash distributions, after giving effect to distributions reinvested by shareholders of $288,045 and $0, respectively.
Our board of directors has approved our entering into the Advisory Agreement, the Property Management Agreement, the Dealer Management Agreement and Operating Agreement of the Joint Venture.
Off-Balance Sheet Arrangements
As of December 31, 2011 and 2010, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanied financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
We will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On November 3, 2011 the Company dismissed RBSM LLP (“RBSM”) as the Registrant’s independent registered public accounting firm. The decision to dismiss RBSM as the Company’s independent registered public accounting firm was approved by the Audit Committee of the Company’s Board of Directors. The report of RBSM dated March 31, 2011 with respect to the balance sheets of the Company as of December 31, 2010 and 2009, and the related statements of operations, equity and cash flows for the year ended December 31, 2010 and for the period from February 5, 2009 (date of
21
inception) through December 31, 2009 did not contain an adverse opinion or disclaimer of opinion, and such report was not qualified or modified as to uncertainty, audit scope, or accounting principle.
During the two most recent fiscal years and through November 3, 2011, the Company did not have any disagreements with RBSM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to RBSM’s satisfaction, would have caused them to make reference thereto in their reports on the Company’s financial statements for such periods.
During the two most recent fiscal years and through November 3, 2011 , there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided RBSM with a copy of the disclosure required under Item 4.01 together with a request to furnish a letter addressed to the Securities & Exchange Commission stating whether or not they agreed with the above statements.
On October 7, 2011 (the “Engagement Date”), the Company engaged Weaver & Tidwell, L.L.P. (“Weaver LLP”) as its independent registered public accounting firm for the Company’s fiscal year ended December 31, 2011. The decision to engage Weaver LLP as the Company’s independent registered public accounting firm was approved by the Audit Committee of the Company’s Board of Directors.
During the two most recent fiscal years and through the Engagement Date, the Company has not consulted with Weaver LLP regarding either:
(1) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided that Weaver LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or
(2) any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Form 10-K, as of December 31, 2011, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the CEO and CFO concluded that as of December 31, 2011, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis. In designing and evaluating 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. Management is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
22
Changes in Internal Control Over Financial Reporting
There have been no changes during the Company’s quarter ended December 31, 2011, in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financing reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our current directors and executive officers and their respective ages and positions are listed below:
| Name |
| Age |
| Position |
| Allen R. Hartman |
| 60 |
| Chairman of the Board, Chief Executive Officer and President |
| Louis T. Fox, III |
| 51 |
| Chief Financial Officer and Treasurer |
| James H. Stokes, Jr. |
| 54 |
| General Counsel and Secretary |
| Jack I. Tompkins |
| 65 |
| Independent Director |
| Richard R. Ruskey |
| 57 |
| Independent Director |
Allen R. Hartman, age 60, has served as our CEO and Chairman of our Board of Directors as well as President of our advisor, Hartman Advisors, and our property manager, HIR Management since our inception in February, 2009. In 1984, Mr. Hartman formed Hartman Management and began sponsoring private real estate investment programs. Over the next 24 years, Mr. Hartman built Hartman Management into one of the leading commercial property management firms in the state of Texas and sponsored 20 privately offered programs and one publicly offered program that invested in commercial real estate in Houston, San Antonio and Dallas, Texas. In 1998, Mr. Hartman merged the Hartman real estate programs and formed Hartman Commercial Properties REIT (HCP REIT), now known as Whitestone REIT. He served as CEO and Chairman of the Board of HCP REIT until October, 2006. In April, 2008, Mr. Hartman merged 4 of the 5 Hartman programs to form Hartman Income REIT (HIREIT) and contributed the assets and ongoing business operations of Hartman Management into Hartman Income REIT Management, a wholly owned subsidiary of HIREIT. Currently Mr. Hartman oversees a staff of 55 employees who manage 32 commercial properties encompassing over 4.77 million square feet. In addition to his day-to-day management responsibilities, Mr. Hartman serves as the principal officer of each Hartman sponsored investment program. Mr. Hartman attended the University of Colorado and studied Business Administration.
Our board of directors, excluding Mr. Hartman, has determined that the leadership positions previously and currently held by Mr. Hartman, and the extensive experience Mr. Hartman has accumulated from acquiring and managing investments in commercial real estate and debt, have provided Mr. Hartman with the experiences, attributes and skills necessary to effectively carry out the duties and responsibilities of a director. Accordingly, our board of directors has determined that Mr. Hartman is a highly qualified candidate for directorship and should therefore continue to serve as one of our directors.
Louis T. Fox, III, age 51, is our Chief Financial Officer and Treasurer. Mr. Fox also serves as Chief Financial Officer for our advisor and our property manager. He has responsibility for financial reporting, accounting, treasury and investor relations. Prior to joining Hartman Management (now, HIR Management) in March, 2007, Mr. Fox served as Chief Financial Officer of Legacy Brands, a restaurant group from April, 2006 until January, 2007. Prior to that, Mr. Fox served as Chief Financial Officer of Unidynamics, Inc., a specialized EPC manufacturer of unique handling system solutions for the marine and energy industries from January, 2004 until April, 2006. He also served as Treasurer and CFO of Goodman Manufacturing, a major manufacturer of residential and commercial HVAC products for 9 years prior to that. In addition to his years of experience in the manufacturing industry, he has served in senior financial positions in the construction and debt collection service concerns. Fox is a former practicing certified public accountant. He received a Bachelor of Arts degree in accounting from the University of Texas at San Antonio. He started his career as a tax accountant with Arthur Andersen & Co.
23
James H. Stokes Jr., age 54, is our General Counsel and Secretary. Mr. Stokes also serves as General Counsel for both our advisor and property manager. In this capacity, Stokes manages our advisor’s in-house legal department and is responsible for all legal matters affecting the Hartman companies. Before joining Hartman Management, (now HIR Management) in September, 2006, Stokes spent over 20 years in his own private law practice, primarily in real estate, corporate law, bankruptcy and civil litigation. He also served as a branch manager for First Colony Commonwealth Title Company and American National Title. Stokes graduated from the University of Texas with a B.A. degree from the Plan II honors program in 1978 and continued his education at the University of Texas School of Law where he received his J.D in 1981.
Jack I. Tompkins, age 65, has served as an independent director of the Company since our inception in February, 2009. Mr. Tompkins has served since 1998 as Chairman & CEO of ARTA Equity Advisors, L.L.C., which was formed to engage in various entrepreneurial opportunities. After obtaining his MBA from Baylor University, Mr. Tompkins began his career with Arthur Young & Co., working as a certified public accountant there for three years before joining Arthur Andersen, L.L.P., where he was elected to the partnership in 1981 and served until 1988. While at Andersen he was in charge of the Merger and Acquisition Program for the Houston office as well as head of the Natural Gas Industry Group. From 1988 until October 1996, Mr. Tompkins served as Chief Financial Officer, Senior Vice President and Chief Information, Administrative & Accounting Officer of a large publicly traded energy company. Corporate functions reporting to Mr. Tompkins included financial planning, risk management, tax, accounting, information systems, administration and internal audit. Mr. Tompkins served as Chairman & CEO of Automotive Realty Trust Company of America from its inception in 1997 until its sale to a publicly traded REIT in January 1999. Automotive Realty was formed to engage in the business of consolidating real estate properties owned by automobile dealerships into a REIT. From March to September of 1999, Mr. Tompkins served as interim Executive Vice President and CFO of Crescent Real Estate Equities as the Company restructured. Mr. Tompkins served as an independent director of Hartman XIX from July 2009 until March 2010 and as an independent director of Hartman Income REIT from January 2008 until July 2009. Mr. Tompkins previously served on the board of directors of Bank of America Texas and Michael Petroleum Corp. He is a member of American Institute of Certified Public Accountants.
Our board of directors, excluding Mr. Tompkins, has determined that the experience as a certified public accountant and leadership positions previously and currently held by Mr. Tompkins, including experience Mr. Tompkins has accumulated from acquiring and managing investments in commercial real estate and debt, have provided Mr. Tompkins with the experiences, attributes and skills necessary to effectively carry out the duties and responsibilities of a director. Accordingly, our board of directors has determined that Mr. Tompkins is a highly qualified candidate for directorship and should therefore continue to serve as one of our directors.
Richard R. Ruskey, age 56, has served as an independent director of the Company since April 2011. Mr. Ruskey began his professional career in 1978 as a Certified Public Accountant with the accounting firm of Peat, Marwick, Mitchell, & Co. in St. Louis, Missouri where he obtained extensive experience in both the audit and tax departments. In 1983 he joined the firm of Deloitte, Haskins, & Sells as a manager in the tax department. In 1986 Mr. Ruskey transitioned into the security brokerage industry as the chief financial officer of Westport Financial Group. Within a one year period he became a full-time broker and due diligence officer for the firm. In 1990 he continued his career in financial services by joining the broker dealer firm of R. T. Jones Capital Equities, Inc. where he served as due diligence officer. In June 2010 Mr. Ruskey joined the broker dealer firm of Moloney Securities Co. Inc. where he currently serves as an investment broker and due diligence officer. Mr. Ruskey received dual B.S. degrees in Accounting and Finance in 1978 from Southern Illinois University – Carbondale. He is a Certified Public Accountant and Certified Financial Planner and is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. He has been an active investor in numerous real estate and business ventures throughout his 30 year career in financial services.
Our board of directors, excluding Mr. Ruskey, has determined that the experience as a certified public accountant and leadership positions previously and currently held by Mr. Ruskey, including experience Mr. Ruskey has accumulated from analyzing and advising with respect to investments in commercial real estate and debt, have provided Mr. Ruskey with the experiences, attributes and skills necessary to effectively carry out the duties and responsibilities of a director. Accordingly, our board of directors has determined that Mr. Ruskey is a highly qualified candidate for directorship and should therefore continue to serve as one of our directors.
24
Meetings and Committees of the Board of Directors
Our Board of Directors met four times during 2011. At a meeting of the Board of Directors held on April 19, 2011, Mr. Larry Bouffard tendered his resignation as an independent director of the Company. At the same meeting, Mr. Richard Ruskey was nominated and appointed as an independent director of the Company to succeed Mr. Bouffard.
Board Committees
Audit Committee
The Audit Committee meets on a regular basis at least four times a year. Our Audit Committee is comprised of our two independent directors, Jack I. Tompkins and Richard Ruskey. Our Board of Directors has adopted our Audit Committee Charter and it is posted on Hartman’s web site at www.hi-reit.com. The audit committee’s primary functions are to evaluate and approve the services and fees of our independent auditors; to periodically review the auditors’ independence; and to assist our board of directors in fulfilling its oversight responsibilities by reviewing the financial information to be provided to the stockholders and others, the system of internal controls that management has established, and the audit and financial reporting process.
Compensation Committee
We have established a Compensation Committee to assist the board of directors in discharging its responsibility in all matters of compensation practices, including any salary and other forms of compensation for our officers and our directors, and employees in the event we ever have employees. Our Compensation Committee is comprised of our two independent directors, Jack I. Tompkins and Richard R. Ruskey. Our Board of Directors has adopted our Compensation Committee Charter and it is posted on Hartman’s web site at www.hi-reit.com. The primary duties of the Compensation Committee include reviewing all forms of compensation for our executive officers, if any, and our directors; approving all stock option grants, warrants, stock appreciation rights and other current or deferred compensation payable with respect to the current or future value of our shares; and advising on changes in compensation of members of the Board of Directors.
Nominating and Corporate Governance Committee
We have established a Nominating and Corporate Governance Committee (“Nominating Committee”). Our Nominating Committee is comprised of our two independent directors, Jack I. Tompkins and Richard R. Ruskey. Our Board of Directors has adopted our Nominating Committee Charter and it is posted on Hartman’s web site at www.hi-reit.com. The Nominating Committee will recommend nominees to serve on our Board of Directors. The Nominating Committee will consider nominees recommended by stockholders if submitted to the committee in accordance with the procedures specified in our bylaws. Generally, this requires that the stockholder send certain information about the nominee to our corporate secretary between 120 and 150 days prior to the first anniversary of the mailing of notice for the annual meeting held in the prior year. Because our directors take a critical role in guiding our strategic direction and oversee our management, board candidates must demonstrate broad-based business and professional skills and experiences, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, directors must have time available to devote to board activities and to enhance their knowledge of our industry. The Nominating Committee is responsible for assessing the appropriate mix of skills and characteristics required of board members in the context of the perceived needs of the board at a given point in time and shall periodically review and recommend for approval by the board any updates to the criteria as deemed necessary. Diversity in personal background, race, gender, age and nationality for the board as a whole may be taken into account favorably in considering individual candidates. The nominating committee will evaluate the qualifications of each director candidate against these criteria in making its recommendation to the Board concerning nominations for election or reelection as a director. The process for evaluating candidates recommended by our stockholders pursuant to our bylaws will be no different than the process for evaluating other candidates considered by the Nominating Committee.
25
Item 11. Executive Compensation
Compensation of our Executive Officers
Our executive officers do not receive compensation directly from us for services rendered to us. As a result, we do not nor has our Board of Directors considered a compensation policy for our executive officers. As a result, we have not included a Compensation and Discussion Analysis in this Annual Report on Form 10-K.
Each of our executive officers, including each executive officer who serves as a director, is an officer or employee of our advisor or its affiliates and receives compensation for his or her services, including services performed on our behalf, from such entities. See Item 13, “Certain Relationships and Related Transactions and Director Independence” below for a discussion of fees paid to our advisor and its affiliates.
Compensation of our Directors
The following table sets forth certain information regarding compensation earned by or paid to our directors during the year ended December 31, 2011. Directors who are also our executive officers do not receive compensation for services rendered as a director.
Name |
| Fees Earned or |
|
| Restricted |
|
| All Other Compensation |
|
| Total |
| ||||
| Allen R. Hartman |
|
| $ — |
|
|
| $ — |
|
|
| $ — |
|
|
| $ — |
|
| Jack I. Tompkins |
|
| 13,000 |
|
|
| 30,000 |
|
|
| — |
|
|
| 43,000 |
|
| Larry A. Bouffard |
|
| 1,500 |
|
|
| 3,750 |
|
|
| — |
|
|
| 5,250 |
|
| Richard R. Ruskey |
|
| 8,000 |
|
|
| 22,500 |
|
|
| — |
|
|
| 30,500 |
|
| Total |
|
| $ 22,500 |
|
|
| $ 56,250 |
|
|
| $ — |
|
|
| $ 78,750 |
|
| (1) | The amounts shown in this column include fees earned for attendance at board of director and committee meetings and annual retainers, as described below under “Cash Compensation.” |
| (2) | As described below under “Independent Directors Compensation Plan,” each of Messrs. Tompkins, Bouffard and Ruskey have been received vested restricted common shares as non-cash compensation for their service as independent members of our Board of Directors. Amounts shown reflect the aggregate fair value of the shares of restricted stock as of the date of grant computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. |
Cash Compensation
We pay each of our independent directors an annual retainer of $10,000, plus $1,000 per board meeting attended, $500 per committee meeting attended; provided, however, we do not pay an additional fee to our directors for attending a committee meeting when the committee meeting is held on the same day as a board meeting. We also reimburse all directors for reasonable out-of-pocket expenses incurred in connection with attending board meetings.
Independent Directors Compensation Plan
We have approved and adopted an independent director’s compensation plan. Under our independent directors compensation plan, each of our current independent directors received 3,000 shares of vested restricted common stock annually in addition to the cash compensation described above. As of December 31, 2011, 10,125 shares of restricted common stock have been granted to our independent directors.
Compensation Committee Interlocks and Insider Participation
The Company does not separately compensate its executive officers. During the fiscal year ended December 31, 2011, our executive officers, Messrs. Hartman, Fox and Stokes, all served as executive officers of our advisor and property manager. In addition, Mr. Hartman served as a director of Hartman Income REIT, Inc. Since Messrs. Hartman, Fox and Stokes are also officers of our advisor and its affiliates; they did not receive any separate compensation from us for service
26
as our executive officers and/or directors, and also did not receive any separate compensation for their service as executive officers and/or directors of those entities.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
The following table sets forth information as of December 31, 2011, regarding the beneficial ownership of our common stock by each person known by us to own 5% or more of the outstanding shares of common stock, each of our directors, and each named executive officer, and our directors and executive officers as a group. The percentage of beneficial ownership is calculated based on 1,813,513 shares of common stock outstanding as of December 31, 2011. The address of each beneficial owner listed below is c/o Hartman Short Term Income Properties XX, Inc., 2909 Hillcroft, Suite 420, Houston, Texas 77057.
| Name of Beneficial Owner | Amount and Nature of Shares Beneficially Owned (1) | |
|
| Number | Percentage |
| Allen R. Hartman (2) | 19,000 | 1.05 |
| Louis T. Fox, III | - | - |
| James H. Stokes, Jr. | - | - |
| Jack I. Tompkins | 6,000 | * |
| Richard R. Ruskey | 2,250 | * |
| All Officers and Directors as a group | 27,250 | 1.51 |
| James A. Cardwell | 114,400 | 6.31 |
* Represents less than 1% of the outstanding common stock.
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and shares issuable pursuant to options warrants and similar rights held by the respective person or group which may be exercised within 60 days following December 31, 2011. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2)
Includes 19,000 shares owned by Hartman XX Holdings. Mr. Hartman is the sole stockholder of Hartman XX Holdings and controls the voting and disposition decisions of Hartman XX Holdings.
Item 13. Certain Relationships and Related Transactions and Director Independence
Ownership Interests
The Company initially issued 100 shares of the Company’s common stock to Hartman XX Holdings, Inc. (“Holdings”) for $1,000. Holdings, is a Texas corporation wholly owned by Allen R. Hartman. Holdings, was formed solely for the purpose of facilitating the organization and offering of the initial offering of the Company’s shares. Effective October 15, 2009 the Company issued an additional 18,900 shares to Holdings for $189,000. Holdings contributed a related party liability in the amount of $189,000 to the Company in exchange for the issuance of an additional 18,900 common shares of the Company. The transaction resulted in a total of 19,000 common shares issued since inception for total consideration of $190,000.
The Company issued the Advisor, Hartman Advisors LLC, 1,000 shares of non-voting convertible preferred stock for $100. Effective October 15, 2009 the Company received additional consideration of $9,900 with respect to the non-voting convertible preferred stock. The Advisor contributed a related party liability in the amount of $9,900 to the Company as donated capital related to the convertible common stock previously issued by the Company to the Advisor. Accordingly, the overall issue price for the 1,000 convertible preferred shares is $10,000 or $10 per share. Upon the terms described below, these shares may be converted into shares of the Company’s common stock, resulting in dilution of the stockholders’ interest in the Company.
27
Our convertible preferred stock will convert to shares of common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common stock (based on the 30-day average closing price) meets the same 6% performance threshold, or (3) the Company’s advisory agreement with Hartman Advisors, LLC expires without renewal or is terminated (other than because of a material breach by our advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the shareholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.
Our Relationships with our Advisor and our Sponsor
Hartman Advisors, LLC is our advisor and, as such, supervises and manages our day-to-day operations and selects our real property investments and real estate-related investments, subject to the oversight by our board of directors. Our advisor also provides marketing, sales and client services on our behalf. Our advisor was formed in March 2009 and is owned 70% by Allen R. Hartman individually and 30% by the Property Manager. The Property Manager is a wholly owned subsidiary of Hartman Income REIT Management, LLC, which is wholly owned by Hartman Income REIT of which Allen R. Hartman is the Chief Executive Officer and Chairman of the Board of Directors.
Fees and Expense Reimbursements Paid to our Advisor
Pursuant to the terms of our Advisory Agreement, we pay our advisor the fees described below.
In addition to the fees we pay to our advisor pursuant to the Advisory Agreement, we also reimburse our advisor and its affiliates for the costs and expenses described below, subject to the limitations described under the heading “2%/25% Guidelines.”
Selling Commissions and Fees Paid to our Dealer Manager
The dealer manager for our offerings of common stock is D.H. Hill Securities, LLLP, an affiliate of our sponsor. Our dealer manager is a licensed broker-dealer registered with FINRA. As the dealer manager for our offering, D.H. Hill Securities, LLLP is entitled to certain selling commissions, dealer manager fees and reimbursements relating to raising capital. Our dealer manager agreement with D.H. Hill Securities, LLLP provides for the following compensation:
| • | We pay our dealer manager selling commissions of up to 7.0% of the gross offering proceeds from the sale of our shares in the private and public offerings, all of which may be reallowed to participating broker-dealers. For the period from January 1, 2010 to December 31, 2011, we paid $1,100,048 in selling commissions to our dealer manager. |
| • | We pay our dealer manager a dealer manager fee of up to 2.5% of the gross offering proceeds from the sale of our shares in the private and public offerings, a portion of which may be reallowed to participating broker-dealers. For the period from January 1, 2010 to December 31, 2011, we paid $213,826 in dealer manager fees to our dealer manager. |
Property Management Fees Paid to Our Property Manager
We have entered into property management agreements with Hartman Income REIT Management, Inc., or the property manager, an affiliate of our sponsor, with respect to the management of properties. Pursuant to the management agreement, we pay the property manager a monthly management fee in an amount equal to between 3% and 5% of each property's gross revenues (as defined in the respective management agreements) for each month. Each management agreement has an initial one year term and will continue thereafter on a month-to-month basis unless either party gives prior notice of its desire to terminate the management agreement, provided that we may terminate the management agreement at any time without cause or upon an uncured breach of the agreement upon thirty (30) days prior written notice to the property manager. For the period from January 1, 2010 to December 31, 2011, we have paid property management fees of $17,450 to our property manager.
Currently Proposed Transactions.
Other than as described above, there is no currently proposed material transactions with related persons other than those covered by the terms of the agreements described above.
Policies and Procedures for Transactions with Related Persons
In order to reduce or eliminate certain potential conflicts of interest, our charter and our Advisory Agreement contain restrictions and conflict resolution procedures relating to transactions we enter into with our advisor, our directors or their respective affiliates. Each of the restrictions and procedures that apply to transactions with our advisor and its affiliates will also apply to any transaction with any entity or real estate program controlled by our advisor and its affiliates. As a general rule, any related party transaction must be approved by a majority of the directors (including a majority of independent directors) not otherwise interested in the transaction. In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between us and the related party is fair and reasonable to us and has terms and conditions no less favorable to us than those available from unaffiliated third parties.
Director Independence
As required by our charter, a majority of the members of our Board of Directors must qualify as “independent” as affirmatively determined by the board. The board consults with our legal counsel and counsel to the independent directors to ensure that the board’s determinations are consistent with our Charter and applicable securities and other laws and regulations regarding the definition of “independent.” After review of all relevant transactions or relationships between each director, or any of his family members, and the Company, our senior management and our independent registered
29
public accounting firm, the board has determined that Messrs. Tompkins and Ruskey, who comprise the majority of our board, qualify as independent directors.
Item 14. Principal Accounting Fees and Services
Independent Registered Public Accounting Firm
RBSM LLP (“RBSM”), served as our independent registered public accounting firm from January 2010 to November 2011. The decision to change our independent registered public accounting firm was approved by the audit committee of our Board of Directors. As discussed in Item 9 (Changes in and Disagreements with Accountants on Accounting and Financial Disclosure), on October 7, 2011, the audit committee of our Board of Directors approved the engagement of Weaver Tidwell LLP (“Weaver”), as our independent registered public accounting firm for the fiscal years ending December 31, 2011.
Pre-Approval Policies
The audit committee charter imposes a duty on the audit committee to pre-approve all auditing services performed for us by our independent auditors as well as all permitted non-audit services in order to ensure that the provision of such services does not impair the auditors’ independence. In determining whether or not to pre-approve services, the audit committee will consider whether the service is a permissible service under the rules and regulations promulgated by the SEC. The audit committee, may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-audit services to be performed by the independent auditors, provided any such approval is presented to and approved by the full audit committee at its next scheduled meeting.
All services rendered to us by RBSM and Weaver for the years ended December 31, 2011 and 2010 were pre-approved in accordance with the policies and procedures described above.
Independent Registered Public Accounting Firm Fees
RBSM
The audit committee reviewed the audit and non-audit services performed by RBSM, as well as the fees charged by RBSM for such services. In its review of the non-audit service fees, the audit committee considered whether the provision of such services is compatible with maintaining the independence of RBSM. The aggregate fees billed to us by RBSM for professional accounting services rendered during the years ended December 31, 2011 and 2010 are set forth in the table below.
|
|
| 2011 |
|
| 2010 |
| ||
| Audit fees |
|
| $ 29,912 |
|
|
| $ 27,300 |
|
| Audit related fees |
|
| 4,000 |
|
|
| - |
|
| Tax fees |
|
| - |
|
|
| - |
|
| All other fees |
|
| - |
|
|
| - |
|
| Total |
|
| $ 33,912 |
|
|
| $ 27,300 |
|
30
Weaver
The audit committee reviewed the audit and non-audit services performed by Weaver, as well as the fees charged by Weaver for such services. In its review of the non-audit service fees, the audit committee considered whether the provision of such services is compatible with maintaining the independence of Weaver. The aggregate fees billed to us by Weaver professional accounting services for the years ended December 31, 2011 and 2010 are set forth in the table below.
|
|
| 2011 |
|
| 2010 |
| ||
| Audit fees |
|
| $ 45,000 |
|
|
| $ - |
|
| Audit related fees |
|
| - |
|
|
| - |
|
| Tax fees |
|
| 1,500 |
|
|
| 1,500 |
|
| All other fees |
|
| - |
|
|
| - |
|
| Total |
|
| $ 46,500 |
|
|
| $ 1,500 |
|
For purposes of the preceding tables, RBSM and Weaver’s professional fees are classified as follows:
| ● | Audit fees—These are fees for professional services performed for the audit of our annual financial statements, the required review of quarterly financial statements, registration statements and other procedures performed by PKF in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements. |
| ● | Audit-related fees—These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards. |
| ● | Tax fees—These are fees for all professional services performed by professional staff in our independent auditor’s tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning, and tax advice, including federal, state, and local issues. Services may also include assistance with tax audits and appeals before the IRS and similar state and local agencies, as well as federal, state, and local tax issues related to due diligence. |
| ● | All other fees—These are fees for any services not included in the above-described categories, including assistance with internal audit plans and risk assessments. |
31
PART IV
Item 15. Exhibits, Financial Statement Schedules
1.
Financial Statements. The list of our financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.
2.
Financial Statement Schedules. The financial statement schedules have been omitted because the required information on such schedules is not present, is not present in amounts sufficient to require a schedule or is included in the financial statements.
3.
Exhibits. This list of exhibits filed as a part of this Annual Report on Form 10-K in response to Item 601 of Regulation S-K is submitted on the Exhibit Index attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
| By: |
| /s/ Allen R. Hartman |
| Date: April 12, 2012 |
|
|
| Allen R. Hartman, |
|
|
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
| ||||
| By: |
| /s/ Louis T. Fox, III |
| Date: April 12, 2012 |
|
|
| Louis T. Fox, III, |
|
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|
|
|
|
| |
32
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Allen R. Hartman and Louis T. Fox, III, and each of them, acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
33
EXHIBIT INDEX
Exhibit |
| Description of Documents |
| 1.1 |
| Dealer Manager Agreement (Incorporated by reference to Exhibit 1.1 to the Company’s Form 8-K filed February 1, 2012) |
| 3.1.1 |
| First Articles of Amendment to Third Amended and Restated Articles of Incorporation of the Registrant. (FILED HEREWITH) |
| 3.1.2 |
| Third Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 1 to the registrant’s registration statement on Form 8-A12G (SEC File No. 000-53912) March 22, 2010) |
| 3.2 |
| Bylaws of the Registrant (Incorporated by reference to Exhibit 2 to the registrant’s registration statement on Form 8-A12G (SEC File No. 000-53912) March 22, 2010) |
| 10.1 |
| Form of Advisory Agreement between the Registrant and Hartman Advisors, LLC. (Incorporated by reference to Exhibit 10.1 to the registrant’s registration statement on Form S-11 Amendment No. 9 (SEC File No. 333-154750) November 24, 2009) |
| 10.2 |
| Form of Property Management Agreement between the Registrant and Hartman Income REIT Management, Inc. (Incorporated by reference to Exhibit 10.2 to registrant’s registration statement on Form S-11 Amendment No. 9 (SEC File No. 333-154750) November 24, 2009) |
| 10.3 |
| Form of Employee and Director Incentive Share Plan (Incorporated by reference to Exhibit 10.3 to registrant’s registration statement on Form S-11 Amendment No. 5 (SEC File No. 333-154750) July 14, 2009) |
| 10.4 |
| Operating Agreement of Hartman Richardson Heights Properties, LLC (Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K filed March 31, 2011) |
| 31.1 |
| Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH) |
| 31.2 |
| Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH) |
| 32.1 |
| Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH) |
| 32.2 |
| Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH) |
|
|
|
|
| 101.INS |
| XBRL INSTANCE DOCUMENT |
| 101.SCH |
| XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
| 101.CAL |
| XBRL EXTENSION CALCUATION LINKBASE DOCUMENT |
| 101.DEF |
| XBRL EXTENSION DEFINITION LINKBASE DOCUMENT |
| 101.LAB |
| XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT |
| 101.PRE |
| XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
|
|
|
|
INDEX TO FINANCIAL STATEMENTS
|
| Page # |
| Reports of Independent Registered Public Accounting Firms | F-1 |
| Consolidated Balance Sheets as of December 31, 2011 and 2010 | F-3 |
| Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010 | F-4 |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2011 and 2010 | F-5 |
| Consolidated Statements of Cash Flows for the Year Ended December 31, 2011 and 2010 | F-6 |
| Notes to Consolidated Financial Statements | F-7 |
| Schedule III – Real Estate and Accumulated Depreciation | F-21 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Hartman Short Term Income Properties XX, Inc.
We have audited the accompanying consolidated balance sheet of Hartman Short Term Income Properties XX, Inc. (a Maryland corporation) (the Company) and subsidiary as of December 31 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hartman Short Term Income Properties XX, Inc. and subsidiary as of December 31, 2011, and the results of their consolidated operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, Schedule III – Real Estate and Accumulated Depreciation, when considered in relation to the basic consolidated financial statements takes as a whole, presents fairly in all material respects the information set forth therein.
/s/ WEAVER AND TIDWELL, L.L.P
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
April 11, 2012
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hartman Short Term Income Properties XX, Inc.
We have audited the accompanying balance sheet of Hartman Short Term Income Properties XX, Inc. (the Company) as of December 31, 2010 and the related statements of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly, in all material respects, the financial position of Hartman Short Term Income Properties XX, Inc. as of December 31, 2010 and the results of operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
|
| /s/ RBSM LLP |
|
New York, New York
March 31, 2011
F-2
| HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. | ||||
| CONSOLIDATED BALANCE SHEETS | ||||
|
|
|
|
|
|
|
|
| December 31, | ||
|
|
| 2011 |
| 2010 |
|
|
|
|
|
|
| ASSETS |
|
|
|
|
| Real estate assets, at cost: |
|
|
|
|
| Property |
| $ 18,968,145 |
| $ - |
| Accumulated depreciation and amortization |
| (352,612) |
| - |
| Real estate assets, net |
| 18,615,533 |
| - |
|
|
|
|
|
|
| Cash and cash equivalents |
| 7,440,362 |
| 636,523 |
| Accrued rent and accounts receivable, net |
| 36,047 |
| - |
| Investment in unconsolidated joint venture |
| - |
| 1,916,719 |
| Deferred loan costs, net |
| 95,153 |
| - |
| Goodwill |
| 249,686 |
| - |
| Prepaid expenses and other assets |
| 18,942 |
| 22 |
| Total assets |
| $ 26,455,723 |
| $ 2,553,264 |
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
| Liabilities: |
|
|
|
|
| Note payable |
| $ 9,575,000 |
| $ - |
| Accounts payable and accrued expenses |
| 698,508 |
| 104,683 |
| Due to related parties |
| 908,511 |
| 355,739 |
| Tenants' security deposits |
| 67,006 |
| - |
| Total liabilities |
| 11,249,025 |
| 460,422 |
|
|
|
|
|
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
| Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
| Preferred stock, $0.001 par value 200,000,000 convertible, non-voting shares authorized, 1,000 shares issued and outstanding at December 31, 2011 and 2010, respectively |
| 1 |
| 1 |
|
|
|
|
|
|
| Common stock, $0.001 par value, 750,000,000 authorized, 1,813,513 shares and 274,966 shares issued and outstanding at December 31, 2011 and 2010, respectively |
| 1,813 |
| 275 |
|
|
|
|
|
|
| Common stock subscribed |
| - |
| 100,000 |
|
|
|
|
|
|
| Additional paid in capital |
| 16,902,468 |
| 2,573,210 |
|
|
|
|
|
|
| Accumulated distributions and net loss |
| (1,697,584) |
| (580,644) |
| Total stockholders' equity |
| 15,206,698 |
| 2,092,842 |
| Total liabilities and total stockholders' equity |
| $ 26,455,723 |
| $ 2,553,264 |
|
|
|
|
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. | ||||
F-3
| HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. | |||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||
|
|
|
|
|
|
|
Year Ended December 31, | ||
| Revenues | 2011 |
| 2010 |
|
|
|
|
|
| Rental revenues | $ 301,348 |
| $ - |
| Tenant reimbursements and other revenues | 52,700 |
| - |
| Total revenues | 354,048 |
| - |
|
|
|
|
|
| Expenses |
|
|
|
| Property operating expenses | 54,495 |
| - |
| Asset management and acquisition fees | 504,682 |
| 47,875 |
| Organization and offering costs | 51,806 |
| 101,580 |
| Real estate taxes and insurance | 119,037 |
| - |
| Depreciation and amortization | 354,101 |
| - |
| General and administrative | 162,104 |
| 99,548 |
| Total expenses | 1,246,225 |
| 249,003 |
|
|
|
|
|
| Loss before other income (expense) and equity in earnings of unconsolidated joint venture, net | (892,177) |
| (249,003) |
|
|
|
|
|
| Other income (expense) |
|
|
|
| Gain on re-measurement | 508,047 |
| - |
| Interest income | - |
| 93 |
| Interest expense | ( 96,586) |
| - |
| Other income (expense), net | 411,461 |
| 93 |
|
|
|
|
|
| Loss after other income (expense) and before equity in earnings of unconsolidated joint venture, net | (480,716) |
| (248,910) |
|
|
|
|
|
| Equity in earnings of unconsolidated joint venture, net | (39,678) |
| 1,719 |
| Net loss | $ (520,394) |
| $ (247,191) |
|
|
|
|
|
| Basic and diluted loss per common share: |
|
|
|
| Loss attributable to common stockholders | $ (0.61) |
| $ (5.31) |
|
|
|
|
|
| Weighted average number of common shares outstanding, basic and diluted | 854,149 |
| 46,551 |
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. | |||
F-4
| HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock | Common Stock |
|
| Accumulated |
| ||
|
|
|
|
|
| Common Stock | Additional Paid-In | Distributions |
|
|
| Shares | Amount | Shares | Amount | Subscribed | Capital | and Net Loss | Total |
| Balance, December 31, 2009 | 1,000 | $ 1 | 19,000 | $ 19 | $ - | $ 199,980 | $ (331,986) | $ (131,986) |
|
|
|
|
|
|
|
|
|
|
| Issuance of common shares | - | - | 255,966 | 256 | - | 2,472,922 | - | 2,473,178 |
| Common shares subscribed | - | - | - | - | 100,000 | - | - | 100,000 |
| Selling commissions | - | - | - | - | - | (99,692) | - | (99,692) |
| Dividends and distributions | - | - | - | - | - | - | (1,467) | (1,467) |
| Net loss | - | - | - | - | - | - | (247,191) | (247,191) |
| Balance, December 31, 2010 | 1,000 | $ 1 | 274,966 | $ 275 | $ 100,000 | $ 2,573,210 | $ (580,644) | $ 2,092,842 |
| Issuance of common shares (cash investment) | - | - | 1,500,961 | 1,500 | - | 14,966,525 | - | 14,968,025 |
| Issuance of common shares (non-cash) | - | - | 37,586 | 38 | - | 363,089 | - | 363,127 |
| Common shares subscribed | - | - | - | - | (100,000) | - | - | (100,000) |
| Selling commissions | - | - | - | - | - | (1,000,356) | - | (1,000,356) |
| Dividends and distributions (stock) | - | - | - | - | - | - | (288,045) | (288,045) |
| Dividends and distributions (cash) | - | - | - | - | - | - | (308,501) | (308,501) |
| Net loss | - | - | - | - | - | - | (520,394) | (520,394) |
| Balance, December 31, 2011 | 1,000 | $ 1 | 1,813,513 | $ 1,813 | $ - | $ 16,902,468 | $ (1,697,584) | $ 15,206,698 |
|
|
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
F-5
| HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. | |||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
|
|
|
|
|
|
| Year Ended December 31, | ||
|
| 2011 |
| 2010 |
|
|
|
|
|
| Cash flows from operating activities: |
|
|
|
| Net Loss | $ (520,394) |
| $ (247,191) |
| Adjustments to reconcile net loss to cash (used in) provided by operating activities: |
|
| |
| Stock based compensation | 61,250 |
| 60,000 |
| Depreciation and amortization | 361,454 |
| - |
| Bad debt provision | 36,791 |
| - |
| Equity in earnings of unconsolidated joint venture, net | 39,678 |
| (1,719) |
| Gain on re-measurement | (508,047) |
| - |
| Changes in operating assets and liabilities: |
|
|
|
| Accrued rent and accounts receivable | 130,739 |
| - |
| Prepaid expenses and other assets | (5,697) |
| - |
| Accounts payable and accrued expenses | 50,159 |
| 38,587 |
| Dividends and distributions payable | - |
| 1,467 |
| Due to related parties | 201,787 |
| 227,260 |
| Tenants' security deposits | (1,550) |
| - |
| Net cash (used in) provided by operating activities | (153,830) |
| 78,404 |
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
| Investment in formerly unconsolidated joint venture | (6,654,339) |
| (1,915,000) |
| Net cash used in investing activities | (6,654,339) |
| (1,915,000) |
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
| Dividend distributions paid in cash | (252,207) |
| (1,467) |
| Payment of selling commissions | (1,000,356) |
| (99,692) |
| Borrowings net of repayment under insurance premium finance note | (3,454) |
| - |
| Proceeds from issuance of common stock | 14,868,025 |
| 2,573,178 |
| Net cash provided by financing activities | 13,612,008 |
| 2,472,019 |
|
|
|
|
|
| Net change in cash | 6,803,839 |
| 635,423 |
| Cash at the beginning of period | 636,523 |
| 1,100 |
| Cash at the end of period | $ 7,440,362 |
| $ 636,523 |
|
|
|
|
|
| Supplementary cash flow information: |
|
|
|
| Cash paid for: |
|
|
|
| Interest: | $ 52,731 |
| $ - |
|
|
|
|
|
| Supplementary non-cash investing and financing additions resulting from real estate acquisitions: |
|
|
|
|
| $ 18,968,145 |
| $ - |
| Goodwill | $ 249,686 |
| $ - |
| Note payable | $ 9,575,000 |
| $ - |
| The accompanying notes are an integral part of these consolidated financial statements. | |||
F-6
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Note 1 — Organization
Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009. The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011. The Company is offering shares to the public in its primary offering (exclusive of 2,500,000 shares available pursuant to the Company’s dividend reinvestment plan) at a price of $10.00 per share. The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc. Hartman XX Holdings, Inc. is a Texas corporation wholly owned by Allen R. Hartman. The Company sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per share. The Company has also issued 1,000 shares of convertible preferred shares to its advisor, Hartman Advisors LLC at a price of $10.00 per share. Hartman Advisors LLC (the “Advisor”) is the Company’s advisor. The Advisor is owned 70% by Allen R. Hartman and 30% by Hartman Income REIT Management, Inc.
As of December 31, 2011, the Company had accepted investor’s subscriptions for, and issued, 1,756,927 shares of the Company’s common stock in its public offering, resulting in gross proceeds to the Company of $17,441,203.
The management of the Company is through the Advisor. Management of the Company’s properties is through Hartman Income REIT Management, Inc. (“HIR Management” or the “Property Manager”). Allied Beacon Partners, Inc. (formerly American Beacon Partners, Inc., the “Dealer Manager”) served as the dealer manager of the Company’s public offering from February 5, 2009 to February 1, 2012. Effective February 1, 2012, D.H. Hill Securities, LLLP succeeded Allied Beacon Partners, Inc. as the dealer manager for the offering. These parties receive compensation and fees for services related to the offering and for the investment and management of the Company’s assets. These entities will receive fees during the offering, acquisition, operational and liquidation stages.
As of December 31, 2011 we owned 1 commercial property located in Richardson, Texas comprising approximately 201,000 square feet.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements as of December 31, 2011 and 2010 have been prepared by us in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-K and Regulation S-K. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management necessary to fairly present the operating results for the respective periods.
Effective January 1, 2011, we determined that we were no longer a development stage company. Prior to January 1, 2011 and for the period from February 5, 2009 (date of inception) to December 31, 2010 the Company was considered a development stage entity, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915. For the period from February 5, 2009 (date of inception) to December 31, 2010, the Company had accumulated net losses of $579,177.
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Hartman Richardson Heights Properties, LLC for the period from October 31, 2011, the date we acquired control of this subsidiary, to December 31, 2011. Prior to October 31, 2011, the financial statements were not consolidated and present only the activity of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-7
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Reclassifications
We have reclassified certain prior fiscal year amounts in the accompanying financial statements in order to be consistent with the current fiscal year presentation. These reclassifications had no effect on the previously reported working capital or results of operations.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Cash and cash equivalents as of December 31, 2011 and 2010 consisted of demand deposits at commercial banks.
Financial Instruments
The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, accrued rent and accounts receivable, accounts payable and accrued expenses and due to related parties. The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.
Revenue Recognition
Our leases are accounted for as operating leases. Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases. Revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space. When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net. In accordance with ASC 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred.
Investment in Unconsolidated Joint Venture
The investment in unconsolidated joint venture consisted of our interest in a joint venture that owns one multi-tenant property (the “Unconsolidated Joint Venture”). For the period from January 1, 2011 through October 31, 2011, consolidation of this investment was not required as the entity did not qualify as a variable interest entity and did not meet the control requirements for consolidation, as defined in ASC 810, Consolidation. Both the Company and the Unconsolidated Joint Venture partner were required to approve significant decisions about the Unconsolidated Joint Venture’s activities.
The Company accounted for the Unconsolidated Joint Venture using the equity method of accounting pursuant to guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires this investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint venture’s earnings and distributions. The Company evaluated the carrying amount of this investment for impairment in accordance with ASC 323. The Unconsolidated Joint Venture was reviewed for potential impairment if the carrying amount of the investment exceeded its fair value. To determine whether impairment was other-than-temporary, the Company considered whether it had the ability and intent to hold the investment until the carrying value is fully recovered. The evaluation of an investment in a joint venture for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the Unconsolidated Joint Venture for the ten months ended October 31, 2011 or the year ended December 31, 2010.
F-8
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Real Estate
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).
The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.
The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles will be included in intangible lease assets in the balance sheet and are amortized to expense over the remaining term of the respective leases.
The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.
Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements. Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease.
Impairment
We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of December 31, 2011.
Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future
F-9
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.
Accrued Rent and Accounts Receivable
Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. As of December 31, 2011 and 2010, we had an allowance for uncollectible accounts of $36,791 and $0, respectively. For the period from November 1, 2011 to December 31, 2011 we recorded bad debt expense in the amount of $36,791 related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness. Bad debt expenses and any related recoveries are included in property operating expenses.
Deferred Loan Costs
Loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method.
Goodwill
Generally accepted accounting principles in the United States require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired. The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test. In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. For the year ended December 31, 2011 no goodwill impairment was recognized.
Prepaid expenses and Other Assets
Prepaid expenses and other assets include prepaid insurance premiums and utility deposits.
Organization and Offering Costs
The Company has incurred certain expenses in connection with organizing the company. These costs principally relate to professional and filing fees. For the years ended December 31, 2011 and 2010 such costs totaled $51,806 and $101,580, respectively, which have been expensed as incurred.
Organization and offering costs will be reimbursed by the Advisor as set forth in the “Costs of Formation and Fees to Related Parties” section of the prospectus, to the extent that organization and offering costs ultimately exceed 1.5% of gross offering proceeds. As of December 31, 2011 the excess of offering and organizational expense incurred in excess of 1.5% of gross offering proceeds is $223,754. No demand has been made of the Advisor for reimbursement as of December 31, 2011 and no receivable has been recorded with respect to the excess costs as of that date. The Company expects the excess cost to diminish as additional offering proceeds are received. Selling commissions in connection with the offering are recorded and charged to additional paid-in-capital.
Share-Based Compensation
The Company follows ASC 718- Compensation- Stock Compensation with regard to issuance of stock in payment of services. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost is measured based on the fair value of the equity or liability instruments issued.
F-10
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
The Company recorded stock based compensation for non-employee directors of $56,250 and $60,000 for the issuance of 5,625 shares and 6,000 shares of restricted common stock at the current issue price of $10.00 per share for the years ended December 31, 2011 and 2010, respectively.
On April 19, 2011 the directors voted to change their compensation, including the share-based compensation. Each non-employee director who also serves as a director of more than one affiliated Hartman entity shall have his compensation divided and paid on a pro-rata basis by the total number of affiliated Hartman entity boards which that director serves. Allen Hartman is the only director of the Company who also serves as a director of more than one affiliated Hartman entity.
On July 28, 2011, the Compensation Committee of the Board of Directors approved awards of 1,000 shares of restricted common stock that were issued on September 29, 2011 to each of two executives of Hartman Income REIT Management, the property manager for the Company. We recognized share based compensation expense of $20,000 with respect to these awards based on the amount offering price of $10 per share for the year ended December 31, 2011.
Share based compensation expense is included in general and administrative expense in the consolidated statements of operations.
Advertising
The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses. Advertising costs totaled $875 and $400 for the years ended December 31, 2011 and 2010, respectively.
Income Taxes
We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT.
For the years ended December 31, 2011 and 2010, the Company incurred a net loss of $520,394 and $247,191, respectively. The Company elected to be treated as a REIT beginning in 2011. The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward. The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected. Accordingly no deferred tax benefit or deferred tax asset has been recorded in the financial statements.
The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recognized a liability related to uncertain tax positions.
F-11
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Loss Per Share
The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock. As of December 31, 2011 and 2010, there were no shares issuable in connection with these potentially dilutive securities. These potentially dilutive securities were excluded from the computations of diluted net loss per share for the years ended December 31, 2011 and 2010 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.
Concentration of Risk
Substantially all of our revenues are derived from a retail location in Richardson, Texas. We maintain cash accounts in two U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances of these accounts may exceed the federally insured limits. No losses have been incurred in connection with these deposits nor are any expected.
Recently Issued Accounting Standards
In September 2011, the FASB issued new guidance for testing goodwill for impairment. This update amends Accounting Standards Codification (ASC) 350, Intangibles—Goodwill and Other to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company adopted this policy on December 31, 2011. The adoption of this policy did not have a material impact on the consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-28 – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This update provides amendments to ASC Topic 350 – Intangibles, Goodwill and Other that requires and entity to perform Step 2 impairment test even if a reporting unit has zero or negative carrying amount. Step 1 tests whether the carrying amount of a reporting unit exceeds its fair value. Previously reporting units with zero or negative carrying value passed Step 1 because the fair value was generally greater than zero. Step 2 requires impairment testing and impairment valuation be calculated in between annual tests if an event or circumstances indicate that it is more likely than not that goodwill has been impaired. ASU 2010-28 is effective beginning January 1, 2011. The implementation of the provisions of ASU 2010-28 did not have a material effect on the Company’s consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (the “ASU”) No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (“ASU No. 2010-01”). This ASU clarifies that when the stock portion of a distribution allows stockholders to elect to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate, the distribution would be considered a share issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share prospectively. ASU No. 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU No. 2010-01 did not have a material effect on the Company’s consolidated financial statements.
Note 3 — Investment in Unconsolidated Joint Venture
As of December 31, 2011 we owned 1 commercial property located in Richardson, Texas. On December 28, 2010, the Company entered into the limited liability company operating agreement of Hartman Richardson Heights Properties LLC (the “Joint Venture”). The Company made an initial capital contribution to the Joint Venture of $1.915 million representing a 10% interest in the Joint Venture. Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”), the other member of the Joint Venture, is a REIT that is managed by affiliates of the Company’s manager and real property manager. As of December 31, 2010 Hartman XIX made capital contributions totaling $17.235 million to the Joint Venture representing a 90% interest therein.
F-12
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
On April 19, 2011 the Board of Directors of the Company authorized the Company’s officers to consider and execute a series of related transactions to acquire up to all of the limited liability company interest of Hartman XIX in the Joint Venture. The Company was not obligated to acquire any specific portion of the Hartman XIX joint venture interest. Each prospective acquisition was subject to management’s discretion and the Company’s financial position and liquidity.
On April 20, 2011 the Company acquired an additional 15% limited liability company interest in the Joint Venture from Hartman XIX for $2,872,500 cash. On May 27, 2011 the Company acquired an additional 4% limited liability company interest in the Joint Venture from Hartman XIX for $766,000 cash. On June 30, 2011 the Company acquired an additional 2% limited liability company interest in the Joint Venture from Hartman XIX for $383,000 cash. On July 20, 2011 the Company acquired an additional 4% limited liability company interest in the Joint Venture from Hartman XIX for $766,000 cash. On August 12, 2011 the Company acquired an additional 7% limited liability company interest in the Joint Venture from Hartman XIX for $1,340,500 cash. On September 13, 2011 the Company acquired an additional 7% limited liability company interest in the Joint Venture from Hartman XIX for $1,340,500 cash. The source of the cash used to acquire the interest of Hartman XIX in the Joint Venture was proceeds from the current public offering of the Company’s common shares.
On October 31, 2011 the Joint Venture distributed a note receivable by the Joint Venture from Hartman XIX to Hartman XIX as a reduction in equity capital attributable to Hartman XIX. The Company acquired the remaining equity interest of Hartman XIX in the Joint Venture for $16,500 cash. As of November 1, 2011 the Company is the sole member of the Joint Venture.
The Company’s equity in earnings of unconsolidated entities from its investment in Richardson Heights Shopping Center was $(39,678) for the ten months ended October 31, 2011 and $1,719 for the year ended December 31, 2010, respectively.
Included in our 2011 consolidated statement of operations are total revenues of $354,048 and net loss of $260,296 related to the operations of the Richardson Heights property for the period from November 1, 2011 through December 31, 2011. The table below presents our pro forma total revenues and net loss as if the Richardson Heights property had been acquired on January 1, 2010. Included in the pro forma net loss adjustments is the elimination of $(39,678) and $1,719 of equity in earnings of unconsolidated joint venture for 2011 and 2010, respectively, because the Richardson Heights property represented the unconsolidated joint veneture which generated this income.
|
|
| Pro Forma -Year Ended December 31, | |||
|
|
| 2011 |
|
| 2010 |
| Total revenues (unaudited) |
| $ 2,140,518 |
|
| $ 2,228,765 |
| Net loss (unaudited) |
| $ (627,252) |
|
| $ (364,362) |
Note 4 — Real Estate Acquisitions
On December 28, 2010, the Joint Venture acquired a retail shopping center located in Richardson, Texas for an aggregate purchase price of $19.15 million on an all cash basis from the seller, LNR Partners, LLC. The property is located at 100 South Central Expressway, Richardson, Texas and commonly known as Richardson Heights Shopping Center. The property consists of approximately 201,000 square feet and was 56.7% occupied at the acquisition date. Richardson is a suburb of Dallas, Texas.
As noted in Note 3, on November 1, 2011 the Company acquired the remaining 51% interest we previously did not control. In accordance with ASC Topic 810 – Business Combinations, the Company re-measured its previously held 49% interest, with a carrying value of $9,361,988. The acquisition date fair value of the previous equity interest in the Joint Venture was $9,870,035. Therefore, we recognized a gain of $508,047 as a result of revaluing our prior equity interest held before the acquisition to fair value as of October 31, 2011. The gain is reflected as “gain on re-measurement” in the consolidated statements of operations.
F-13
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date:
| Assets acquired: |
|
|
|
| Real estate assets |
| $ | 18,968,145 |
| Cash and cash equivalents |
|
| 830,671 |
| Accounts receivable |
|
| 36,608 |
| Other assets |
|
| 285,011 |
| Total assets acquired |
|
| 20,120,435 |
|
|
|
|
|
| Liabilities assumed: |
|
|
|
| Note payable |
|
| 9,575,000 |
| Accounts payable and accrued expenses |
|
| 504,658 |
| Tenant security deposits |
|
| 68,556 |
| Due to related parties |
|
| 351,814 |
| Total liabilities assumed |
|
| 10,500,028 |
|
|
|
|
|
| Fair value of net assets acquired |
| $ | 9,620,407 |
|
|
|
|
|
The Company acquired the controlling interest in the Joint Venture without the transfer of consideration, as defined in ASC Topic 815, as control was obtained by a distribution of equity to the former controlling interest. Therefore, as required by ASC Topic 815, in order to determine whether the Company had goodwill or a bargain purchase gain as a result of this transaction, the fair value of the assets acquired and liabilities assumed is compared to the value of the investment in the acquired entity. The fair value of the identifiable assets and liabilities assumed were less than the fair value of the investment in the Joint Venture. As a result we recognized goodwill of $249,686. None of the goodwill recognized is expected to be deductible for tax purposes. Management has determined that the goodwill asset has not been impaired as of December 31, 2011 and accordingly no impairment loss has been recorded for the year then ended.
As further discussed in Note 3, the Company’s interest in the now former Unconsolidated Joint Venture increased from 49% to 100% effective November 1, 2011. For the period from November 1, 2011 through December 31, 2011, the accounts of Hartman Richardson Heights Properties, LLC are consolidated with the accounts of the Company. All significant inter-company balances have been eliminated.
Note 5 — Real Estate
As of December 31, 2011 we owned 1 commercial property located in Richardson, Texas comprising approximately 201,000 square feet.
Property consisted of the following at December 31, 2011 and 2010 respectively:
|
|
|
| December 31, | ||
|
|
|
| 2011 |
| 2010 |
|
|
|
|
|
|
|
| Land | $ 4,787,500 |
| $ - | ||
| Building and improvements | 10,706, 882 |
| - | ||
| In-place lease value intangible | 3,473,763 |
| - | ||
|
|
|
| $ 18,968,145 |
| $ - |
|
|
|
|
| ||
| Less accumulated depreciation and amortization | (352,612) |
| - | ||
|
|
|
|
|
|
|
| Real estate assets, net | $ 18,615,533 |
| $ - | ||
F-14
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Depreciation expense for the year ended December 31, 2011 and 2010 was $87,880 and $0, respectively. Amortization expense of in-place lease value intangible was $264,732 and $0 for the year ended, December 31, 2011 and 2010, respectively.
Acquisition fees paid to Advisor were $430,875 and $47,875 and are included in asset management and acquisition fees of the Company’s consolidated statements of operations for the years ended December 31, 2011 and 2010, respectively.
Note 6 — Acquired Lease Intangibles
We identify and record the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms, which for the Richardson Heights property, range from 6 months to 10 years from December 31, 2011. With respect to the Richardson Heights property, we consider all of the in-place leases to be market rate leases.
The amount of total in-place lease intangible asset and the respective accumulated amortization as of December 31, 2011 and 2010 are as follows:
|
|
| December 31, | |||
|
|
| 2011 |
|
| 2010 |
| Acquired lease intangible assets: |
|
|
|
|
|
| In-place leases |
| $ 3,473,763 |
|
| $ - |
| In-place leases – accumulated amortization |
| (264,732) |
|
| - |
| Acquired lease intangible assets, net |
| $ 3,209,031 |
|
| $ - |
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows:
| Years ending December 31, | In-place lease amortization | |
| 2012 |
| $ 1,020,908 |
| 2013 |
| 666,735 |
| 2014 |
| 496,137 |
| 2015 |
| 293,172 |
| 2016 |
| 209,871 |
| Thereafter |
| 522,208 |
| Total |
| $ 3,209,031 |
Note 7 — Accrued Rent and Accounts Receivable, net
|
|
| December 31, | |||
|
|
| 2011 |
|
| 2010 |
| Tenant receivables | $ | 67,857 |
| $ | - |
| Accrued rent |
| 4,981 |
|
| - |
| Allowance for doubtful accounts |
| (36,791) |
|
| - |
|
| $ | 36,047 |
| $ | - |
F-15
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Note 8 — Deferred Loan Costs
Costs which have been deferred consist of the following:
|
|
| December 31, | |||
|
|
| 2011 |
|
| 2010 |
|
|
|
|
|
|
|
| Deferred loan costs |
| $133,405 |
|
| $- |
| Less: deferred loan cost accumulated amortization |
| (38,252) |
|
| - |
| Total cost, net of accumulated amortization |
| $95,153 |
|
| $- |
A summary of expected future amortization of deferred loan costs as of December 31, 2011 is as follows:
| Years ending December 31, | Deferred Loan Costs | |
| 2012 |
| $44,116 |
| 2013 |
| 44,116 |
| 2014 |
| 6,921 |
| Total |
| $95,153 |
Note 9 — Future Minimum Lease Income
We lease the majority of our properties under noncancelable operating leases which provide for minimum base rentals. A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and contingent rentals) under noncancelable operating leases in existence at December 31, 2011 is as follows:
| Years ending December 31, | Minimum Future Rents | |
| 2012 |
| $ 1,513,946 |
| 2013 |
| 1,109,484 |
| 2014 |
| 867,559 |
| 2015 |
| 530,803 |
| 2016 |
| 389,826 |
| Thereafter |
| 956,244 |
| Total |
| $ 5,367,862 |
Note 10 — Note Payable
Related to the Richardson Heights property acquisition discussed in Note 4, we acquired a $9.575 million mortgage note payable with a bank secured by the Richardson Heights shopping center. Loan proceeds of $9.575 million were funded at closing. The note bears interest at the lesser of 5.5% per annum or Texas Capital Bank Prime plus 1% per annum. The interest rate was 5.5% per annum as of December 31, 2011. Monthly payments of interest only began February 14, 2011. The loan matures on January 30, 2014. The loan is subject to customary covenants. As of December 31, 2011 we were in compliance with all loan covenants.
Note 11 — Loss Per Share
Basic earnings per share is computed using net income to common stockholders and the weighted average number of common shares outstanding. Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share.
F-16
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
|
| Year Ended December 31, | |||
|
|
| 2011 |
| 2010 |
| Numerator: |
|
|
|
|
| Net loss attributable to common stockholders |
| ($520,394) |
| ($247,191) |
| Denominator: |
|
|
|
|
| Basic and diluted weighted average shares outstanding |
| 854,149 |
| 46,551 |
|
|
|
|
|
|
| Basic and diluted loss per common share: |
|
|
|
|
| Net loss attributable to common stockholders |
| ($0.61) |
| ($5.31) |
Note 12 — Income Taxes
Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. The Company’s federal income tax returns for the years ended December 31, 2009 and 2010 have not been examined by the Internal Revenue Service. The Company’s federal income tax return for the year ended December 31, 2009 may be examined on or before September 15, 2013.
Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.
For Federal income tax purposes, the cash dividends distributed to stockholders are characterized as follows for the years ended December 31:
|
| 2011 |
| 2010 |
| Ordinary income (unaudited) | - % |
| - % |
| Return of capital (unaudited) | 100.0% |
| 100.0% |
| Capital gains distribution (unaudited) | - % | - | - % |
| Total | 100.0% |
| 100.0% |
A provision for Texas Franchise tax under the Texas Margin Tax Bill in the amount of $14,966 and $0 was recorded in the consolidated financial statements for the year ended December 31, 2011 and 2010, respectively with a corresponding charge to real estate taxes and insurance.
Note 13 — Related Party Transactions
The Company initially issued 100 shares of the Company’s common stock to Hartman XX Holdings, Inc. (“Holdings”) for $1,000. Holdings, is a Texas corporation wholly owned by Allen R. Hartman. Holdings, was formed solely for the purpose of facilitating the organization and offering of the initial offering of the Company’s shares. Effective October 15, 2009 the Company issued an additional 18,900 shares to Holdings for $189,000. Holdings contributed a related party liability in the amount of $189,000 to the Company in exchange for the issuance of an additional 18,900 common shares of the Company. The transaction resulted in a total of 19,000 common shares issued since inception for total consideration of $190,000.
F-17
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
The Company issued the Advisor, Hartman Advisors LLC, 1,000 shares of non-voting convertible preferred stock for $100. Effective October 15, 2009 the Company received additional consideration of $9,900 with respect to the non-voting convertible preferred stock. The Advisor contributed a related party liability in the amount of $9,900 to the Company as donated capital related to the convertible common stock previously issued by the Company to the Advisor. Accordingly, the overall issue price for the 1,000 convertible preferred shares is $10,000 or $10 per share. Upon the terms described below, these shares may be converted into shares of the Company’s common stock, resulting in dilution of the stockholders’ interest in the Company.
Hartman Advisors LLC, is a Texas limited liability company owned 70% by Allen R. Hartman individually and 30% by the Property Manager. The Property Manager is a wholly owned subsidiary of Hartman Income REIT Management, LLC, which is wholly owned by Hartman Income REIT of which Allen R. Hartman is the Chief Executive Officer and Chairman of the Board of Directors.
As of December 31, 2011 and 2010, respectively, the Company had a balance due to an affiliated entity, the Property Manager of $556,698 and $355,739. The Property Manager has paid various organization and offering expenses on behalf of the Advisor for the Company. The Advisor will reimburse Hartman Income REIT Management, Inc., for expenses paid on behalf of the Company from proceeds of the offering. The Company ultimately may not incur or make reimbursement for offering and organization expenses in excess of 1.5% of gross offering proceeds. Any amount in excess will be reimbursed to the Company by the Advisor.
The Company owed the Advisor $56,356 and $0 for asset management fees for the years ended December 31, 2011 and 2010, respectively. These fees are monthly fees equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset. The asset management fee will be based only on the portion of the cost or value attributable to the Company’s investment in an asset, if we do not own all or a majority of an asset.
The Company will pay the Dealer Manager up to 7.0% of the gross proceeds of the primary offering for any selling commissions on sales of shares from participating retail broker-dealers, except those issued under the distribution reinvestment plan. The Company will also pay the Dealer Manager up to 2.5% of its dealer manager fees to participating broker-dealers. At December 31, 2011 and 2010, respectively, the Company owed the Dealer Manager $15,019 and $10,850 for selling commissions and dealer management fees.
Note 14 – Stockholders’ Equity
Common Stock
Shares of common stock entitle the holders to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.
Under our articles of incorporation, we have authority to issue 750,000,000 common shares of beneficial interest, $0.001 par value per share, and 200,000,000 preferred shares of beneficial interest, $0.001 par value per share.
As of December 31, 2011, the Company has accepted investors’ subscriptions for and issued 1,756,927 shares of the Company’s common stock it is public offering, resulting in gross proceeds to the Company of $17,441,203.
Preferred Stock
Under our articles of incorporation the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares. As of December 31, 2011 and 2010 we have issued 1,000 shares of convertible preferred shares to Hartman Advisors LLC at a price of $10.00 per share.
F-18
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Common Stock Issuable Upon Conversion of Convertible Preferred Stock - The convertible preferred stock will convert to shares of common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common stock (based on the 30-day average closing price) meets the same 6% performance threshold, or (3) the Company’s advisory agreement with Hartman Advisors, LLC expires without renewal or is terminated (other than because of a material breach by our advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the shareholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.
Share-Based Compensation
We award vested restricted common shares to non-employee directors as compensation in part for their service as members of the board of directors of the Company. These shares are fully vested when granted. These shares may not be sold while an independent director is serving on the board of directors. For the years ended December 31, 2011 and 2010, respectively, the Company granted 5,625 and 6,000 shares of restricted common stock to independent directors as compensation for services. We recognized $56,250 and $60,000 as share-based compensation expense for the year ended December 31, 2011 and 2010, respectively, based upon the estimated fair value per share. Share based compensation also includes incentive plan awards discussed at Note 15. These amounts are included in general and administrative expenses for the years ending December 31, 2011 and 2010, respectively.
Distributions
Our board of directors declared our first dividend distribution as of December 31, 2010 which was paid in January 2011. During 2011 we paid distributions in cash totaling $253,677. We paid $52,905 in cash distributions in January 2012 with respect to 2011 distributions declared. We issued 56.6 distribution reinvestment plan shares in January 2011 with respect to the 2010 distribution declaration. In 2011 we issued 25,405.1 distribution reinvestment plan shares with respect to 2011 declared distributions with 4,859.6 such shares to be issued in January 2012.
The following table reflects the total distributions we have paid, including the total amount paid and amount paid per common share, in each indicated quarter:
| Quarter paid |
| | Distributions per Common Share |
|
| Total Amount Paid |
| 2011 |
|
|
|
|
|
|
| 4th Quarter |
| $ | 0.175 |
| $ | 119,000 |
| 3rd Quarter |
|
| 0.175 |
|
| 69,559 |
| 2nd Quarter |
|
| 0.175 |
|
| 44,563 |
| 1st Quarter |
|
| 0.175 |
|
| 20,555 |
| Total |
| $ | 0.700 |
| $ | 253,677 |
|
|
|
|
|
|
|
|
| 2010 |
|
|
|
|
|
|
| 4th Quarter |
| $ | - |
| $ | - |
| 3rd Quarter |
|
| - |
|
| - |
| 2nd Quarter |
|
| - |
|
| - |
| 1st Quarter |
|
| - |
|
| - |
| Total |
| $ | - |
| $ | - |
Hartman Short Term Income Properties XX, Inc.
Notes to Consolidated Financial Statements
Note 15 – Incentive Awards Plan
The Company has adopted an incentive plan (the “2009 Omnibus Stock Incentive Plan” or the “Incentive Plan”) that provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards within the meaning of Internal Revenue Code Section 422, or any combination of the foregoing. We have initially reserved 5,000,000 shares of our common stock for the issuance of awards under our stock incentive plan, but in no event more than ten (10%) percent of our issued and outstanding shares. The number of shares reserved under our stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under our stock incentive plan also will be available for future awards. On July 28, 2011, the Compensation Committee of the Board of Directors approved awards of 1,000 shares of restricted common stock that were issued on September 29, 2011 to each of two executives of Hartman Income REIT Management, the property manager for the Company. We recognized share based compensation expense of $20,000 with respect to these awards based on the amount offering price of $10 per share during the year ending December 31, 2011.
Note 16 – Commitments and Contingencies
Economic Dependency
The Company is dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock and preferred stock available for issue; the identification, evaluation, negotiation, purchase and disposition of properties’, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other providers.
Note 17 – Subsequent Events
For the three months ended March 31, 2012, the Company issued 349,347 shares of its common stock from its public offering, resulting in gross proceeds of $3,491,968. As of March 31, 2012 there were 2,153,605 shares of common stock issued and outstanding.
F-20
Hartman Short Term Income Properties XX, Inc. and Subsidiary
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2011
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Initial Cost |
| Costs Capitalized Subsequent to Acquisition |
| Gross Amount at which Carried at End of Period | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Property Name |
| Land |
| Building and Improvements |
| Improvements (net) |
| Carrying Costs |
| Land |
| Building and Improvements |
| Total | ||||||||||||||
| Richardson Heights Shopping Center |
|
| $ 4,787,500 |
|
|
| $14,180,645 |
|
|
| $ - |
|
|
| $ - |
|
|
| $ 4,787,500 |
|
|
| $14,180,645 |
|
|
| $18,968,145 |
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| Date of |
| Date |
| Depreciation | ||
Property Name |
| Encumbrances |
| Depreciation |
| Construction |
| Acquired |
| Life | ||
| Richardson Heights Shopping Center |
| $9,575,000 |
| $ | 352,612 |
|
| 1958 |
| 10/31/2011 |
| 5-39 years |
|
|
|
|
|
| (1 | The aggregate cost of real estate for federal income tax purposes is $19,177,916. |
|
|
|
F-21
HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
FIRST ARTICLES OF AMENDMENT TO
THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
Hartman Short Term Income Properties XX, Inc., a Maryland corporation (the “Company”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Third Amended and Restated Articles of Incorporation (“Articles of Incorporation”) of the Company are hereby amended by deleting therefrom the definition of “Acquisition Expenses” in Section 2.2 of Article II and inserting in lieu thereof the following definition of “Acquisition Expenses” in Section 2.2 of Article II:
"Acquisition Expenses" means any and all expenses including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired.
SECOND: The Articles of Incorporation of the Company are hereby amended by deleting therefrom Section 8.11 of Article VIII and inserting in lieu thereof the following Section 8.11 of Article VIII:
(a)
Stockholders shall have: (1) a minimum annual gross income of $70,000 and a minimum Net Worth (determined exclusive of home, home furnishings and automobiles) of $70,000; or (2) a minimum Net Worth (determined exclusive of home, home furnishings, and automobiles) of $250,000.
(b)
The Sponsor and each Person selling Shares on behalf of the Sponsor or Company shall make every reasonable effort to determine that the purchase of Shares is a suitable and appropriate investment for each Stockholder. In making this determination, the Sponsor or each Person selling Shares on behalf of the Sponsor or Company shall ascertain that the prospective Stockholder: (1) meets the minimum income and net worth standards established for the Company in section 8.11(a) above; (2) can reasonably benefit from an investment in the Company based on the prospective Stockholder’s overall investment objectives and portfolio structure; (3) is able to bear the economic risk of the investment based on the prospective Stockholder’s overall financial situation; and (4) has apparent understanding of: (i) the fundamental risks of the investment; (ii) the risk that the Stockholder may lose the entire investment; (iii) the lack of liquidity of the Shares; (iv) the restrictions on transferability of the Shares; (v) the background and qualifications of the Sponsor or the Advisor; and (vi) the tax consequences of the investment. In the case of a fiduciary account, the standards set forth in this section 8.11(b) shall be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the Shares if the donor or grantor is the fiduciary.
(c)
The Sponsor or each Person selling Shares on behalf of the Sponsor or the Company will make this determination on the basis of information it has obtained from a prospective Stockholder. Relevant information for this purpose will include at least the age, investment objectives, investment experience, income, Net Worth, financial situation, and other investments of the prospective Stockholder, as well as any other pertinent factors.
(d)
The Sponsor or each Person selling Shares on behalf of the Sponsor or the Company shall maintain records of the information used to determine that an investment in Shares is suitable and appropriate investment for a Stockholder. The Sponsor or each Person selling Shares on behalf of the Sponsor or the Company shall maintain these records for at least six years.
(e)
In connection with the Company’s initial public offering only, the minimum purchase of Shares is $10,000, except for IRAs which may purchase a minimum of $5,000 of Shares.
THIRD: The Articles of Incorporation of the Company are hereby amended by adding the following language to the end of Sections 9.1.
The Advisor or any Affiliate may not sell this Initial Investment while the Advisor remains a Sponsor but may transfer the shares representing the Initial Investment to other Affiliates of the Sponsor.
1
FOURTH: The Articles of Incorporation of the Company is hereby amended by deleting therefrom the last sentence of Section 9.5 of Article IX and replacing it with the following language:
Payment of such fee shall be made only if the Property Manager provides a substantial amount of services in connection with the sale of a Property or Properties.
FIFTH: The Articles of Incorporation of the Company are hereby amended by deleting therefrom Section 9.7 of Article IX and inserting in lieu thereof the following Section 9.7 of Article IX:
The Company shall reimburse the Advisor for Operating Expenses incurred by the Advisor except that the Company shall not reimburse the Advisor for Operating Expenses that in the four consecutive fiscal quarters then ended exceed the greater of 2% of Average Invested Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. The Independent Directors shall have the fiduciary responsibility of limiting such expenses to amounts that do not exceed such limitations unless such Independent Directors shall have made a finding that, based on such unusual and non-recurring factors which they deem sufficient, a higher level of expenses is justified for such year. Any such findings and the reasons in support thereof shall be reflected in the minutes of the meeting of the Directors. Within 60 days after the end of each fiscal quarter, the Advisor will reimburse the Company for any amounts by which the Operating Expenses exceeded the 2% / 25% Guidelines for such year, unless the Independent Directors determine, based on such unusual and non-recurring factors which they deem sufficient, that such excess was justified. Within 60 days after the end of any fiscal quarter of the Company for which Operating Expenses (for the 12 months just ended) exceed the 2%/25% Guidelines, the Advisor shall send a written disclosure of such fact to the Stockholders, together with an explanation of the factors the Independent Directors considered in arriving at the conclusion that such higher Operating Expenses were justified, if applicable. If the Independent Directors do not determine that such excess Operating Expenses are justified, the Advisor shall reimburse the Company within a reasonable time after the end of such 12-month period the amount by which the Operating Expenses exceeded the 2%/25% Guidelines.
SIXTH: The Articles of Incorporation of the Company is hereby amended by deleting therefrom Section 14.2(a) of Article XIV and inserting in lieu thereof the following Section 14.2(a) of Article XIV:
(a)
In connection with any proposed Roll-Up Transaction, an appraisal of all Properties shall be obtained from an Independent Expert. If the appraisal will be included in a Prospectus used to offer the securities of a Roll-Up Entity, the appraisal shall be filed with the SEC and the states as an Exhibit to the Registration Statement for the offering. The Properties shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the Properties as of a date immediately prior to the announcement of the proposed Roll-Up Transaction. The appraisal shall assume an orderly liquidation of Properties over a 12-month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Company and the Stockholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to Stockholders in connection with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction, the Person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of:
(i) accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or
(ii) one of the following:
(1)
remaining as Stockholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or
(2)
Receiving cash in an amount equal to the Stockholder’s pro rata share of the appraised value of the Net Assets of the Company.
SEVENTH: These amendments to the Articles of Incorporation of the Company as set forth above has been duly advised by the Board of Directors and approved by the stockholders of the Company as required by law.
EIGHTH: The undersigned Chief Executive Officer acknowledges these First Articles of Amendment to the Third Amended and Restated Articles of Incorporation to be the corporate act of the Company and as to all matters of facts required to be verified under oath, the undersigned Chief Executive Officer acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury.
2
Except as amended hereby, the rest and remainder of the Company’s Articles of Incorporation shall be and remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused these First Articles of Amendment to the Third Amended and Restated Articles of Incorporation to be executed under seal in its name and on its behalf by its Chief Executive Officer, and attested to by its Secretary, on this 23rd day of December, 2011.
| ATTEST: /s/ James H. Stokes, Jr. By: __________________________________ Name: James H. Stokes, Jr.______________ Title: Secretary________________________ | HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. /s/ Allen R. Hartman By: __________________________________ Name: Allen R. Hartman________________ Title: Chief Executive Officer____________ |
3
THIRD AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
ARTICLE I
ORGANIZATION
Hartman Short Term Income Properties XX, Inc. (the "Company") is a Maryland corporation within the meaning of the Maryland General Corporation Law ("Maryland Corporation Law").
ARTICLE II
NAME AND CERTAIN DEFINITIONS
Section 2.1. Name. The name of the Company is "Hartman Short Term Income Properties XX, Inc." The Board of Directors of the Company (the "Board of Directors") may determine that the Company may use any other designation or name for the Company.
Section 2.2. Certain Definitions. As used in these Articles of Incorporation, the terms set forth below shall have the following respective meanings.
"Acquisition Expenses" means any and all expenses incurred by the Company, the Advisor, or any Affiliate thereof in connection with the selection or acquisition of any Property, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired.
"Acquisition Fee" means any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Company or the Advisor) in connection with the purchase, development or construction of a Property, including, without limitation, real estate commissions, acquisition fees, finder's fees, selection fees, Development Fees and Construction Fees (except as provided in the following sentence), nonrecurring management fees, consulting fees, loan fees, points, or any other fees or commissions of a similar nature. Excluded shall be any commissions or fees incurred in connection with the leasing of property, and Development Fees or Construction Fees paid to any Person or entity not affiliated with the Advisor in connection with the actual development and construction of any Property. For the avoidance of doubt, in the event the Company purchases a property from an Affiliated Seller where such property has been developed, refurbished or re-developed by the Affiliated Seller or an Affiliate thereof, the terms "Construction Fees" and "Development Fees" shall not include the excess of the purchase price for such property over the Affiliated Seller's cost to acquire, develop, refurbish and/or re-develop (as the case may be) the property, provided that the transaction is approved by the Board of Directors in accordance with Sections 10.4(j) and 11.1.
"Advisor" or "Advisors" means the Person or Persons, if any, appointed, employed or contracted with by the Company pursuant to Article IX hereof and responsible for directing or performing the day-to-day business affairs of the Company, including any Person to whom the Advisor subcontracts substantially all of such functions. The initial Advisor is Hartman Advisors, LLC.
"Advisory Agreement" means the agreement between the Company and the Advisor pursuant to which the Advisor will direct or perform the day-to-day business affairs of the Company.
"Affiliate" means, (A) any Person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other Person, (B) any Person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with the power to vote, by such other Person, (C) any Person directly or indirectly controlling, controlled by, or under common control with such other Person, (D) any executive officer, director, trustee or general partner of such other person, or (E) any legal entity for which such Person acts as an executive officer, director, trustee or general partner.
"Affiliated Seller" means the Sponsor, Advisor, a Director or any Affiliate of the foregoing.
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"Aggregate Share Ownership Limit" is defined in Section 7.1(a).
"Average Invested Assets" means, for a specified period, the average of the aggregate book value of the assets of the Company 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, computed by taking the average of such values at the end of each month during such period.
"Beneficial Ownership" is defined in Section 7.1(b).
"Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
"Bylaws" means the Bylaws of the Company, as the same may be amended from time to time.
"Charitable Beneficiary" is defined in Section 7.1(c).
“Charitable Trust” is defined in Section 7.1(d).
"Charitable Trust Trustee" is defined in Section 7.1(e).
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" is defined in Section 6.1.
"Competitive Real Estate Commission" means a real estate or brokerage commission for the purchase or sale of property which is reasonable, customary, and competitive in light of the size, type, and location of the property.
"Constructive Ownership" is defined in Section 7.1(f).
"Construction Fee" means a fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide major repairs or rehabilitation for a Property.
"Control" means, with respect to a Person, the possession (directly or indirectly) of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise.
"Contract Price for the Property" means the amount actually paid or allocated to the purchase, development, construction or improvement of a property exclusive of Acquisition Fees and Acquisition Expenses.
"Dealer Manager" means American Beacon Partners, Inc., formerly known as Pavek Investments, Inc., or such other Person or entity selected by the Board of Directors to act as the dealer manager for the offering of the Shares.
"Development Fee" means a fee for the packaging of a Property, including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and financing for the specific Property, either initially or at a later date.
"Director" is defined in Section 5.2(a).
"Dividends" means any distributions of money or other property by the Company to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes.
“Enterprise Value” means the actual value of the Company as a going concern based on the difference between (a) the actual value of all of its assets as determined by appraisal prepared by an Independent Expert, less (b) all of its liabilities as set forth on its then current balance sheet; provided that (i) if such Enterprise Value is being determined in connection with a Change of Control that establishes the Company’s net worth (e.g., a successful tender offer or other sale for the Common Shares, sale of all or substantially all of the Company’s assets or a merger) then the
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Enterprise Value shall be the net worth established thereby and (ii) if such Enterprise Value is being determined in connection with a listing on a national exchange, then the Enterprise Value shall be equal to the number of outstanding Common Shares multiplied by the Market Price of a single Common Share averaged over a period of 30 trading days during which the Shares are listed or quoted for trading after the date of listing. For purposes hereof, a “trading day” shall be any day on which the exchange on which the Shares are listed is open for trading whether or not there is an actual trade of Common Shares on any such day.
"Excepted Holder" is defined in Section 7.1(g).
"Excepted Holder Limit" is defined in Section 7.1(h).
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Gross Proceeds" means the aggregate purchase price of all Shares sold for the account of the Company, without deduction for Selling Commissions, volume discounts, fees paid to the Dealer Manager or other Organizational and Offering Expenses. For the purposes of computing Gross Proceeds, the purchase price of any Share for which reduced Selling Commissions are paid to the Dealer Manager or a Soliciting Dealer (where net proceeds to the Company are not reduced) shall be deemed to be the full amount of the offering price per Share.
"Indemnitee" is defined in Section 12.2(a).
"Independent Director" means a Director who is not, and within the last two years has not been, directly or indirectly associated with the Advisor or Sponsor by virtue of (i) ownership of an interest in the Advisor or Sponsor or their Affiliates, (ii) employment by the Advisor or Sponsor or their Affiliates, (iii) service as an officer, or director of the Advisor or Sponsor or their Affiliates, (iv) performance of services, other than as a Director, for the Company, (v) service as a director, or trustee of more than three real estate investment trusts advised by the Advisor or Sponsor, or (vi) maintenance of a material business or professional relationship with the Advisor or Sponsor or any of their Affiliates. For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective Independent Director from the Sponsor and Advisor and Affiliates shall be deemed material if it exceeds 5% of the prospective Independent Director’s: (A) annual gross revenue, derived from all sources, during either of the last two years; or (B) Net worth, on a fair market value basis. An indirect relationship shall include circumstances in which a Director's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-in-law is or has been associated with the Advisor or Sponsor or any of their Affiliates or the Company. A business or professional relationship is considered material if the gross revenue derived by the Director from the Advisor or Sponsor and their Affiliates exceeds five percent of either the Director's annual gross revenue during either of the last two years or the Director's net worth on a fair market value basis.
"Independent Expert" means a Person or entity with no material current or prior business or personal relationship with the Advisor or the Directors and who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company.
“Initial Investment” means that portion of the initial capitalization of the Company contributed by the Advisor, the Sponsor or their Affiliates.
"Leverage" means the aggregate amount of indebtedness of the Company for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured.
"Market Price" means, with respect to a specific date: (a) the last reported sales price per share of the Shares at the close of trading (whether or not the last reported sale occurred on such date) as reported in the Wall Street Journal on the first Business Day of the calendar quarter immediately preceding the applicable date, or (b) if the Shares have not yet been listed on a national securities exchange, national market quotation system or over-the-counter market, the fair market value of the Shares as determined by a third party chosen by the Board on the first Business Day of the calendar quarter immediately preceding the date for which the value of the Shares is being determined.
"Maryland Corporation Law" is defined in Article I.
"Net Assets" means the total assets of the Company (other than intangibles), at cost, before deducting depreciation or other non-cash reserves, less total liabilities, calculated quarterly by the Company on a basis consistently applied.
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"Net Income" means for any period, the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves; provided, however, Net Income for purposes of calculating total allowable Operating Expenses shall exclude the gain from the sale of the Company's assets.
"Official Capacity" is defined in Section 12.2(a).
"Operating Expenses" means all costs and expenses incurred by the Company, as determined under generally accepted accounting principles, which in any way are related to the operation of the Company or to Company business, including advisory expenses, but excluding (i) the expenses of raising capital such as Organizational and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses, and taxes incurred in connection with the issuance, distribution, transfer, registration, and stock exchange listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves, (v) incentive fees, (vi) Acquisition Fees and Acquisition Expenses, (vii) distributions made pursuant to percentage interests in the Operating Partnership and (viii) real estate commissions on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, mortgage loans, or
other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property).
"Organizational and Offering Expenses" means all expenses incurred by and to be paid from the assets of the Company in connection with and in preparing the Company for registration and subsequently offering and distributing it to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales and offering activity, charges of transfer agents, registrars, trustees, escrow holders, depositaries, experts expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants' and attorneys' fees.
"Person" shall mean an individual, corporation, partnership, , trust, a , association, or other legal entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and (for purposes of Article VII) a group to which an Excepted Holder Limit applies.
"Preferred Shares" is defined in Section 6.1.
"Proceeding" is defined in Section 2.2(a).
"Prohibited Owner" is defined in Section 7.1(i).
"Property" or "Properties" means the real properties or real estate investments which are acquired by the Company either directly or through the Operating Partnership, joint ventures, partnerships or other entities.
"Reinvestment Plan" is defined in Section 6.9.
"REIT" means a "real estate investment trust" as defined in Section 856 of the Code and applicable Treasury Regulations.
"Restriction Termination Date" is defined in Section 7.1(j).
"Roll-up Entity" means a partnership, real estate investment trust, corporation, trust or similar entity that would be created or would survive after the successful completion of a proposed Roll-Up Transaction.
"Roll-up Transaction" means a transaction involving the acquisition, merger, conversion, or consolidation, directly or indirectly, of the Company and the issuance of securities of a Roll-Up Entity. Such term does not include: (i) a transaction involving securities of the Company that have been listed on a national securities exchange or included for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System for at least 12 months; or (ii) a transaction involving the conversion to limited liability company, trust, or association form of only the Company if, as a consequence of the transaction, there will be no significant adverse
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change in Stockholder voting rights, the term of existence of the Company, compensation to the Advisor or the investment objectives of the Company.
"Securities" means Shares, any other stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Commissions" means any and all commissions payable to underwriters, dealer managers, or other broker-dealers in connection with the sale of Shares, including, without limitation, commissions payable to the Dealer Manager.
"Share Ownership Limit" is defined in Section 7.1(k).
"Shares" is defined in Section 6.1.
"Soliciting Dealers" means those broker-dealers that are members of the FINRA, or that are exempt from broker-dealer registration, and that, in either case, enter into participating broker or other selling agreements with the Dealer Manager to sell Shares.
"Sponsor" means any Person directly or indirectly instrumental in organizing, wholly or in part, the Company or any Person who will control, manage or participate in the management of the Company, and any Affiliate of such Person. Not included is any Person whose only relationship with the Company is that of an independent property manager of Company assets, and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services. A Person may also be deemed a Sponsor of the Company by:
a.
taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the Company, either alone or in conjunction with one or more other Persons;
b.
receiving a material participation in the Company in connection with the founding or organizing of the business of the Company, in consideration of services or property, or both services and property;
c.
having a substantial number of relationships and contacts;
d.
possessing significant rights to control Company;
e.
receiving fees for providing services to the Company which are paid on a basis that is not customary in the Company's industry; or
f.
providing goods or services to the Company on a basis which was not negotiated at arms length with the Company.
"Stockholder List" is defined in Section 8.8(a).
"Stockholders" means the holders of record of shares.
"Transfer" shall mean any direct or indirect issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Shares or the right to vote or receive dividends on Shares, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Shares or any interest in Shares or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in
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Beneficial or Constructive Ownership of Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms "Transferring" and "Transferred" shall have the correlative meanings.
"2%/25% Guidelines" is defined in Section 9.7.
"Unimproved Real Property" means Property in which the Company has an equity interest that is not acquired for the purpose of producing rental or other operating income, that has no development or construction in process and for which no development or construction is planned, in good faith, to commence within one year.
ARTICLE III
POWERS AND PURPOSE
The Company is organized as a corporation under the Maryland Corporation Law for any lawful business or activity permitted to corporations generally by the Maryland Corporation Law (including, without limitation or obligation, engaging in business as a REIT) and shall have all further powers consistent with such law and appropriate to attain its purposes, including, without limitation or obligation, qualifying as a REIT.
ARTICLE IV
RESIDENT AGENT AND PRINCIPAL OFFICE
The name of the resident agent of the Company in the State of Maryland is Harbor City Research, Inc whose address is 201 N. Charles Street, Suite 900, Baltimore, Maryland 21202. The resident agent is a Maryland corporation. The post office address of the principal office of the Company in the State of Maryland is 300 East Lombard Street, Baltimore, Maryland 21202. The Company may have such offices or places of business within or outside the State of Maryland as the Board of Directors may from time to time determine.
ARTICLE V
BOARD OF DIRECTORS
Section 5.1. Powers.
(a)
Subject to the limitations herein or in the Bylaws, the business and affairs of the Company shall be managed under the direction of the Board of Directors. The Board of Directors shall have the full, exclusive and absolute power, control and authority over the property of the Company and over the business of the Company. The Board of Directors may take any actions as in its sole judgment and discretion are necessary or desirable to conduct the business of the Company. These Articles of Incorporation shall be construed with a presumption in favor of the grant of power and authority to the Board of Directors. Any construction of these Articles of Incorporation or determination made in good faith by the Board of Directors concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Board of Directors included in these Articles of Incorporation or in the Bylaws shall in no way be construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Directors under the Maryland Corporation Law, general laws of the State of Maryland or any other applicable laws.
(b)
Except as otherwise provided in the Bylaws, the Board of Directors, without any action by the Stockholders, shall have and may exercise, on behalf of the Company, without limitation, the power to: adopt, amend and repeal Bylaws; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from Stockholders; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers.
(c) The Board of Directors shall take such efforts as they deem necessary to cause the Company to satisfy the requirements for qualification as a REIT under the provisions of the Code applicable to REITs. The Board of Directors shall take no action to disqualify the Company as a REIT or to otherwise revoke the Company's election to be taxed as a REIT without the affirmative vote of holders representing a majority of the Shares entitled to vote on such matter at a meeting of the Stockholders.
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Section 5.2. Number and Classification.
(a)
The Board of Directors shall have at least three (3) members (the "Directors"). The number of Directors shall be fixed by, or in the manner provided in, the Bylaws of the Company, and may be increased or decreased from time to time in the manner prescribed in the Bylaws; provided, however, that the number of Directors shall never be fewer than three nor more than ten. The holders of a majority of the shares of equity stock outstanding present in person or by proxy at an annual meeting of Stockholders at which a quorum is present may, without the necessity for concurrence by the Board of Directors, vote to elect the Directors. Each Director shall hold office for one year, until the next annual meeting of Stockholders, or (if longer) until a successor has been duly elected and qualified. Directors may be elected to an unlimited number of successive terms.
(b)
The name and address of the Directors who have been duly elected as of the date hereof and who shall serve until the next scheduled meeting of the Company are Allen Hartman, 2909 Hillcroft, Suite 420, Houston, Texas 77057, Jack I. Tompkins, 2909 Hillcroft, Suite 420, Houston, Texas 77057 and Larry A. Bouffard, 2909 Hillcroft, Suite 420, Houston, Texas 77057.
(c)
If a vacancy in the Board of Directors shall occur or be created (whether arising through death, retirement, resignation or removal or through an increase in the number of Directors), the vacancy shall be filled by the affirmative vote of a majority of the remaining Directors, even though less than a quorum of the Board of Directors may exist, or by the affirmative vote of the holders of at least a majority of the outstanding Common Shares.
(d)
A majority of the Board of Directors will be Independent Directors except for a period of 60 days after the death, removal or resignation of an Independent Director. Any vacancies will be filled by the affirmative vote of a majority of the remaining Directors, though less than a quorum. When possible, Independent Directors shall nominate replacements for vacancies in the Independent Director positions. No reduction in the number of Directors shall cause the removal of any Director from office prior to the expiration of his term. Cumulative voting for the election of Directors is prohibited.
Section 5.3. Experience. A Director shall have had at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the Company. At least one of the Independent Directors shall have three years of real estate experience relevant to the type of real estate assets to be acquired by the Company.
Section 5.4. Committees. Subject to Maryland law, the Directors may establish such committees as they deem appropriate, in their discretion, provided that at least a majority of the members of each committee are Independent Directors.
Section 5.5. Fiduciary Obligations. The Directors serve in a fiduciary capacity to the Company and the Stockholders and have a fiduciary duty to supervise the relationship between the Company and the Advisor.
Section 5.6. Resignation or Removal. Any Director may resign by written notice to the Board of Directors, effective upon execution and delivery to the Company of such written notice or upon any future date specified in the notice. Subject to the rights of holders of one or more classes or series of Preferred Shares or other classes of Common Shares to elect one or more Directors (if any), a Director may be removed at any time, with or without cause, by either a majority of the Directors, or by the affirmative vote of the holders of not less than a majority of the shares of equity stock outstanding and entitled to vote generally in the election of Directors at a meeting of the Stockholders.
Section 5.7. Determination of Best Interests of Company. In determining what is in the best interests of the Company, a Director shall consider the interests of the Stockholders and, in his sole and absolute discretion, may consider any other factors or interests allowed by the Maryland Corporation Law or other applicable law.
Section 5.8. Approval by Independent Directors. A majority of Independent Directors must approve all applicable matters to which Sections 9.1, 9.2, 9.6, 9.7, 9.8, 10.2, 10.4(f), 10.4(j) and 12.2 herein apply. The Directors have reviewed and ratified these articles of incorporation, as amended, by a majority vote of the Directors and the
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Independent Directors.
Section 5.9. Business Combination Statute. Notwithstanding any other provision of these Articles of Incorporation or any contrary provision of law, the Maryland Business Combination Statute, found in Title 3, subtitle 6 of the Maryland Corporation Law, as amended from time to time, or any successor statute thereto, shall not apply to any "business combination" (as defined in Section 3-601(e) of the Maryland Corporation Law, as amended from time to time, or any successor statute thereto) of the Company and any Person.
Section 5.10. Control Share Acquisition Statute. Notwithstanding any other provision of these Articles of Incorporation or any contrary provision of law, the Maryland Control Share Acquisition Statute, found in Title 3, subtitle 7 of the Maryland Corporation Law, as amended from time to time, or any successor statute thereto shall not apply to any acquisition of Securities of the Company by any Person.
ARTICLE VI
SHARES
Section 6.1. Authorized Shares. The total number of shares of capital stock (the "Shares") which the Company has authority to issue is 950,000,000 shares of stock, consisting of 750,000,000 shares of Common Stock, $.001 par value per share ("COMMON STOCK"), and 200,000,000 shares of Preferred Stock, $.001 par value per share ("PREFERRED STOCK"). To the extent permitted by Maryland law, the Board of Directors may amend these Articles of Incorporation to increase or decrease the aggregate number of shares that the Company is authorized to issue, without any action of the Stockholders of the Company. Pursuant to Section 2-208 of the Maryland Corporation Law, the Board of Directors may classify or reclassify any authorized but unissued shares from time to time, without amending the Articles of Incorporation. All Shares shall be personal property entitling the Stockholders only to those rights provided in these Articles of Incorporation or designated by the Board of Directors in accordance with these Articles of Incorporation. The Stockholders shall have no interest in the property of the Company and shall have no right to compel any partition, division, dividend or distribution of the Company or the Company's assets except as specifically set forth in these Articles of Incorporation. All Stockholders are subject to the provisions of these Articles of Incorporation and the Bylaws.
Section 6.2. Common Shares. The Common Shares shall be subject to the express terms of any series of Preferred Shares. To the extent permitted by Maryland law and as contemplated by Section 6.4, the Board of Directors may reclassify any authorized but unissued Common Shares from time to time into one or more classes or series of Shares. Subject to the provisions of Article VII, each Common Share shall entitle the holder thereof to one vote on each matter upon which holders of all Common Shares are entitled to vote. The holders of all Common Shares will participate equally in (i) dividends payable to holders of Common Shares when and as authorized and declared by the Board of Directors and (ii) the Company's net assets available for distribution to holders of Common Shares upon liquidation or dissolution.
Section 6.3. Preferred Shares. The Board of Directors are hereby expressly granted the authority to authorize from time to time the issuance of one or more series or classes of Preferred Shares. Prior to the issuance of each such class or series, the Board of Directors, by resolution, shall fix the number of shares to be included in each series or class, and the designation, preferences, terms, rights, restrictions, limitations and qualifications and terms and conditions of redemption of the shares of each class or series. The authority of the Board of Directors with respect to each series or class shall include, but not be limited to, determination of the following:
(a)
The designation of the series or class, which may be by distinguishing number, letter, or title.
(b)
The dividend rate on the shares of the series or class, if any, whether any dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series or class.
(c)
The redemption rights, including conditions and the price or prices, if any, for shares of the series or class.
(d)
The terms and amounts of any sinking fund for the purchase or redemption of shares of the series or class.
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(e)
The rights of the shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, and the relative rights of priority, if any, of payment of shares of the series or class.
(f)
Whether the shares of the series or class shall be convertible into shares of any other class or series, or any other security, of the Company or any other corporation or other entity, and, if so, the specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates on which such shares shall be convertible and all other terms and conditions upon which such conversion may be made.
(g)
Restrictions on the issuance of shares of the same series or class or of any other class or series.
(h)
The voting rights of the holders of shares of the series or class.
(i)
Any other relative rights, preferences and limitations on that series or class, subject to the express provisions of any other series or class of Preferred Shares then outstanding.
Notwithstanding any other provision of these Articles of Incorporation, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares, or alter the designation or classify or reclassify any unissued shares of a particular series or class of Preferred Shares, by fixing or altering, in one or more respects, from time to time before issuing the shares, the terms, rights, restrictions and qualifications of the shares of any such series or class of Preferred Shares.
Section 6.4. Classified or Reclassified Shares. Prior to the issuance of Shares classified or reclassified by the Board of Directors pursuant to Section 6.1, the Board of Directors by resolution shall (a) designate that class or series to distinguish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) set, subject to the provisions of Article VI and VII and subject to the express terms, rights, powers and preferences of any class or series of Shares outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Company to file articles supplementary with the State Department of Assessments and Taxation of Maryland (the "Department") pursuant to Section 2-208 of the Maryland Corporation Law. Any of the terms of any class or series of Shares established pursuant to this Section 6.4(c) or otherwise in these Articles of Incorporation may be made dependent upon facts or events ascertainable outside these Articles of Incorporation (including determinations or actions by the Board of Directors) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in the Articles of Incorporation.
Section 6.5. Authorization by the Board of Directors of Share Issuance.
(a)
The Board of Directors may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Directors may deem advisable (or without consideration in the case of a Share split, Share dividend or as otherwise allowed by the Maryland Corporation Law in order to qualify as a REIT), subject to such restrictions or limitations, if any, as may be set forth in these Articles of Incorporation or the Bylaws.
(b)
Notwithstanding any other provision in these Articles of Incorporation, no determination shall be made by the Board of Directors and no transaction shall be entered into by the Company that would cause any Shares or other beneficial interest in the Company not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Code or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. Additionally, the Company may, without the consent or approval of any Stockholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share. When issued, all Shares shall be non-assessable.
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Section 6.6. Dividends and Distributions.
(a)
Subject to the preferences and rights of any class or series of Shares, the Board of Directors may from time to time authorize and declare to Stockholders such dividends and distributions, in cash or other assets of the Company, or in securities of the Company or from any other source as the Board of Directors in its discretion shall determine. The Board of Directors shall endeavor to declare and pay promptly such dividends and distributions as shall be necessary for the Company to qualify as a REIT; however, Stockholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board of Directors.
(b)
The Company will make no distributions of in-kind property except for distributions of beneficial interests in a liquidating trust established for the dissolution of the Company and the liquidation of its assets in connection with the termination of the Company or readily marketable securities unless: (i) the Board of Directors advises each Stockholder of the risks associated with direct ownership of the property, (ii) the Board of Directors offers each Stockholder the election of receiving in-kind property distributions, and (iii) the Company distributes in-kind property only to those Stockholders who accept such offer by the Board of Directors
Section 6.7. Intentionally omitted.
Section 6.8. Repurchase of Shares. The Board of Directors may establish, from time to time, a program or programs by which the Company voluntarily repurchases Shares from its Stockholders, provided, however, that such repurchase does not impair the capital or operations of the Company. The Sponsor, Advisor, Directors or any Affiliates thereof may not receive any fees on the repurchase of Shares by the Company.
Section 6.9. Dividend Reinvestment Plans. The Board of Directors may establish, from time to time, a dividend reinvestment plan or plans (a "Reinvestment Plan"). Pursuant to such Reinvestment Plan, (i) all material information regarding the Dividend to the Stockholders and the effect of reinvesting such Dividend, including the tax consequences thereof, shall be provided to the Stockholders at least annually, and (ii) each Stockholder participating in such Reinvestment Plan shall have a reasonable opportunity to withdraw from the Reinvestment Plan at least annually after receipt of the information required in clause (i) above.
ARTICLE VII
RESTRICTIONS ON TRANSFER AND OWNERSHIP
Section 7.1. Definitions. For the purpose of this Article VII, the following terms shall have the following meanings:
(a)
"Aggregate Share Ownership Limit" shall mean 9.8% in value of the aggregate of the outstanding Shares. The value of the outstanding Shares shall be determined by the Board of Directors in good faith, which determination shall be conclusive for all purposes hereof.
(b)
"Beneficial Ownership" shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h) (1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings.
(c)
"Charitable Beneficiary" shall mean one or more beneficiaries of a Charitable Trust as determined pursuant to Section 7.3(g), provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
(d)
"Charitable Trust" shall mean any trust created by the Board of Directors for the purposes of Section 7.3.
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(e)
"Charitable Trust Trustee" shall mean the trustee of a Charitable Trust. The Charitable Trust Trustee shall be appointed by the Company and shall be a Person unaffiliated with the Company and any Prohibited Owner.
(f)
"Constructive Ownership" shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings.
(g)
"Excepted Holder" shall mean a Stockholder of the Company for whom an Excepted Holder Limit is created by this Article VII or by the Board of Directors pursuant to Section 7.2(g).
(h)
"Excepted Holder Limit" shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2(g), the percentage limit established by the Board of Directors for such Excepted Holder pursuant to Section 7.2(g).
(i)
"Prohibited Owner" shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 7.2(a), would Beneficially Own or Constructively Own Shares in violation of the provisions of Section 7.2(a)(i), and if appropriate in the context, shall also mean any Person who would have been the record owner of Shares that the Prohibited Owner would have so owned.
(j)
"Restriction Termination Date" shall mean the first day on which the Board of Directors determines that it is no longer in the best interests of the Company to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Shares set forth herein is no longer required in order for the Company to qualify as a REIT.
(k)
"Share Ownership Limit" shall mean, as to any class or series of Shares, 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate number of the outstanding Shares in such class or series. The number and value of outstanding Shares in such class or series shall be determined by the Board of Directors in good faith, which determination shall be conclusive for all purposes hereof.
Section 7.2 Ownership and Transfer Restrictions.
(a) Ownership Limitations. During the period prior to the Restriction Termination Date:
(i) Basic Restrictions.
(A)
(1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares in excess of the Aggregate Share Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares of any particular class or series of Shares in excess of the applicable Share Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own Shares in excess of the Excepted Holder Limit for such Excepted Holder.
(B)
No Person shall Beneficially or Constructively Own Shares to the extent that such Beneficial or Constructive Ownership of Shares would result in the Company being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause the Company to fail to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Company owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Company from such tenant would cause the Company to fail to satisfy any of the
14
gross income requirements of Section 856(c) of the Code).
(C)
Notwithstanding any other provisions contained herein, any Transfer of Shares that, if effective, would result in Shares being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
(ii)
Transfer to Charitable Trust. If any Transfer of Shares occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Shares in violation of Section 7.2(a)(i)(A) or (B),
(A)
then that number of Shares the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2(a)(i)(A) or (B) (rounded to the nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Shares, or
(B)
if the transfer to the Charitable Trust described in clause (A) of this sentence would not be effective for any reason to prevent the violation of Section 7.2(a)(i)(A) or (B), then the Transfer of that number of Shares that otherwise would cause any Person to violate Section 7.2(a) (i)(A) or (B) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
(b) Remedies for Breach. If the Board of Directors or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2(a) or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any Shares in violation of Section 7.2(a) (whether or not such violation is intended), the Board of Directors or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Company to redeem Shares, refusing to give effect to such Transfer on the books of the Company or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfers or attempted Transfers or other events in violation of Section 7.2(a) shall automatically result in the transfer to the Charitable Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Directors or a committee thereof.
(c) Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Shares that will or may violate Section 7.2(a)(i), any Person that is an entity whose stock or equity interests are being transferred, redeemed, acquired or issued in a manner that will or may violate Section 7.2(a)(i), or any Person who would have owned Shares that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 7.2(a)(ii), shall immediately give written notice to the Company of such event, or in the case of such a proposed or attempted transaction, give at least 15 days' prior written notice, and shall provide to the Company such other information as the Company may request in order to determine the effect, if any, of such Transfer on the Company's status as a REIT.
(d) Owners Required To Provide Information. Prior to the Restriction Termination Date:
(i) Every owner of more than five percent (5%) (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding Shares, within 30 days after the end of each taxable year, shall give written notice to the Company stating the name and address of such owner, the number of Shares Beneficially Owned by such owner and a description of the manner in which such Shares are held. Each such owner shall provide to the Company such additional information as the Company may request in order to determine the effect, if any, of such Beneficial Ownership on the Company's status as a REIT and to ensure compliance with the Aggregate Share Ownership Limit. In cases
15
where such owner holds Shares on behalf of another Person (the "Actual Owner") who is required to include the dividends or distributions received from such Shares in its tax return, the foregoing information shall be furnished for, by or on behalf of each Actual Owner.
(ii)
Each Person who is a Beneficial or Constructive Owner of Shares and each Person (including the Stockholder of record) who is holding Shares for a Beneficial or Constructive Owner shall provide to the Company such information as the Company may request, in good faith, in order to determine the Company's status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
(e) Remedies Not Limited. Subject to Section 5.1 of these Articles of Incorporation, nothing contained in this Section 7.2 shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Company and the interests of its Stockholders in preserving the Company's status as a REIT.
(f) Ambiguity. In the case of an ambiguity in the application of any of the provisions of any sections of this Article VII, the Board of Directors shall have the power to determine the application of the provisions of such sections with respect to any situation based on the facts known to it. In the event any section of this Article VII requires an action by the Board of Directors and these Articles of Incorporation fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of this Article VII.
(g)
Exceptions.
(i) Subject to Section 7.2(a)(i)(B), the Board of Directors, in its sole discretion, may exempt a Person from the Aggregate Share Ownership Limit and/or a Share Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if:
(A)
the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial or Constructive Ownership of such Shares will violate Section 7.2(a)(i)(B);
(B)
such Person does own, actually or Constructively, an interest in a tenant of any entity owned or Controlled by the Company to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Company (or an entity owned or Controlled by the Company) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Directors, rent from such tenant would not adversely affect the Company's ability to qualify as a REIT) shall not be treated as a tenant of the Company; and
(C) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 7.2(a) through 7.2(f)) will result in such Shares being automatically transferred to a Charitable Trust in accordance with Sections 7.2(a)(ii) and 7.3.
(ii) Prior to granting any exception pursuant to Section 7.2(g)(i), the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Company's status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
16
(iii) Subject to Section 7.2(a)(i)(B), an underwriter which participates in a public offering or a private placement of Shares (or securities convertible into or exchangeable for Shares) may Beneficially Own or Constructively Own Shares (or securities convertible into or exchangeable for Shares) in excess of the Aggregate Share Ownership Limit, any Share Ownership Limit or both such limits, but only to the extent necessary to facilitate such public offering or private placement.
(iv)The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (A) with the written consent of such Excepted Holder at any time, or (B) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Share Ownership Limit.
(h) Increase in Aggregate Share Ownership and Share Ownership Limits. The Board of Directors may from time to time, in its sole discretion, increase any Share Ownership Limit and the Aggregate Share Ownership Limit.
(i) Legend. If the Company issues certificates for Shares, each certificate for Shares shall bear substantially the following legend:
"The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Company's maintenance of its status as a Real Estate Investment Trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as expressly provided in the Company's Articles of Incorporation”
(j) no Person may Beneficially or Constructively Own Common Shares of the Company in excess of 9.8% (in value or number of shares) of the outstanding shares of any series or class of Shares of the Company unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable);
(k) no Person may Beneficially or Constructively Own Shares of the Company in excess of 9.8% of the value of the total outstanding Shares of the Company, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Shares that would result in the Company being "closely held" under Section 856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT; and (iv) no Person may Transfer Shares if such Transfer would result in Shares of the Company being owned by fewer than 100 Persons. Any Person who beneficially or Constructively Owns or attempts to Beneficially or Constructively Own Shares which cause or will cause a Person to Beneficially or Constructively Own Shares in excess or in violation of the above limitations must immediately notify the Company. If any of the foregoing restrictions on transfer or ownership are violated, the Shares represented hereby will be automatically transferred to a Trustee of a Charitable Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Company's Articles of Incorporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Shares of the Company on request and without charge."
Instead of the foregoing legend, the certificate may state that the Company will furnish a full statement about certain restrictions on transferability to a Stockholder on request and without charge.
Section 7.3. Transfer of Shares in Company.
(a)
Ownership in Company. Upon any purported Transfer or other event described in Section
17
7.2(a)(ii) that would result in a transfer of Shares to a Charitable Trust, such Shares shall be deemed to have been transferred to the Charitable Trust Trustee to be held in a trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Charitable Trust Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Charitable Trust pursuant to Section 7.2(a)(ii). Each Charitable Beneficiary shall be designated by the Company as provided in Section 7.3(g).
(b)
Status of Shares Held by the Charitable Trust Trustee. Shares held by the Charitable Trust Trustee shall be issued and outstanding Shares of the Company. The Prohibited Owner shall have no rights in the shares held by the Charitable Trust Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Charitable Trust Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the Shares held in the Charitable Trust.
(c) Dividend and Voting Rights. The Charitable Trust Trustee shall have all voting rights and rights to dividends or other distributions with respect to Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid to a Prohibited Owner prior to the discovery by the Company that Shares have been transferred to the Charitable Trust Trustee shall be paid with respect to such Shares by the Prohibited Owner to the Charitable Trust Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Charitable Trust Trustee. Any dividends or distributions so paid over to the Charitable Trust Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to Shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Shares have been transferred to the Charitable Trust Trustee, the Charitable Trust Trustee shall have the authority (at the Charitable Trust Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Company that Shares have been transferred to the Charitable Trust Trustee and (ii) to recast such vote in accordance with the desires of the Charitable Trust Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Company has already taken irreversible action, then the Charitable Trust Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Company has received notification that Shares have been transferred into a Charitable Trust, the Company shall be entitled to rely on its share transfer and other Stockholder records for purposes of preparing lists of Stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of Stockholders.
(d) Sale of Shares by Director. Within a reasonable time after (but no earlier than 30 days) receiving notice from the Company that Shares have been transferred to the Charitable Trust, the Charitable Trust Trustee shall sell the shares held in the Charitable Trust to a Person, designated by the Charitable Trust Trustee, whose ownership of the Shares will not violate the ownership limitations set forth in Section 7.2(a)(i). Upon such sale, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trust Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3(d). The Prohibited Owner shall receive the lesser of (i) the price paid by the Prohibited Owner for the Shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the Shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the Shares effective on the day of the event causing the Shares to be held in the Charitable Trust and (ii) the price received by the Charitable Trust Trustee from the sale or other disposition of the Shares held in the Charitable Trust. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Company that Shares have been transferred to the Charitable Trust Trustee, such Shares are sold by a Prohibited Owner, then (x) such Shares shall be deemed to have been sold on behalf of the Charitable Trust and (y) to the extent that the Prohibited Owner received an amount for such Shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3(d), such excess shall be paid to the Charitable Trust Trustee upon demand.
(e) Purchase Right in Shares Transferred to the Charitable Trust Trustee. Shares transferred to the Charitable Trust Trustee shall be deemed to have been offered for sale to the
18
Company, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company shall have the right to accept such offer until the Charitable Trust Trustee has sold the Shares held in the Charitable Trust pursuant to Section 7.3(d). Upon such a sale to the Company, the proceeds therefrom shall be distributed to the Prohibited Owner or Charitable Beneficiary in the manner described in Section 7.3(d).
(f)
Rights Upon Liquidation. Upon any voluntary or involuntary liquidation, dissolution or winding up (or any other distribution of the assets) of the Company, the Charitable Beneficiary shall be entitled to receive, ratably with each other holder of Shares of the class or series of the Shares that is held in the Charitable Trust, that portion of the assets of the Company available for distribution to the holders of such class or series (determined based upon the ratio that the number of Shares held by the Charitable Trust Trustee bears to the total number of applicable Shares then outstanding). The Charitable Trust Trustee shall distribute any such assets received in respect of the Shares held in the Charitable Trust pursuant to this Section 7.3(f) in the same manner as proceeds from the sale of Shares are distributed pursuant to Section 7.3(d) above.
(g) Designation of Charitable Beneficiaries. By written notice to the Charitable Trust Trustee, the Company shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) Shares held in the Charitable Trust would not violate the restrictions set forth in Section 7.2(a)(i) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
Section 7.4. Enforcement. The Company is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. No delay or failure on the part of the Company or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Company or the Board of Directors, as the case may be, except to the extent specifically waived in writing.
Section 7.5. Settlements. Nothing in Sections 7.1, 7.2 and 7.3 shall preclude the settlement of any transaction with respect to the Common Shares entered into through the facilities of the New York Stock Exchange or other national securities exchange on which the Common Shares are listed.
Section 7.6. Severability. If any provision of this Article VII or any application of any such provision is determined to be void, invalid, or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions of this Article VII shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.
ARTICLE VIII
STOCKHOLDERS
Section 8.1. Meetings. There shall be an annual meeting of the Stockholders, to be held upon written notice at such time (at least 30 days after the delivery of the annual report) and convenient location, within or outside of the State of Maryland, as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Directors, to review and discuss the business and affairs of the Company and the Operating Partnership, and for the transaction of any other business within the powers of the Company. The Directors shall take reasonable steps to ensure that the annual meeting is held. A quorum shall exist if at least 50% of the then outstanding Shares entitled to vote at such meeting are present or represented at the meeting. Except as otherwise provided in these Articles of Incorporation, special meetings of Stockholders may be called in the manner provided in the Bylaws. If there are no Directors, the officers of the Company shall promptly call a special meeting of the Stockholders entitled to vote for the election of successor Directors. Any meeting may be adjourned and reconvened as the Directors determine or as provided in the Bylaws.
Section 8.2. Voting Rights. Subject to the rights and powers of any class or series of Shares then outstanding, the Stockholders shall be entitled to vote only on the following matters:
19
(a)
the election of Directors as provided in Section 5.2(a) and the removal of Directors as provided in Section 5.6;
(b)
an amendment of these Articles of Incorporation as provided in Article XIII;
(c)
the termination of the Company as provided in Section 15.2;
(d)
a merger or consolidation of the Company, or the sale or disposition of substantially all of the Company's assets, as provided in Article XIV;
(e)
the termination of the Company's status as a REIT for federal income tax purposes as provided by Section 5.1(c); and
(f)
such other matters with respect to which the Board of Directors has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the Stockholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the Stockholders at any meeting shall in any way bind the Board of Directors.
Section 8.3. Preemptive and Appraisal Rights. Except as may be provided by the Board of Directors in establishing the terms of any class or series of Shares pursuant to Article VI, or as may otherwise be provided by contract, no holder of Shares shall, as such holder, (a) have any preemptive right to purchase or subscribe for any additional Shares of the Company or any other Securities of the Company which it may issue or sell or (b) except as expressly required by Maryland law, have any right to require the Company to pay him the fair value of his Shares in an appraisal or similar proceeding.
Section 8.4. Extraordinary Actions. Except as otherwise expressly provided in these Articles of Incorporation and notwithstanding any provision of law permitting or requiring any action to be taken or authorized by the affirmative vote of the holders of a greater number of votes, any Stockholder action shall be effective and valid if approved by the affirmative vote of holders of Shares representing a majority of all the Shares entitled to vote on the matter.
Section 8.5. Action By Stockholders Without a Meeting. To the extent allowed under Maryland Corporation Law, the Bylaws of the Company may provide that any action required or permitted to be taken by the Stockholders may be taken without a meeting by the written consent of the Stockholders entitled to cast a sufficient number of votes to approve the matter as required by statute, these Articles of Incorporation or the Bylaws of the Company, as the case may be.
Section 8.6. Voting Limitations on Shares Held by the Advisor, Directors and Affiliates. With respect to Shares owned by the Advisor, the non-Independent Directors or any of their Affiliates, neither the Advisor, the non-Independent Directors, nor any of their Affiliates, may vote or consent on matters submitted to the Stockholders regarding the removal of the Advisor, any non-Independent Director or any of their Affiliates or any transaction between the Company and the Advisor or any non-Independent Director or any of their respective Affiliates. With respect to Shares owned by any Independent Director, such Independent Director (or any of its Affiliates) may not vote or consent on matters submitted to the Stockholders regarding the removal of such Director or any of its Affiliates or any transaction between the Company and such Director any its Affiliates. In determining the requisite percentage in interest of Shares necessary to approve a matter on which the Advisor, any Director and any of their Affiliates may not vote or consent, any Shares owned by any of them shall not be included.
Section 8.7. Right of Inspection. Any Stockholder and any designated representative thereof shall be permitted reasonable access to all corporate records of the Company at and during reasonable times, and may inspect and copy any of them for a reasonable charge. Inspection of the Company books and records by the office or agency administering the securities laws of a jurisdiction shall be provided upon reasonable notice and during normal business hours.
Section 8.8. Access to Stockholder List.
(a)
An alphabetical list of the names, addresses and telephone number of the Stockholders of the
20
Company, along with the number of Shares held by each of them (the "Stockholder List"), shall be maintained as part of the books and records of the Company and shall be available for inspection by any Stockholder or the Stockholder's designated agent at the home office of the Company upon the request of the Stockholder. The Stockholder List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of such list shall be mailed to any Stockholder so requesting within ten days of the request. The copy of the Stockholder List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). The Company may impose a reasonable charge for postage costs expenses incurred in reproduction pursuant to the Stockholder request. A Stockholder may request a copy of the Stockholder List in connection with matters relating to Stockholder's voting rights, and the exercise of Stockholder rights under federal proxy laws.
(b)
If the Advisor or Directors neglect or refuse to exhibit, produce or mail a copy of the Stockholder List as requested, the Advisor and the Directors shall be liable to any Stockholder requesting the list for the costs, including attorney's fees, incurred by that Stockholder for compelling the production of the Stockholder List, and for actual damages suffered by any Stockholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Stockholder List is to secure such list of Stockholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Stockholder relative to the affairs of the Company. The Company may require the Stockholder requesting the Stockholder List to represent that the list is not requested for a commercial purpose unrelated to the Stockholder's interest in the Company. The remedies provided hereunder to Stockholders requesting copies of the Stockholder List are in addition to and shall not in any way limit other remedies available to Stockholders under federal law, or the laws of any state.
Section 8.9. Reports. The Directors, including the Independent Directors, shall take reasonable steps to ensure that the Company shall cause to be prepared and mailed or delivered to each Stockholder as of a record date after the end of the fiscal year and each holder of other publicly-held securities of the Company within 120 days after the end of the fiscal year to which it relates an annual report for each fiscal year ending after the date of the initial public offering of the Shares which shall include: (i) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; (ii) the ratio of the costs of raising capital during the period to the capital raised; (iii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and any Affiliate of the Advisor by the Company and including fees or charges paid to the Advisor and any Affiliate of the Advisor by third parties in connection with the operation of the Company by such third parties; (iv) the Operating Expenses of the Company, stated as a percentage of Average Invested Assets and as a percentage of its Net Income; (v) a report from the Independent Directors that the policies being followed by the Company are in the best interests of its Stockholders and the basis for such determination; (vi) separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the Company, Directors, Advisors, Sponsors and any Affiliate thereof occurring in the year for which the annual report is made, and the Independent Directors shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions; and (vii) Dividends to the Stockholders for the period, identifying the source of such Dividends, and if such information is not available at the time of the distribution, a written explanation of the relevant circumstances will accompany the Dividends.
Section 8.10. Rights of Objecting Stockholders. Stockholders shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the Maryland Corporation Law unless the Board of Directors shall determine that such rights shall apply, with respect to all or any classes or series of Shares, to a particular transaction or all transactions occurring after the date of such approval in connection with which Stockholders would otherwise be entitled to exercise such rights.
Section 8.11. Stockholder Suitability.
(a)
Stockholders shall have: (1) a minimum annual gross income of $70,000 and a minimum NET WORTH (determined exclusive of home, home furnishings and automobiles) of $70,000; or (2) a minimum NET WORTH (determined exclusive of home, home furnishings, and automobiles) of $250,000.
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(b)
Each PERSON selling SHARES on behalf of the Company shall make every reasonable effort to determine that the purchase of SHARES is a suitable and appropriate investment for each Stockholder. In making this determination, the each PERSON selling SHARES on behalf of the Company shall ascertain that the prospective Stockholder: (1) meets the minimum income and net worth standards established for the Company in section 8.11(a) above; (2) can reasonably benefit from an investment in the Company based on the prospective Stockholder’s overall investment objectives and portfolio structure. (3) is able to bear the economic risk of the investment based on the prospective Stockholder’s overall financial situation; and (4) has apparent understanding of: (i) the fundamental risks of the investment; (ii) the risk that the Stockholder may lose the entire investment; (iii) the lack of liquidity of the SHARES; (iv) the restrictions on transferability of the SHARES; and (v) the tax consequences of the investment. In the case of a fiduciary account, the standards set forth in this section 8.11(b) shall be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the SHARES if the donor or grantor is the fiduciary.
(c)
In connection with the Company’s initial public offering only, the minimum purchase of Shares is $10,000, except for IRAs which may purchase a minimum of $5,000 of Shares.
ARTICLE IX
ADVISOR
Section 9.1. Appointment and Initial Investment of Advisor. The Board of Directors is responsible for setting the general policies of the Company and for the general supervision of the Company's business. However, the Directors are not required personally to conduct the business of the Company, and they may (but need not) appoint, employ or contract with any Person (including a Person Affiliated with any Director) as an Advisor and may grant or delegate such authority to the Advisor as the Board of Directors may, in its sole discretion, deem necessary or desirable. The term of retention of any Advisor shall not exceed one year, although there is no limit to the number of times that a particular Advisor may be retained. The Advisor, the Sponsor and their Affiliates have made an Initial Investment of $200,000 to the capital of the Company.
Section 9.2. Supervision of Expenses and the Advisor.
(a)
The Board of Directors shall evaluate the performance of the Advisor before entering into or renewing the Advisory Agreement and the criteria used in such evaluation shall be reflected in the minutes of meetings of the Board of Directors. The Board of Directors may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Company, to act as agent for the Company, to execute documents on behalf of the Company and to make executive decisions which conform to general policies and principles established by the Board of Directors. The Board of Directors shall monitor the Advisor to assure that the administrative procedures, operations and programs of the Company are in the best interests of the Stockholders and are fulfilled.
(b)
The Independent Directors are responsible for reviewing the fees and expenses of the Company at least annually or with sufficient frequency to determine that the expenses incurred are reasonable in light of the investment performance of the Company, its Net Assets, its Net Income and the fees and expenses of other comparable unaffiliated companies. Each such determination shall be reflected in the minutes of the meetings of the Board of Directors. The Independent Directors will be responsible for reviewing the performance of the Advisor from time to time, but at least annually, and determining that compensation to be paid to the Advisor is reasonable in relation to the nature and quality of services performed and the investment performance of the Company and that the provisions of the Advisory Agreement are being carried out. Specifically, the Independent Directors will consider factors such as:
(i)
the Net Assets and Net Income of the Company,
(ii)
the amount of the fees paid to the Advisor in relation to the size, composition and performance of the Company's portfolio,
(iii)
the success of the Advisor in generating opportunities that meet the investment objectives of the Company,
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(iv)
rates charged to comparable companies and to investors other than comparable companies by advisors performing the same or similar services,
(v)
additional revenues realized by the Advisor and its Affiliates through their relationship with the Company, whether paid by the Company or by others with whom the Company does business,
(vi)
the quality and extent of service and advice furnished by the Advisor,
(vii)
the performance of the investment portfolio of the Company, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations, and the quality of the portfolio of the Company relative to the investments generated by the Advisor for its own account.
The Independent Directors may also consider all other factors which they deem relevant and the findings of the Independent Directors on each of the factors considered shall be recorded in the minutes of the Board of Directors.
(c)
The Board of Directors shall determine whether any successor Advisor possesses sufficient qualifications to perform the advisory function for the Company and whether the compensation provided for in its contract with the Company is justified.
Section 9.3. Fiduciary Obligation of the Advisor. The Advisor has a fiduciary responsibility to the Company and to the Stockholders.
Section 9.4. Termination. Either a majority of the Independent Directors or the Advisor may terminate the Advisory Agreement on 60 days' written notice without cause or penalty, and, in such event, the Advisor will cooperate with the Company and the Directors in making an orderly transition of the advisory function.
Section 9.5. Real Estate Commission on Sale of Property. The Company may pay the Property Manager a real estate disposition fee upon sale of one or more Properties, in an amount equal to the lesser of (i) one-half of a Competitive Real Estate Commission, or (ii) three percent of the sales price of such Property or Properties. In addition, the amount paid when added to the sums paid to unaffiliated parties in such a capacity shall not exceed the lesser of the Competitive Real Estate Commission or an amount equal to 6% of the sales price of such Property or Properties. Payment of such fee shall be made only if the Advisor provides a substantial amount of services in connection with the sale of a Property or Properties.
Section 9.6. Organizational and Offering Expenses. The Company shall only pay reasonable Organizational and Offering Expenses and in no event shall such expenses exceed 15% of Gross Proceeds of any applicable offering.
Section 9.7. Reimbursement for Operating Expenses. The Company shall reimburse the Advisor for Operating Expenses incurred by the Advisor except that the Company shall not reimburse the Advisor for Operating Expenses that in the four consecutive fiscal quarters then ended exceed the greater of 2% of Average Invested Assets or 25% of Net Income (the "2%/25% Guidelines") for such year. Within 60 days after the end of each fiscal quarter, the Advisor will reimburse the Company for any amounts by which the Operating Expenses exceeded the 2% / 25% Guidelines for such year, unless the Independent Directors determine, based on such unusual and non-recurring factors which they deem sufficient, that such excess was justified. Within 60 days after the end of any fiscal quarter of the Company for which Operating Expenses (for the 12 months just ended) exceed the 2%/25% Guidelines, the Advisor shall send a written disclosure of such fact to the Stockholders, together with an explanation of the factors the Independent Directors considered in arriving at the conclusion that such higher Operating Expenses were justified, if applicable. If the Independent Directors do not determine that such excess Operating Expenses are justified, the Advisor shall reimburse the Company within a reasonable time after the end of such 12-month period the amount by which the Operating Expenses exceeded the 2%/25% Guidelines.
Section 9.8. Limitation on Acquisition Fees and Acquisition Expenses. Notwithstanding anything contained in this Article IX, the total of all Acquisition Fees and Acquisition Expenses shall not exceed, in the aggregate, an amount equal to 6% of the Contract Price for the Property with respect to Properties purchased by the Company or in the case of a mortgage loan, 6% of the funds advanced; provided, however, that a majority of the Directors (including a
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majority of the Independent Directors) not otherwise interested in the transaction may approve fees and expenses in excess of this limit if they determine the transaction to be commercially competitive, fair and reasonable to the Company.
Section 9.9 Incentive Fees. An interest in the gain from the sale of assets of the Company, for which full consideration is not paid in cash or property of equivalent value, shall be allowed provided the amount or percentage of such interest is reasonable. Such an interest gain from the sale of the Company’s assets shall be considered presumptively reasonable if it does not exceed 15% of the balance of such net proceeds remaining after payment to Stockholders, in the aggregate, of an amount equal to 100% of the original issue price of the Company’s Shares, plus an amount equal to 6% of the original issue price of the Company’s shares per annum cumulative. For purposes of this Section 9.9, the original issue price of the Shares may be reduced by prior cash distributions to Stockholders of net proceeds from the sale of assets.
ARTICLE X
INVESTMENT OBJECTIVES AND LIMITATIONS
Section 10.1. Investment Objectives. The Company's primary investment objectives are: (i) to invest in a diversified portfolio of high-quality real estate, (ii) to preserve invested capital, (iii) to pay regular cash dividends that increase over the long term, (iv) to increase the cash flow generated by the Company's assets over the long term, (v) to achieve moderate appreciation of the Company's assets over the long term, and (vi) to remain qualified as a REIT for federal income tax purposes.
Section 10.2. Review of Objectives. The Independent Directors shall review the investment and borrowing policies of the Company with sufficient frequency and at least annually to determine that the policies being followed by the Company at any time are in the best interests of its Stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the meetings of the Board of Directors.
Section 10.3. Certain Permitted Investments.
(a)
The Company may invest in Properties and notes secured by mortgages or deeds of trust secured by liens on real property. The Company shall ordinarily purchase or invest in Properties or make loans fully secured by Properties based on their fair market value as determined by a majority of the Directors or, if decided by a majority of the Independent Directors as otherwise required by Section 11.1, as determined by an Independent Expert.
(b)
The Company may invest in joint ventures with the Sponsor, Advisor, one or more Directors or any Affiliate, if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction (i) approve such investment as being fair and reasonable to the Company and (ii) determine that the investment by the Company and other third party investors making a comparable investment in the joint venture are on substantially the same terms and conditions.
(c)
The Company shall not invest in equity securities, unless a majority of the directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable.
Section 10.4. Investment Limitations. In addition to other investment restrictions imposed by the Board of Directors from time to time, consistent with the Company's objective of qualifying as a REIT, the following shall apply to the Company's investments:
(a)
Not more than 10% of the Company's total assets shall be invested in Unimproved Real Property or mortgage loans on Unimproved Real Property.
(b)
The Company shall not invest in commodities or commodity futures contracts. This limitation is not intended to apply to futures contracts, when used solely for hedging purposes in connection with the Company's ordinary business of investing in real estate assets and mortgages, or forward looking purchase agreements.
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(c)
The Company shall not make or invest in mortgage loans, including construction loans, on any one Property if the aggregate amount of all mortgage loans outstanding on the Property, including the loans of the Company, would exceed an amount equal to 85% of the appraised value of the Property as determined by appraisal obtained from an Independent Expert, unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the "aggregate amount of all mortgage loans outstanding on the Property, including the loans of the Company" shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged Property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds five percent per annum of the principal balance of the loan.
(d)
The Company shall not invest in indebtedness ("Junior Debt") secured by a mortgage on real property which is subordinate to the lien or other indebtedness ("Senior Debt"), except where such amount of such Junior Debt, plus the outstanding amount of Senior Debt, does not exceed 90% of the appraised value, obtained from an Independent Expert, of such property, if after giving effect thereto, the value of all such mortgage loans of the Company (as shown on the books of the Company in accordance with generally accepted accounting principles, after all reasonable reserves but before provision for depreciation) would not then exceed 25% of the Company's Net Assets. The value of all investments in Junior Debt of the Company which does not meet the aforementioned requirements shall be limited to 10% of the Company's tangible assets (which would be included within the 25% limitation).
(e)
The aggregate Leverage of the Company shall be reasonable in relation to the Net Assets of the Company and shall be reviewed by the Board of Directors at least quarterly. The maximum amount of such Leverage shall not exceed 300% of the Net Assets, unless approved by the Independent Directors and disclosed to the Stockholders in the next quarterly report of the Company along with the explanation for such excess borrowings..
(f)
Notwithstanding Section 10.4(d) above, the Company shall not make or invest in any mortgage loans that are subordinate to any mortgage, other indebtedness or equity interest of the Advisor, the Directors, the Sponsor or an Affiliate of the Company. In addition, the Company shall not invest in any security of any entity holding investments or engaging in activities prohibited by these Articles of Incorporation.
(g)
The Company shall not underwrite the Securities of other issuers. In addition, the Company shall not invest in Securities of other issuers, except for investments in joint ventures, unless a majority of the Directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair, competitive and commercially reasonable.
(h)
The Company shall not issue (i) redeemable equity securities; (ii) non-voting or assessable securities; (iii) options, warrants, or similar evidences of a right to buy its securities (collectively, "Options") unless (1) issued to all of its Stockholders ratably, (2) as part of a financing arrangement, or (3) as part of a Stock Option Plan available to Directors, officers or employees of the Company or the Advisor. Options may not be issued to the Advisor, Directors, Sponsor or any Affiliate thereof except on the same terms as such Options are sold to the general public, when applicable. The prohibition on redeemable equity securities does not apply to a class of equity securities that is convertible at the holder’s option into shares of common stock of the Company. Options may be issued to persons other than the Advisor, Directors, Sponsor or any Affiliate thereof but not at exercise prices less than the fair market value of the underlying securities on the date of grant and not for consideration that in the judgment of the Independent Directors has a market value less than the value of such Option on the date of grant. Options issuable to the Advisor, Directors, Sponsor or any Affiliate thereof shall not exceed 10% of the outstanding Shares on the date of grant.
(i)
A majority of the Directors shall authorize the consideration to be paid for each Property, based on the fair market value of the Property. If a majority of the Independent Directors determine, or if the Property is acquired from the Advisor, a Director, the Sponsor or their Affiliates, such fair market value shall be determined by an Independent Expert selected by the Independent Directors.
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(j)
The Company shall not operate so as to be classified as an "investment company" under the Investment Company Act of 1940, as amended. The Company shall not issue (i) debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt; or (ii) Shares on a deferred payment basis or under similar arrangements.
(k)
The Company shall not invest in real estate contracts of sale unless such contracts of sale are in recordable form and appropriately recorded in the chain of title.
ARTICLE XI
CONFLICTS OF INTEREST
Section 11.1. Sales and Leases to Company. The Company may purchase or lease a Property or Properties from an Affiliated Seller upon a finding by a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction that such transaction is fair and reasonable to the Company; such determination shall be made based on the fair market value of the Property as determined by an Independent Expert as selected by the Independent Directors. Additionally, the Company may not purchase a Property or Properties from an Affiliated Seller at a price to the Company that is greater than the cost of the asset to the Affiliated Seller unless substantial justification for such excess exists and such excess is reasonable, there is appropriate disclosure of the material facts concerning each such transaction and the transaction is otherwise approved by the Board of Directors as contemplated by this Section 11.1. Notwithstanding the previous sentence, substantial justification for a purchase price to the Company in excess of the cost to the Affiliated Seller shall be deemed to exist if (i) the Property was acquired by the Affiliated Seller prior to the formation of the Company, or (ii) the Property was developed, re-developed or substantially refurbished by the Affiliated Seller or an Affiliate of the Affiliated Seller provided that, in all cases, the transaction is otherwise approved by the Board of Directors as contemplated by the first sentence of this Section 11.1. In no event shall the cost of such asset to the Company exceed its current appraised value.
Section 11.2. Sales and Leases to the Sponsor, Advisor, Directors or Affiliates. A Sponsor, Advisor, Director or Affiliate may purchase or lease a Property or Properties from the Company if a majority of Directors (including a majority of Independent Directors) not otherwise interested in the transaction determine that the transaction is fair and reasonable to the Company.
Section 11.3. Other Transactions.
(a)
No goods or services will be provided by the Advisor or its Affiliates to the Company, except for transactions in which the Advisor or its Affiliates provide goods or services to the Company in accordance with these Articles of Incorporation or if a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transactions approve such transactions as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.
(b) The Company shall not make loans to the Sponsor, Advisor, Directors or any Affiliates thereof, except for mortgage loans described in Section 10.4(c) in these Articles of Incorporation or to a wholly-owned subsidiary. Any loans to the Company by the Sponsor, Advisor, Directors, or any Affiliates must be approved by a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transaction as fair, competitive, and commercially reasonable, and no less favorable to the Company than comparable loans between unaffiliated parties.
ARTICLE XII
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE COMPANY
Section 12.1. Limitation of Stockholder Liability. No Stockholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Company by reason of being a Stockholder, nor shall any Stockholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any person in connection with the property or the affairs of the Company by reason of being a Stockholder.
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Section 12.2. Limitation of Liability and Indemnification.
(a) In this Section 12.2:
(i) "Indemnitee" means (1) any present or former Director or officer of the Company, (2) any person nominated or designated by (or pursuant to authority granted by) the Directors or any committee thereof to serve in any of the capacities referred to in clause (1) hereof, or (3) any person acting in an Official Capacity.
(ii)
"Official Capacity" means (1) when used with respect to a Director, the office of Director of the Company and (2) when used with respect to a person other than a Director, the elective or appointive office of the Company held by such person or the employment or agency relationship undertaken by such person on behalf of the Company or Operating Partnership, but in each case does not include service for any other real estate investment trust or foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise.
(iii)"Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding.
(b)
Subject to subsection 12.2(e), the Company shall indemnify every Indemnitee against all judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement and reasonable expenses actually incurred by the Indemnitee in connection with any Proceeding in which he or she was, is or is threatened to be named defendant or respondent, or in which he or she was or is a witness without being named a defendant or respondent, by reason, in whole or in part, of his or her serving or having served, or having been nominated or designated to serve, in any of the capacities referred to in Section 12.2(a)(i), to the fullest extent that indemnification is permitted by the Maryland Corporation Law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than the law permitted the Company to provide prior to such amendment) or any other applicable laws presently or hereinafter in effect
(c) Any indemnification of expenses or agreement to hold harmless may be paid only out of the Net Assets of the Company and no portion may be recoverable from the Stockholders. An Indemnitee shall be deemed to have been found liable in respect of any claim, issue or matter only after the Indemnitee shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses shall include, without limitation, all court costs and all fees and disbursements of attorneys for the Indemnitee.
(d) Subject to Subsection 12.2(e), reasonable expenses (including court costs and attorneys' fees) incurred by an Indemnitee who was or is a witness or was, is or is threatened to be made a named defendant or respondent in a Proceeding, shall be paid or reimbursed by the Company at reasonable intervals in advance of the final disposition of such Proceeding. Notwithstanding any other provision of this Section 12.2, the Company may pay or reimburse expenses incurred by an Indemnitee in connection with his or her appearance as a witness or other participation in a Proceeding at a time when he or she is not named a defendant or respondent in the Proceeding.
(e)
Limitations on Indemnification.
(1)
The Company shall not provide for indemnification of the Directors, Advisors or Affiliates for any liability or loss suffered by the Directors, Advisors or Affiliates, nor shall it provide that the Directors, Advisors or Affiliates be held harmless for any loss or liability suffered by the Company, unless all of the following conditions are met:
a. The Directors, Advisors or Affiliates determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Company.
b. The Directors, Advisors or Affiliates were acting on behalf of or performing services for the Company.
c. Such liability or loss was not the result of:
i. negligence or misconduct by the Directors (excluding the Independent Directors), or Advisors or Affiliates; or
ii. gross negligence or willful misconduct by the Independent Directors.
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d. Such indemnification or agreement to hold harmless is recoverable only out of net assets of the Company and not from Stockholders.
(2)
Notwithstanding anything to the contrary contained in Section 12.2(e)(1), the Directors, Advisors or Affiliates and any persons acting as a broker-dealer shall not be indemnified by the Company for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met:
a. There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee.
b. Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee.
c. A court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which the Company’s securities were offered or sold as to indemnification for violations of securities laws.
(3) The advancement of Company funds to the Directors, Advisors or Affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied:
a. The legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the REIT.
b. The legal action is initiated by a third party who is not a Stockholder or the legal action is initiated by a Stockholder acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement.
c. The Directors, Advisors or Affiliates undertake to repay the advanced funds to the Company, together with the applicable legal rate of interest thereon, in cases in which such Directors, Advisors or Affiliates are found not to be entitled to indemnification.
Section 12.3. Transactions Between the Company and its Directors, Officers, Employees and Agents. Subject to any express restrictions in these Articles of Incorporation or the Bylaws, or an express restriction adopted by the Board of Directors by resolution, the Company may enter into any contract or transaction of any kind with any person, including any Director, officer, employee or agent of the Company or any person affiliated with a Director, officer, employee or agent of the Company, whether or not any of them has a financial interest in such transaction; provided that the terms of the transaction are no less favorable to the Company than would be obtained in a transaction with an unaffiliated party.
ARTICLE XIII
AMENDMENTS
Section 13.1. General. Subject to the terms of these Articles of Incorporation, the Company reserves the right from time to time to make any amendment to these Articles of Incorporation, now or hereafter authorized by law. All rights and powers conferred by these Articles of Incorporation on Stockholders, Directors and officers are granted subject to this reservation. An amendment to these Articles of Incorporation (a) shall be signed and acknowledged by at least a majority of the Directors, an officer duly authorized by at least a majority of the Directors, or signed and acknowledged by the Chairman of the Board of Directors, and witnessed by the Secretary, (b) shall be filed for record as provided in Section 16.5 and (c) shall become effective as of the later of the time the Department accepts the amendment for record or the time established in the amendment, not to exceed 30 days after the amendment is accepted for record. All references to these Articles of Incorporation shall include all effective amendments thereto.
Section 13.2. By Stockholders. These Articles of Incorporation may be amended, without the necessity for concurrence by the Board of Directors, by the affirmative vote of the holders of not less than a majority of the Common Shares then outstanding and entitled to vote thereon, except that: (i) no amendment may be made which would change any rights with respect to any outstanding class of securities, by reducing the amount payable thereon upon liquidation, or by diminishing or eliminating any voting rights pertaining thereto; (ii) Sections 13.3, 14.1 and this Section 13.2 shall not be amended (or any other provision of these Articles of Incorporation be amended or any provision of these Articles of Incorporation be added that would have the effect of amending such sections); (iii) no term or provision of the Articles of Incorporation may be added, amended or repealed in any respect that would, in the determination of the Board of Directors, cause the Company to fail to qualify as a REIT under the Code; and (iv) certain provisions of these
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Articles of Incorporation, including provisions relating to the removal of Directors, Independent Directors, preemptive rights of holders of stock and indemnification and limitation of liability of officers and directors may not be amended or repealed.
Section 13.3. By Directors. The Board of Directors, by a majority vote, may amend provisions of these Articles of Incorporation from time to time as necessary to enable the Company to qualify as a REIT under the Code or to create a class or series of Shares as contemplated by Article VI. With the exception of the foregoing, the Board of Directors may not amend these Articles of Incorporation.
ARTICLE XIV
MERGER, CONSOLIDATION OR SALE OF COMPANY PROPERTY
Section 14.1. Authority of Directors. Subject to the provisions of any class or series of Shares at the time outstanding, the Board of Directors shall have the power to:
(a)
merge the Company into another entity;
(b)
consolidate the Company with one or more other entities into a new entity;
(c)
sell or otherwise dispose of all or substantially all of the Company Property; or
(d)
dissolve or liquidate the Company;
provided, however, that such action shall have been approved, at a meeting of the Stockholders called for that purpose, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon. Any such transaction involving an Affiliate of the Company or the Advisor also must be approved by a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in such transaction as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.
Section 14.2. Roll-Up Transactions.
(a)
In connection with any proposed Roll-Up Transaction, an appraisal of all Properties shall be obtained from an Independent Expert. The Properties shall be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the Properties as of a date immediately prior to the announcement of the proposed Roll-Up Transaction. The appraisal shall assume an orderly liquidation of Properties over a 12-month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Company and the Stockholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to Stockholders in connection with a proposed Roll-Up Transaction. In connection with a proposed Roll-Up Transaction, the Person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of:
(iii)
accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or
(iv) one of the following:
(3)
remaining as Stockholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or
(4)
Receiving cash in an amount equal to the Stockholder’s pro rata share of the appraised value of the Net Assets of the Company.
(b)
The Company is prohibited from participating in any proposed Roll-Up Transaction:
(i)
which would result in the Stockholders having democracy rights in a Roll-Up Entity that are less than the rights provided for in Sections 8.1, 8.2, 8.8, and 12.1 of these Articles of Incorporation;
(ii)
which includes provisions that would operate as a material impediment to, or frustration of,
29
the accumulation of shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity), or which would limit the ability of an investor to exercise the voting rights of its Securities of the Roll-Up Entity on the basis of the number of Shares held by that investor;
(iii)
in which investor's rights to access of records of the Roll-Up Entity will be less than those described in Sections 8.8 and 8.9 hereof; or
(iv)
in which any of the costs of the Roll-Up Transaction would be borne by the Company if the Roll-Up Transaction is not approved by the Stockholders.
ARTICLE XV
DURATION AND TERMINATION OF THE COMPANY
Section 15.1. Duration. The Company shall continue perpetually unless terminated pursuant to Section 15.2 or pursuant to any applicable provision of the Maryland Corporation Law.
Section 15.2. Termination.
(a)
Unless the Board of Directors has caused the Company’s Common Stock to be listed or quoted for trading on an established securities exchange, including the NASDAQ, National Market System, within ten years of the termination of the Company’s initial public offering, the Company shall begin the process of liquidating our assets, unless the Board of Directors has obtained the approval of a majority of our shareholders to defer the liquidation or to approve an alternate strategy. To obtain that approval, the Board of Directors shall call a Stockholders’ meeting pursuant to Section 8.1 to present a proposal for the orderly disposition of the Company’s assets or for an alternate strategy. The proposal will include information regarding appraisals of the Company’s real estate assets. If the Stockholders do not approve the proposal presented by the Board of Directors prior to the end of ten years after the termination of the Company’s initial public offering, the Board of Directors shall begin the process of liquidating the Company’s assets or listing the Company’s Shares.
(b)
Subject to the provisions of any class or series of Shares at the time outstanding, without the necessity for concurrence by the Board of Directors, the Company may be terminated upon the affirmative vote of the holders of a majority of the outstanding Shares. Upon the termination of the Company:
(i)
The Company shall carry on no business except for the purpose of winding up its affairs.
(ii)
The Board of Directors shall proceed to wind up the affairs of the Company and all of the powers of the Board of Directors under these Articles of Incorporation shall continue, including the powers to fulfill or discharge the Company's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Company to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business.
(iii)
After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Company may distribute the remaining property of the Company among the Stockholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Company shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding.
(c)
After termination of the Company, the liquidation of its business and the distribution to the Stockholders as herein provided, a majority of the Directors shall execute and file with the Company’s records a document certifying that the Company has been duly terminated, and the Directors shall be discharged from all liabilities and duties hereunder, and the rights and interests of all Stockholders shall cease.
30
ARTICLE XVI
MISCELLANEOUS
Section 16.1. Governing Law. The Articles shall be construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof.
Section 16.2. Reliance by Third Parties. Any certificate shall be final and conclusive as to any person dealing with the Company if executed by the Secretary or an Assistant Secretary of the Company or a Director, and if certifying to: (a) the number or identity of Directors, officers of the Company or Stockholders; (b) the due authorization of the execution of any document; (c) the action or vote taken, and the existence of a quorum, at a meeting of the Board of Directors or Stockholders; (d) a copy of these Articles of Incorporation or of the Bylaws as a true and complete copy as then in force; (e) an amendment to these Articles of Incorporation; (f) the termination of the Company; or (g) the existence of any fact relating to the affairs of the Company. No purchaser, lender, transfer agent or other person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Company on its behalf or by any officer, employee or agent of the Company.
Section 16.3. Severability.
(a)
The provisions of these Articles of Incorporation are severable, and if the Board of Directors shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the Code, Maryland Corporation Law or other applicable federal or state laws, the Conflicting Provisions, to the extent of the conflict, shall be deemed never to have constituted a part of these Articles of Incorporation, even without any amendment of these Articles of Incorporation pursuant to Article XIII and without affecting or impairing any of the remaining provisions of these Articles of Incorporation or rendering invalid or improper any action taken or omitted prior to such determination. No Director shall be liable for making or failing to make such a determination.
(b)
If any provision of these Articles of Incorporation shall be held invalid or unenforceable in any jurisdiction, such holding shall apply only to the extent of any such invalidity or unenforceability and shall not in any manner affect, impair or render invalid or unenforceable such provision in any other jurisdiction or any other provision of these Articles of Incorporation in any jurisdiction.
Section 16.4. Construction. In these Articles of Incorporation, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of these Articles of Incorporation.
Section 16.5. Recordation. These Articles of Incorporation and any amendment hereto shall be filed for record with the Department and may also be filed or recorded in such other places as the Board of Directors deems appropriate, but failure to file for record these Articles of Incorporation or any amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of these Articles of Incorporation or any amendment hereto. A restated Articles of Incorporation shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Articles of Incorporation and the various amendments thereto.
IN WITNESS WHEREOF, these Third Amended and Restated Articles of Incorporation have been signed by the undersigned, the Company’s sole Stockholder, as of the date hereof, of all of the issued and outstanding shares of the Company’s common stock, and acknowledges, under penalty of perjury, that this document is its free act and deed, and that to the best of its knowledge, information and belief, the matters and facts set forth herein are true in all material respects.
Dated:
February __, 2010
Hartman XX Holdings, Inc.
By: ______________________________
Allen R Hartman, President
and sole voting shareholder
31
APPROVAL BY THE BOARD OF DIRECTORS ATTESTED TO:
James H. Stokes, Jr., Secretary
32
| 1. | I have reviewed this annual report on Form 10-K of Hartman Short Term Income Properties XX, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| /s/ Allen R. Hartman Allen R. Hartman Chairman and Chief Executive Officer |
| 1. | I have reviewed this annual report on Form 10-K of Hartman Short Term Income Properties XX, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| | a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| | b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| /s/ Louis T. Fox, III Louis T. Fox, III Chief Financial Officer |
Date: April 12, 2012 | | /s/ Allen R. Hartman | |
| Allen R. Hartman | |||
| Chairman and Chief Executive Officer |
Date: April 12, 2012 | | /s/ Louis T. Fox, III | |
| Louis T. Fox, III | |||
| Chief Financial Officer | |||
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