Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Griffin-American Healthcare REIT II, Inc. | c91834exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Griffin-American Healthcare REIT II, Inc. | c91834exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Griffin-American Healthcare REIT II, Inc. | c91834exv32w1.htm |
EX-10.1 - EXHIBIT 10.1 - Griffin-American Healthcare REIT II, Inc. | c91834exv10w1.htm |
EX-32.2 - EXHIBIT 32.2 - Griffin-American Healthcare REIT II, Inc. | c91834exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-158111 (1933 Act)
GRUBB & ELLIS HEALTHCARE REIT II, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
26-4008719 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, Suite 300, Santa Ana, California (Address of principal executive offices) |
92705 (Zip Code) |
(714) 667-8252
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. o Yes þ 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).
o Yes o 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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As
of October 23, 2009, there were 326,835 shares of common stock of Grubb & Ellis Healthcare
REIT II, Inc. outstanding.
Grubb & Ellis Healthcare REIT II, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
(A Maryland Corporation)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
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2 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
16 | ||||||||
25 | ||||||||
25 | ||||||||
25 | ||||||||
PART II OTHER INFORMATION |
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26 | ||||||||
26 | ||||||||
62 | ||||||||
63 | ||||||||
63 | ||||||||
63 | ||||||||
63 | ||||||||
64 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2009
(Unaudited)
ASSETS |
||||
Cash |
$ | 202,000 | ||
Total assets |
$ | 202,000 | ||
LIABILITIES AND EQUITY |
||||
Liabilities: |
||||
Accrued liabilities |
$ | 25,000 | ||
Accounts payable due to affiliates |
37,000 | |||
Total liabilities |
62,000 | |||
Commitments and contingencies (Note 3) |
||||
Equity: |
||||
Stockholders equity: |
||||
Preferred stock, $0.01 par value; 200,000,000 shares
authorized; none issued and outstanding |
| |||
Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 20,000 shares issued and outstanding |
| |||
Additional paid-in capital |
200,000 | |||
Accumulated deficit |
(62,000 | ) | ||
Total stockholders equity |
138,000 | |||
Noncontrolling interest (Note 5) |
2,000 | |||
Total equity |
140,000 | |||
Total liabilities and equity |
$ | 202,000 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2009 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
Period from January 7, 2009 | ||||||||
Three Months Ended | (Date of Inception) through | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Expenses: |
||||||||
General and administrative |
$ | 62,000 | $ | 62,000 | ||||
Total expenses |
62,000 | 62,000 | ||||||
Net loss |
(62,000 | ) | (62,000 | ) | ||||
Less: Net income (loss) attributable
to noncontrolling interest |
| | ||||||
Net loss attributable to controlling interest |
(62,000 | ) | (62,000 | ) | ||||
Net loss per share basic and diluted |
$ | (3.10 | ) | $ | (3.46 | ) | ||
Weighted average number of shares
outstanding basic and diluted |
20,000 | 17,895 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the Period from January 7, 2009 (Date of Inception) through September 30, 2009 (Unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | ||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interest | Total Equity | ||||||||||||||||||||||
BALANCE January 7, 2009 (Date
of Inception) |
| $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
Issuance of common stock |
20,000 | | 200,000 | | | | 200,000 | |||||||||||||||||||||
Noncontrolling interest
contribution to operating
partnership |
| | | | | 2,000 | 2,000 | |||||||||||||||||||||
Net loss |
| | | | (62,000 | ) | | (62,000 | ) | |||||||||||||||||||
BALANCE September 30, 2009 |
20,000 | $ | | $ | 200,000 | $ | | $ | (62,000 | ) | $ | 2,000 | $ | 140,000 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Grubb & Ellis Healthcare REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES |
||||
Net loss |
$ | (62,000 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||
Changes in operating assets and liabilities: |
||||
Accrued liabilities |
25,000 | |||
Accounts payable due to affiliates |
37,000 | |||
Net cash provided by operating activities |
| |||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||
Proceeds from issuance of common stock |
200,000 | |||
Noncontrolling interest contribution to operating partnership |
2,000 | |||
Net cash provided by financing activities |
202,000 | |||
NET CHANGE IN CASH |
202,000 | |||
CASH Beginning of period |
| |||
CASH End of period |
$ | 202,000 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended September 30, 2009 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
The use of the words we, us or our refers to Grubb & Ellis Healthcare REIT II, Inc. and
its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context
otherwise requires.
1. Organization and Description of Business
Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7,
2009 and therefore we consider that our date of inception. We were initially capitalized on
February 4, 2009. We intend to invest in a diversified portfolio of real estate properties,
focusing primarily on medical office buildings and healthcare-related facilities. We may also
originate and acquire secured loans and real estate-related investments. We generally will seek
investments that produce current income. We intend to elect to be treated as a real estate
investment trust, or REIT, for federal income tax purposes for our taxable year ending December 31,
2009, or the first year in which we commence material operations.
We are conducting a best efforts initial public offering, or our offering, in which we are
offering to the public a minimum of 200,000 shares of our common stock for $10.00 per share
aggregating at least $2,000,000, or the minimum offering, and a maximum of 300,000,000 shares of
our common stock for $10.00 per share and 30,000,000 shares of our common stock pursuant to our
distribution reinvestment plan, or the DRIP, for $9.50 per share, aggregating up to $3,285,000,000,
or the maximum offering. Shares purchased by our executive officers and directors, Grubb & Ellis
Securities, Inc., or our dealer manager, Grubb & Ellis Healthcare REIT II Advisor, LLC, or our
advisor, or their affiliates did not count towards the minimum offering. On October 15, 2009,
excluding shares purchased by our executive officers and directors, our dealer manager and our
advisor and its affiliates, as well as residents of Ohio and Tennessee (who are subject to higher
minimum offering amounts), we had received and accepted subscriptions in our offering for 224,231
shares of our common stock, or $2,242,000, thereby exceeding the minimum offering (provided, that
subscriptions from residents of Ohio and Tennessee will continue to be held in escrow until we have
received and accepted subscriptions aggregating at least $20,000,000 and $10,000,000,
respectively). See Note 8, Subsequent Events Status of our Offering for a further discussion.
We will conduct substantially all of our operations through Grubb & Ellis Healthcare REIT
II Holdings, LP, or our operating partnership. We are externally advised by our advisor pursuant to
an advisory agreement, or the Advisory Agreement, between us and our advisor that has a one-year
term that expires August 24, 2010 and is subject to successive one-year renewals upon the mutual
consent of the parties. Our advisor supervises and manages our day-to-day operations and selects
the properties and real estate-related investments we acquire, subject to the oversight by our
board of directors. Our advisor also provides marketing, sales and client services on our behalf.
Our advisor will engage affiliated entities to provide various services to us. Our advisor is
managed by and is a wholly owned subsidiary of Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis
Equity Advisors, which is a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or
our sponsor.
As of September 30, 2009, we have neither purchased nor contracted to purchase any
investments nor has our advisor identified any real estate or real estate-related investments in
which it is probable that we will invest.
6
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim unaudited condensed consolidated financial statements. Such interim
unaudited condensed consolidated financial statements and the accompanying notes thereto are the
representations of our management, who are responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been consistently applied in preparing our
accompanying interim unaudited condensed consolidated financial statements.
Basis of Presentation
We intend to operate in an umbrella partnership REIT structure in which our operating
partnership, or wholly owned subsidiaries of our operating partnership, will own substantially all
of the properties acquired on our behalf. We are the sole general partner of our operating
partnership and as of September 30, 2009 own a 99.0% general partnership interest therein. Our
advisor is a limited partner and as of September 30, 2009 owns a 1.0% noncontrolling limited
partnership interest in the operating partnership.
Our operating partnership currently has no real estate operations and no assets other
than the partners initial capital contributions. Because we are the sole general partner of our
operating partnership and have unilateral control over its management and major operating
decisions, the accounts of our operating partnership are consolidated in our condensed consolidated
financial statements. All significant intercompany accounts and transactions are eliminated in
consolidation.
Interim Unaudited Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP in conjunction with the rules and regulations of the United
States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures
required for annual financial statements have been condensed or excluded pursuant to SEC rules and
regulations. Accordingly, our accompanying interim unaudited condensed consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. Our accompanying interim unaudited condensed consolidated financial
statements reflect all adjustments, which are, in our view, of a normal recurring nature and
necessary for a fair presentation of our financial position, results of operations and cash flows
for the interim period. Interim results of operations are not necessarily indicative of the results
to be expected for the full year; such results may be less favorable. In preparing our accompanying
financial statements, management has evaluated subsequent events through November 4, 2009 (the
financial statement issue date). We believe that although the disclosures contained herein are
adequate to prevent the information presented from being misleading, our accompanying interim
unaudited condensed consolidated financial statements should be read in conjunction with our
Registration Statement on Form S-11 (File No. 333-158111, effective August 24, 2009), as filed with
the SEC, or our prospectus.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP,
requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
These estimates are made and evaluated on an on-going basis using information that is currently
available as well as various other assumptions believed to be reasonable under the circumstances.
Actual results could differ from those estimates, perhaps in material adverse ways, and those
estimates could be different under different assumptions or conditions.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Restricted Cash Held in Escrow
Restricted funds held in escrow of $793,000, including funds received from shares sold to our
executive officers and directors, our dealer manager, and our advisor and its affiliates, as of
September 30, 2009, are not included in our assets in our accompanying condensed consolidated
balance sheet and consist of funds received in connection with subscription agreements to purchase
shares of our common stock in connection with our offering. We were required to raise the minimum
offering on or before August 24, 2010 (one year following the commencement of our offering), or the
funds raised, including interest, would have been returned to the subscribers. Therefore, as of
September 30, 2009, the funds were held in an escrow account and were not released to or available
to us until the minimum offering was raised.
On October 15, 2009, we raised the minimum offering and the funds held in escrow were released
to us (provided, that subscriptions from residents of Ohio and Tennessee will continue to be held
in escrow until we have received and accepted subscriptions aggregating at least $20,000,000 and
$10,000,000, respectively).
Income Taxes
We intend to make an election to be taxed as a REIT, under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, or the Code, and we intend to be taxed as such
beginning with our taxable year ending December 31, 2009, or the first year in which we commence
material operations. We have not yet qualified as a REIT. To qualify as a REIT, we must meet
certain organizational and operational requirements, including a requirement to currently
distribute at least 90.0% of our ordinary taxable income to stockholders. As a REIT, we generally
will not be subject to federal income tax on taxable income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income
taxes on our taxable income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service, or the IRS, grants us relief under
certain statutory provisions. Such an event could materially adversely affect our net income and
net cash available for distribution to stockholders.
Segment Disclosure
Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or FASB
Codification, Topic 280, Segment Reporting, establishes standards for reporting financial and
descriptive information about an enterprises reportable segments. As of September 30, 2009, we
have neither purchased nor contracted to purchase any investments. As such, we evaluate current
operations as one segment and do not report segment information.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140, or SFAS No.
166 (not yet contained in FASB Codification). SFAS No. 166 removes the concept of a qualifying
special-purpose entity from SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities (now contained in FASB Codification Topic 860, Transfer
and Servicing), and removes the exception from applying Financial Accounting Standards Board
Interpretation, or FIN, No. 46(R), Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51, as revised, or FIN No. 46(R) (now contained in FASB
Codification Topic 810, Consolidation). SFAS No. 166 also clarifies the requirements for isolation
and limitations on portions of financial assets that are eligible for sale accounting. SFAS No. 166
is effective for financial asset transfers occurring after the beginning of an entitys first
fiscal year that begins after November 15, 2009. Early adoption is prohibited. We will adopt SFAS
No. 166 on January 1, 2010. The adoption of SFAS No. 166 is not expected to have a material impact
on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (not yet contained in FASB Codification), which amends the consolidation guidance
applicable to variable interest entities, or VIEs. The amendments to the overall consolidation
guidance affect all entities currently within the scope of FIN No. 46(R), as well as qualifying
special-purpose entities that are currently excluded from the scope of FIN No. 46(R). Specifically,
an enterprise will need to reconsider its conclusion regarding whether an entity is a VIE, whether
the enterprise is the VIEs primary beneficiary and what type of financial statement disclosures
are required. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins
after November 15, 2009. Early adoption is prohibited. We will adopt SFAS No. 167 on January 1,
2010. The adoption of SFAS No. 167 is not expected to have a material impact on our consolidated
financial statements.
8
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
3. Commitments and Contingencies
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against us, which if determined unfavorably to us, would have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Other Organizational and Offering Expenses
Our other organizational and offering expenses are being paid by our advisor or its affiliates
on our behalf. These other organizational and offering expenses include all expenses (other than
selling commissions and the dealer manager fee which generally represent 7.0% and 3.0%,
respectively, of our gross offering proceeds) to be paid by us in connection with our offering. As
of September 30, 2009, our advisor and its affiliates have incurred expenses of $1,773,000 on our
behalf. These costs are not recorded in our condensed consolidated balance sheet because such costs
were not our liability until we reach the minimum offering, and then only to the extent that other
organizational and offering expenses do not exceed 1.0% of the gross proceeds of our offering. When
recorded by us, other organizational expenses will be expensed as incurred, and offering expenses
will be charged to stockholders equity as such amounts will be reimbursed to our advisor or its
affiliates from the gross proceeds of our offering.
4. Related Party Transactions
We entered into the Advisory Agreement and a dealer manager agreement, or the Dealer Manager
Agreement, with our dealer manager. These agreements entitle our advisor, our dealer manager and
their affiliates to specified compensation for certain services, as well as reimbursement of
certain expenses, related to our offering. In the aggregate, for the three months ended September
30, 2009 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we
incurred $37,000 to our advisor or its affiliates as detailed below.
Offering Stage
Selling Commissions
Our dealer manager will receive selling commissions of up to 7.0% of the gross offering
proceeds from the sale of shares of our common stock in our offering other than shares of our
common stock sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these
fees to participating broker-dealers. Our dealer manager did not receive selling commissions for
the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009. Selling commissions are not recorded in our accompanying
condensed consolidated financial statements because such commissions were not our liability since
we had not raised the minimum offering as of September 30, 2009. When recorded by us, selling
commissions will be charged to stockholders equity as such amounts are reimbursed to our dealer
manager from the gross proceeds of our offering.
Dealer Manager Fee
Our dealer manager will receive a dealer manager fee of up to 3.0% of the gross offering
proceeds from the sale of shares of our common stock in our offering other than shares of our
common stock sold pursuant to the DRIP. Our dealer manager did not receive dealer manager fees for
the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009. Dealer manager fees are not recorded in our accompanying
condensed consolidated financial statements because such dealer manager fees were not our liability
since we had not raised the minimum offering as of September 30, 2009. When recorded by us, dealer
manager fees will be charged to stockholders equity as such amounts are reimbursed to our dealer
manager or its affiliates from the gross proceeds of our offering.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Other Organizational and Offering Expenses
Our other organizational and offering expenses are paid by our advisor or Grubb & Ellis Equity
Advisors on our behalf. Our advisor or Grubb & Ellis Equity Advisors are reimbursed for actual
expenses incurred up to 1.0% of the gross offering proceeds from the sale of shares of our common
stock in our offering other than shares of our common stock sold pursuant to the DRIP. We did not
incur other organizational and offering expenses for the three months ended September 30, 2009 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009. Other
organizational and offering expenses are not recorded in our accompanying condensed consolidated
financial statements because such expenses were not our liability since we had not raised the
minimum offering as of September 30, 2009. When recorded by us, such expenses will be charged to
stockholders equity as such amounts are reimbursed to our advisor or Grubb & Ellis Equity Advisors
from the gross proceeds of our offering.
Acquisition and Development Stage
Acquisition Fee
Our advisor or its affiliates will receive an acquisition fee of up to 2.75% of the contract
purchase price for each property we acquire or 2.0% of the origination or acquisition price for any
real estate-related investment we originate or acquire. Our advisor or its affiliates will be
entitled to receive these acquisition fees for properties and real estate-related investments we
acquire with funds raised in our offering, including acquisitions completed after the termination
of the Advisory Agreement, or funded with net proceeds from the sale of a property or real
estate-related investment, subject to certain conditions.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur such acquisition fees to our advisor or its
affiliates.
Development Fee
Our advisor or its affiliates will receive, in the event our advisor or its affiliates provide
development-related services, a development fee in an amount that is usual and customary for
comparable services rendered for similar projects in the geographic market where the services are
provided; however, we will not pay a development fee to our advisor or its affiliates if our
advisor elects to receive an acquisition fee based on the cost of such development.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur such development fees to our advisor or its
affiliates.
Reimbursement of Acquisition Expenses
Our advisor or its affiliates will be reimbursed for acquisition expenses related to
selecting, evaluating and acquiring assets, which will be reimbursed regardless of whether an asset
is acquired. The reimbursement of acquisition expenses, acquisition fees and real estate
commissions paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase
price or total development costs, unless fees in excess of such limits are approved by a majority
of our disinterested independent directors.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur such acquisition expenses to our advisor
and its affiliates, including amounts our advisor or its affiliates incurred to third parties.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Operational Stage
Asset Management Fee
Our advisor or its affiliates will be paid a monthly fee for services rendered in connection
with the management of our assets equal to one-twelfth of 0.85% of average invested assets, subject
to our stockholders receiving distributions in an amount equal to 5.0% per annum, cumulative, non-compounded, of
average invested capital. For such purposes, average invested assets means the average of the
aggregate book value of our assets invested in real estate properties and real estate-related
investments, before deducting depreciation, amortization, bad debt and other similar non-cash
reserves, computed by taking the average of such values at the end of each month during the period
of calculation; and average invested capital means, for a specified period, the aggregate issue
price of shares of our common stock purchased by our stockholders, reduced by distributions of net
sales proceeds by us to our stockholders and by any amounts paid by us to repurchase shares of our
common stock pursuant to our share repurchase plan.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur an asset management fee to our advisor or
its affiliates. When incurred by us, the asset management fee will be included in general and
administrative in our condensed consolidated statements of operations.
Property Management Fee
Our advisor or its affiliates will be paid a monthly property management fee of up to 4.0% of
the gross monthly cash receipts from each property managed by our advisor or its affiliates. Our
advisor or its affiliates may sub-contract its duties to any third-party, including for fees less
than the property management fees payable to the advisor, or its affiliates. In addition to the
above property management fee, for each property managed directly by entities other than our
advisor or its affiliates, we will pay our advisor or its affiliates a monthly oversight fee of up
to 1.0% of the gross cash receipts from the property; provided, however, that in no event will we
pay both a property management fee and an oversight fee to our advisor or its affiliates with
respect to the same property.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur a property management fee to our advisor
and its affiliates.
On-site Personnel and Engineering Payroll
We will reimburse our advisor or its affiliates for on-site personnel and engineering
incurred on our behalf. For the three months ended September 30, 2009 and for the period from
January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur any on-site
personnel and engineering payroll to our advisor and its affiliates.
Lease Fees
We may pay our advisor or its affiliates a separate fee for any leasing activities in an
amount not to exceed the fee customarily charged in arms-length transactions by others rendering
similar services in the same geographic area for similar properties as determined by a survey of
brokers and agents in such area. Such fee is generally expected to range from 3.0% to 8.0% of the
gross revenues generated during the initial term of the lease.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur any lease fees to our advisor and its
affiliates.
Construction Management Fee
In the event that our advisor or its affiliates assist with planning and coordinating the
construction of any capital or tenant improvements, our advisor or its affiliates will be paid a
construction management fee of up to 5.0% of the cost of such improvements. For the three months
ended September 30, 2009 and for the period from January 7, 2009 (Date of Inception) through
September 30, 2009, we did not incur such construction management fee to our advisor or its
affiliates.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Operating Expenses
We will reimburse our advisor or its affiliates for operating expenses incurred in rendering
services to us, subject to certain limitations. However, we cannot reimburse our advisor or its
affiliates at the end of any fiscal quarter for total operating expenses that, in the four consecutive fiscal quarters then ended,
exceed the greater of: (i) 2.0% of our average invested assets, as defined in the Advisory
Agreement, or (ii) 25.0% of our net income, as defined in the Advisory Agreement, beginning with
the four consecutive fiscal quarters ending June 30, 2010, unless our independent directors
determine that such excess expenses were justified based on unusual and non-recurring factors.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, Grubb & Ellis Equity Advisors incurred operating expenses on
our behalf of $37,000, which is included in general and administrative in our accompanying
condensed consolidated statements of operations.
Related Party Services Agreement
We entered into a services agreement, effective September 21, 2009, with Grubb & Ellis
Investor Solutions, LLC, or our transfer agent, for subscription agreement processing and investor
services. The services agreement has an initial one-year term and shall thereafter automatically be
renewed for successive one-year terms. Since our transfer agent is an affiliate of our advisor, the
terms of this agreement were approved and determined by a majority of our directors, including a
majority of our independent directors, as fair and reasonable to us and at fees which are no
greater than that which would be paid to an unaffiliated third party for similar services. The
services agreement requires our transfer agent to provide us with a 180 day advance written notice
for any termination, while we have the right to terminate upon 60 days advance written notice.
As an other organizational and offering expense, subscription agreement processing expenses,
when incurred, will only become our liability to the extent other organizational and offering
expenses do not exceed 1.0% of the gross proceeds of our offering. Investor services, when incurred
by us, will be included in general and administrative in our accompanying condensed consolidated
statements of operations.
For the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, we did not incur any related party services to our advisor
and its affiliates.
Compensation for Additional Services
Our advisor or its affiliates are paid for services performed for us other than those required
to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of
compensation for these services must be approved by a majority of our board of directors, including
a majority of our independent directors, and cannot exceed an amount that would be paid to
unaffiliated third parties for similar services. For the three months ended September 30, 2009 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not
incur such services to our advisor and its affiliates.
Liquidity Stage
Disposition Fees
For services relating to the sale of one or more properties, our advisor or its affiliates
will be paid a disposition fee up to the lesser of 2.0% of the contract sales price or 50.0% of a
customary competitive real estate commission given the circumstances surrounding the sale, in each
case as determined by our board of directors (including a majority of our independent directors),
upon the provision of a substantial amount of the services in the sales effort. The amount of
disposition fees paid, when added to the real estate commissions paid to unaffiliated parties, will
not exceed the lesser of the customary competitive real estate commission or an amount equal to
6.0% of the contract sales price. For the three months ended September 30, 2009 and for the period
from January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur such
disposition fees.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Subordinated Participation Interest
Subordinated Distribution of Net Sales Proceeds
In the event of liquidation, our advisor will be paid a subordinated distribution of net sales
proceeds. The distribution will be equal to 15.0% of the net proceeds from the sales of properties,
after distributions to our stockholders, in the aggregate, of (1) a full return of capital raised
from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share
repurchase plan) plus (2) an annual 8.0% cumulative, non-compounded return on the gross proceeds
from the sale of shares of our common stock, as adjusted for distributions of net sale proceeds.
Actual amounts to be received depend on the sale prices of properties upon liquidation. For the
three months ended September 30, 2009 and for the period from January 7, 2009 (Date of Inception)
through September 30, 2009, we did not incur such distributions.
Subordinated Distribution upon Listing
Upon the listing of shares of our common stock on a national securities exchange, our advisor
will be paid a distribution equal to 15.0% of the amount by which (1) the market value of our
outstanding common stock at listing plus distributions paid prior to listing exceeds (2) the sum of
the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our
common stock pursuant to our share repurchase plan) and the amount of cash that, if distributed to
stockholders as of the date of listing would have provided them an annual 8.0% cumulative,
non-compounded return on the gross proceeds from the sale of shares of our common stock through the
date of listing. Actual amounts to be received depend upon the market value of our outstanding
stock at the time of listing among other factors. For the three months ended September 30, 2009 and
for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not
incur such distributions.
Accounts Payable Due to Affiliates
As of September 30, 2009, we had $37,000 in general and administrative expenses due to Grubb &
Ellis Equity Advisors.
5. Equity
Preferred Stock
Our charter authorizes us to issue 200,000,000 shares of our $0.01 par value preferred stock.
As of September 30, 2009, no shares of preferred stock were issued and outstanding.
Common Stock
We are offering and selling to the public up to 300,000,000 shares of our $0.01 par value
common stock for $10.00 per share and up to 30,000,000 shares of our $0.01 par value common stock
to be issued pursuant to the DRIP for $9.50 per share. Our charter authorizes us to issue
1,000,000,000 shares of our common stock.
On February 4, 2009, our advisor purchased 20,000 shares of common stock for total cash
consideration of $200,000 and was admitted as the initial stockholder. We used the proceeds from
the sale of shares of our common stock to our advisor to make such capital contribution to our
operating partnership.
Common Stock Held in Escrow
As of September 30, 2009, in connection with our offering, we received subscriptions of
69,688 shares of our common stock, or $692,000, including shares sold to our executive officers and
directors, our dealer manager, and our advisor and its affiliates. On October 15, 2009, we raised
the minimum offering and the funds held in escrow were released to us (provided, that subscriptions
from residents of Ohio and Tennessee will continue to be held in escrow until we have received and
accepted subscriptions aggregating at least $20,000,000 and $10,000,000, respectively). See Note 8,
Subsequent Events Status of our Offering for a further discussion.
Distribution Reinvestment Plan
We adopted the DRIP that allows stockholders to purchase additional shares of our common stock
through the reinvestment of distributions, subject to certain conditions. We have registered and
reserved 30,000,000 shares of our common stock for sale pursuant to the DRIP in our offering. No
reinvestment of distributions were made for the period from January 7, 2009 (Date of Inception)
through September 30, 2009.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Share Repurchase Plan
Our board of directors has approved a share repurchase plan. The share repurchase plan
allows for share repurchases by us when certain criteria are met. Share repurchases will be made at
the sole discretion of our board of directors. Funds for the repurchase of shares will come
exclusively from the proceeds we receive from the sale of shares under the DRIP. No share
repurchases were made for the period from January 7, 2009 (Date of Inception) through September 30,
2009.
2009 Incentive Plan
Under the terms of the 2009 Incentive Plan, or our incentive plan, the aggregate number of
shares of our common stock subject to options, restricted shares of common stock, stock purchase
rights, stock appreciation rights or other awards, will be no more than 2,000,000 shares. As of
September 30, 2009, we have not granted any awards under our incentive plan.
Noncontrolling Interest of Limited Partner in Operating Partnership
On February 4, 2009, our advisor made an initial capital contribution of $2,000 to our
operating partnership in exchange for 200 partnership units.
As of September 30, 2009, we owned a 99.0% general partnership interest in our operating
partnership and our advisor owned a 1.0% limited partnership interest in our operating partnership.
As such, 1.0% of the earnings of our operating partnership are allocated to noncontrolling
interest of limited partner.
6. Subordinated Distribution Upon Termination
Upon termination or non-renewal of the Advisory Agreement, our advisor will also be entitled
to a subordinated distribution from our operating partnership equal to 15.0% of the amount, if any,
by which (1) the appraised value of our assets on the termination date, less any indebtedness
secured by such assets, plus total distributions paid through the termination date, exceeds (2) the
sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares
of our common stock pursuant to our share repurchase plan) and the total amount of cash that, if
distributed to them as of the termination date, would have provided them an annual 8.0% cumulative,
non-compounded return on the gross proceeds from the sale of shares of our common stock through the
termination date. In addition, our advisor may elect to defer its right to receive a subordinated
distribution upon termination until either a listing or other liquidity event, including a
liquidation, sale of substantially all of our assets or merger in which our stockholders receive,
in exchange for their shares of our common stock, shares of a company that are traded on a national
securities exchange.
7. Per Share Data
We report earnings (loss) per share pursuant to FASB Codification Topic 260, Earnings per
Share. Basic earnings (loss) per share attributable for all periods presented are computed by
dividing net income (loss) by the weighted average number of shares of our common stock outstanding
during the period. Diluted earnings (loss) per share are computed based on the weighted average
number of shares of our common stock and all potentially dilutive securities, if any. As of
September 30, 2009, we did not have any securities that give rise to potentially dilutive shares of
our common stock.
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Grubb & Ellis Healthcare REIT II, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
8. Subsequent Events
Status of our Offering
As of October 15, 2009, excluding shares purchased by our executives officers and directors,
our dealer manager and our advisor and its affiliates, as well as residents of Ohio and Tennessee
(who are subject to higher minimum offering amounts), we had received and accepted subscriptions in
our offering for 224,231 shares of our common stock, or $2,242,000, thereby exceeding the minimum
offering. Having raised the minimum offering, the offering proceeds were released by the escrow
agent to us and are available for the acquisition of properties and other purposes disclosed in our
prospectus (provided, that subscriptions from residents of Ohio and Tennessee will continue to be
held in escrow until we have received and accepted subscriptions aggregating at least $20,000,000
and $10,000,000, respectively).
As of October 23, 2009, we had received and accepted subscriptions in our offering for 291,835
shares of our common stock, or $2,913,000, excluding subscriptions from residents of Ohio and
Tennessee and shares of our common stock issued under the DRIP.
Declaration of Distribution
On October 21, 2009, our board of directors authorized a daily distribution to be paid to our
stockholders of record as of the close of business on each day of the period commencing on the
closing date of our first property acquisition and ending on March 31, 2010. The distributions will
be calculated based on 365 days in the calendar year and will be equal to $0.0017808 per share of
our common stock, which is equal to an annualized distribution rate of 6.5%, assuming a purchase
price of $10.00 per share. These distributions will be aggregated and paid in cash monthly in
arrears. The distributions declared for each record date in the December, January, February and
March periods would be paid in January, February, March and April 2010, respectively. The
distributions will be payable to our stockholders only from legally available funds therefor.
Independent Director Stock Grants
On
October 21, 2009, we granted an aggregate of 15,000 shares of restricted common stock, as defined in our
incentive plan, to our independent directors in connection with their initial election to our board
of directors, of which 20.0% vested on the grant date and 20.0% will vest on each of the first four
anniversaries of the date of grant. Shares of restricted common stock may not be sold, transferred,
exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions expire upon
vesting.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us or our refers to Grubb & Ellis Healthcare REIT II, Inc. and
its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context
otherwise requires.
The following discussion should be read in conjunction with our accompanying interim unaudited
condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report
on Form 10-Q. Such interim unaudited condensed consolidated financial statements and information
have been prepared to reflect our financial position as of September 30, 2009, together with our
results of operations for the three months ended September 30, 2009 and for the period from January
7, 2009 (Date of Inception) through September 30, 2009 and cash flows for the period from January
7, 2009 (Date of Inception) through September 30, 2009.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ
materially from those included in the forward-looking statements. We intend those forward-looking
statements to be covered by the safe-harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes
of complying with those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations, are generally
identifiable by use of the words expect, project, may, will, should, could, would,
intend, plan, anticipate, estimate, believe, continue, predict, potential or the
negative of such terms and other comparable terminology. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations and future prospects on a consolidated basis include, but
are not limited to: changes in economic conditions generally and the real estate market
specifically; legislative and regulatory changes, including changes to laws governing the taxation
of real estate investment trusts, or REITs; the availability of capital; changes in interest rates;
competition in the real estate industry; the supply and demand for operating properties in our
proposed market areas; changes in accounting principles generally accepted in the United States of
America, or GAAP, policies and guidelines applicable to REITs; the success of our best efforts
initial public offering, or our offering; the availability of properties to acquire; the
availability of financing; and our ongoing relationship with Grubb & Ellis Company, or Grubb &
Ellis, or our sponsor, and its affiliates. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on such statements.
Additional information concerning us and our business, including additional factors that could
materially affect our financial results, is included herein and in our other filings with the
United States Securities and Exchange Commission, or the SEC.
Overview and Background
Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7,
2009 and therefore we consider that our date of inception. We were initially capitalized on
February 4, 2009. We intend to invest in a diversified portfolio of real estate properties,
focusing primarily on medical office buildings and healthcare-related facilities. We may also
originate and acquire secured loans and other real estate-related investments. We generally will
seek investments that produce current income. We intend to elect to be treated as a REIT for
federal income tax purposes for our taxable year ending December 31, 2009, or the first year in
which we commence material operations.
We are conducting our offering in which we are offering to the public a minimum of 200,000
shares of our common stock for $10.00 per share, aggregating at least $2,000,000, or the minimum
offering, and a maximum of 300,000,000 shares of our common stock for $10.00 per share and
30,000,000 shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP,
for $9.50 per share, aggregating up to $3,285,000,000, or the maximum offering. Shares purchased by
our executive officers and directors, by Grubb & Ellis Securities, Inc., or our dealer manager, by
Grubb & Ellis Healthcare REIT II Advisor, LLC, or our advisor, or by its affiliates did not count
towards the minimum offering. On October 15, 2009, excluding shares purchased by our executive
officers and directors, our dealer manager and our advisor and its affiliates, as well as residents of
Ohio and Tennessee (who are subject to higher minimum offering amounts), we had received and
accepted subscriptions in our offering for 224,231 shares of our common stock, or $2,242,000,
thereby exceeding the minimum offering.
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We will conduct substantially all of our operations through Grubb & Ellis Healthcare REIT
II Holdings, LP, or our operating partnership. We are externally advised by our advisor pursuant to
an Advisory Agreement, or the Advisory Agreement, between us and our advisor that has a one-year
term that expires August 24, 2010 and is subject to successive one-year renewals upon the mutual
consent of the parties. Our advisor supervises and manages our day-to-day operations and selects
the properties and real estate-related investments we acquire, subject to the oversight by our
board of directors. Our advisor also provides marketing, sales and client services on our behalf.
Our advisor will engage affiliated entities to provide various services to us. Our advisor is
managed by and is a wholly owned subsidiary of Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis
Equity Advisors, which is a wholly owned subsidiary of our sponsor.
As of September 30, 2009, we have neither purchased nor contracted to purchase any
investments nor has our advisor identified any real estate or real estate-related investments in
which it is probable that we will invest.
Critical Accounting Policies
We believe that our critical accounting policies once we commence material operations will be
those that require significant judgments and estimates such as those related to revenue
recognition, tenant receivables, allowance for uncollectible accounts, capitalization of
expenditures, depreciation of assets, impairment of real estate, properties held for sale, purchase
price allocation, and qualification as a REIT. These estimates will be made and evaluated on an
on-going basis using information that is available as well as various other assumptions believed to
be reasonable under the circumstances.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
These estimates are made and evaluated on an on-going basis using information that is currently
available as well as various other assumptions believed to be reasonable under the circumstances.
Actual results could differ from those estimates, perhaps in material adverse ways, and those
estimates could be different under different assumptions or conditions.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
We require that all four of the following basic criteria be met before revenue is realized or
realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the sellers price to the buyer is fixed and
determinable; and (4) collectability is reasonably assured.
In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or FASB Codification, Topic 840, Leases, minimum annual rental revenue will be
recognized on a straight-line basis over the term of the related lease (including rent holidays).
Differences between rental income recognized and amount contractually due under the lease
agreements will be credited or charged, as applicable, to rent receivable. Tenant reimbursement
revenue, which will be comprised of additional amounts recoverable from tenants for common area
maintenance expenses and certain other recoverable expenses, will be recognized as revenue in the
period in which the related expenses will be incurred. Tenant reimbursements will be recognized and
presented in accordance with FASB Codification Subtopic 605-45, Revenue Recognition Principal
Agent Consideration. Such guidance requires that these reimbursements be recorded on a gross basis,
as we will generally be the primary obligor with respect to purchasing goods and services from
third-party suppliers, have discretion in selecting the supplier and have credit risk. We will
recognize lease termination fees if there is a signed termination letter agreement, all of the
conditions of the agreement have been met, and the tenant is no longer occupying the property.
Tenant receivables and unbilled deferred rent receivables will be carried net of the
allowances for uncollectible current tenant receivables and unbilled deferred rent. An allowance
will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations
under their lease agreements. We will also maintain an allowance for deferred rent receivables
arising from the straight-lining of rents. Our determination of the adequacy of these allowances
will be based primarily upon evaluations of historical loss experience, the tenants financial
condition, security deposits, letters of credit, lease guarantees and current economic conditions
and other relevant factors.
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Capitalization of Expenditures and Depreciation of Assets
The cost of operating properties will include the cost of land and completed buildings and
related improvements. Expenditures that increase the service life of properties will be
capitalized; the cost of maintenance and repairs will be charged to expense as incurred. The cost
of building and improvements will be depreciated on a straight-line basis over the estimated useful
lives. The cost of improvements will be depreciated on straight-line basis over the shorter of the
lease term or useful life. Furniture, fixtures and equipment will be depreciated over the estimated
useful lives. When depreciable property is retired or disposed of, the related costs and
accumulated depreciation will be removed from the accounts and any gain or loss reflected in
operations.
Impairment
Our properties will be carried at historical cost less accumulated depreciation. We will
assess the impairment of a real estate asset when events or changes in circumstances indicate that
its carrying value may not be recoverable. Indicators we consider important and that we believe
could trigger an impairment review include the following:
| significant negative industry or economic trends; | ||
| a significant underperformance relative to historical or projected future operating results; and | ||
| a significant change in the manner in which the asset is used. |
In the event that the carrying amount of a property exceeds the sum of the undiscounted cash
flows (excluding interest) that would be expected to result from the use and eventual disposition
of the property, we would recognize an impairment loss to the extent the carrying amount exceeds
the estimated fair value of the property. The estimation of expected future net cash flows is
inherently uncertain and relies on subjective assumptions dependent upon future and current market
conditions and events that affect the ultimate value of the property. It will require us to make
assumptions related to discount rates, future rental rates, tenant allowances, operating
expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds
generated from the future sale of the property.
Properties Held for Sale
We will account for our properties held for sale in accordance with FASB Codification Topic
360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and requires that, in a period in which a component of
an entity either has been disposed of or is classified as held for sale, the income statements for
current and prior periods shall report the results of operations of the component as discontinued
operations.
In accordance with FASB Codification Topic 360, Property, Plant, and Equipment, at such time
as a property is held for sale, such property is carried at the lower of (1) its carrying amount or
(2) fair value less costs to sell. In addition, a property being held for sale ceases to be
depreciated. We will classify operating properties as property held for sale in the period in which
all of the following criteria are met:
| management, having the authority to approve the action, commits to a plan to sell the asset; | ||
| the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; | ||
| an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; |
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| the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; | ||
| the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and | ||
| given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. |
Purchase Price Allocation
In accordance with FASB Codification Topic 805, Business Combinations, we, with assistance
from independent valuation specialists, will allocate the purchase price of acquired properties to
tangible and identified intangible assets and liabilities based on their respective fair values.
The allocation to tangible assets (building and land) will be based upon our determination of the
value of the property as if it were to be replaced and vacant using discounted cash flow models
similar to those used by independent appraisers. Factors considered by us will include an estimate
of carrying costs during the expected lease-up periods considering current market conditions and
costs to execute similar leases. Additionally, the purchase price of the applicable property will
be allocated to the above or below market value of in-place leases, the value of in-place leases,
tenant relationships and above or below market debt assumed.
The value allocable to the above or below market component of the acquired in-place leases
will be determined based upon the present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between: (1) the contractual amounts to be
paid pursuant to the lease over its remaining term and (2) our estimate of the amounts that would
be paid using fair market rates over the remaining term of the lease. The amounts allocated to
above market leases will be included in identified intangible assets, net in our condensed
consolidated balance sheet and amortized to rental income over the remaining non-cancelable lease
term of the acquired leases with each property. The amounts allocated to below market lease values
will be included in identified intangible liabilities, net in our condensed consolidated balance
sheet and will be amortized to rental income over the remaining non-cancelable lease term plus any
renewal options of the acquired leases with each property.
The total amount of other intangible assets acquired will be further allocated to in-place
lease costs and the value of tenant relationships based on managements evaluation of the specific
characteristics of the tenants lease and our overall
relationship with the tenants. Characteristics
considered by us in allocating these values will include the nature and extent of the credit
quality and expectations of lease renewals, among other factors. The amounts allocated to in place
lease costs will be included in identified intangible assets, net in our condensed consolidated
balance sheet and will be amortized to depreciation and amortization expense over the average
remaining non-cancelable lease term of the acquired leases with each property. The amounts
allocated to the value of tenant relationships will be included in identified intangible assets,
net in our condensed consolidated balance sheet and will be amortized to depreciation and
amortization expense over the average remaining non-cancelable lease term of the acquired leases
plus the market lease term.
The value allocable to above or below market debt will be determined based upon the present
value of the difference between the cash flow stream of the assumed mortgage and the cash flow
stream of a market rate mortgage at the time of assumption. The amounts allocated to above or below
market debt will be included in mortgage loan payables, net on our condensed consolidated balance
sheet and will be amortized to interest expense over the remaining term of the assumed mortgage.
These allocations will be subject to change based on information identified at the time of
purchase which confirms the value of an asset or liability received in an acquisition of property.
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Qualification as a REIT
We have not yet qualified as a REIT. We intend to qualify and make the election to be taxed as
a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the
Code, when we file our tax return for the taxable year ending December 31, 2009, or the first year
in which we commence material operations. To qualify as a REIT, we must meet certain organizational
and operational requirements, including a requirement to distribute at least 90.0% of our ordinary
taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax
on taxable income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income
taxes on our taxable income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service grants us relief under certain statutory
provisions. Such an event could have a material adverse effect on our net income and net cash
available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Summary of
Significant Accounting Policies Recently Issued Accounting Pronouncements, to our accompanying
condensed consolidated financial statements.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the acquisition, management and
operation of properties other than those listed in Part II, Item 1A. Risk Factors, of this report.
Rental Income
The amount of rental income generated by our future properties will depend principally on
our ability to maintain the occupancy rates of leased space and to lease available space and space
available from unscheduled lease terminations at the then existing rental rates. Negative trends in
one or more of these factors could adversely affect our rental income in future periods.
Offering Proceeds
If we fail to raise significant proceeds above our minimum offering, we will not have enough
proceeds to invest in a diversified real estate portfolio. Our real estate portfolio would be
concentrated in a small number of properties, resulting in increased exposure to local and regional
economic downturns and the poor performance of one or more of our properties and, therefore, expose
our stockholders to increased risk. In addition, many of our expenses are fixed regardless of the
size of our real estate portfolio. Therefore, depending on the amount of proceeds we raise from our
offering, we would expend a larger portion of our income on operating expenses. This would reduce
our profitability and, in turn, the amount of net income available for distribution to our
stockholders.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies, have increased the costs of compliance with corporate governance, reporting
and disclosure practices. These costs may have a material adverse effect on our results of
operations and could impact our ability to pay distributions to our stockholders. Furthermore, we
expect that these costs will increase in the future due to our continuing implementation of
compliance programs mandated by these requirements. Any increased costs may affect our ability to
distribute funds to our stockholders. As part of our on-going compliance with the Sarbanes-Oxley
Act, we will be providing managements assessment of our internal control over financial reporting
as of December 31, 2010.
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In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in the event of
non-compliance, thereby increasing the risks of liability and potential sanctions against us. We
expect that our efforts to comply with these laws and regulations will continue to involve
significant and potentially increasing costs, and that our failure to comply with these laws could
result in fees, fines, penalties or administrative remedies against us.
Results of Operations
For the three months ended September 30, 2009 and for the period from January 7, 2009
(Date of Inception) through September 30, 2009, we had a net loss of approximately $62,000, or
$3.10 per share, and approximately $62,000, or $3.46 per share, respectively, due to general and
administrative expenses primarily related to directors and
officers liability insurance of $19,000, board of
directors fees of $23,000 and legal fees of $17,000. We expect general and administrative expenses
to increase in the future based on a full year of operations as well as increased activity as we
make real estate investments. Our results of operations are not indicative of those expected in
future periods.
Liquidity and Capital Resources
We are dependent upon the net proceeds to be received from our offering to conduct our
proposed activities. The capital required to purchase real estate and real estate-related
investments will be obtained from our offering and from any indebtedness that we may incur. We have
been initially capitalized with $200,000 from the sale of 20,000 shares of our common stock to our
advisor and our advisor has invested $2,000 in our operating partnership for a total of $202,000 in
cash as of September 30, 2009.
As such, cash flows from financing activities for the period from January 7, 2009 (Date of
Inception) through September 30, 2009, were $202,000. We had no cash flows from operating or
investing activities for the period from January 7, 2009 (Date of Inception) through September 30,
2009.
As of September 30, 2009, we had accrued liabilities and accounts payable due to
affiliates in the amount of approximately $62,000 for an insurance
premium for directors and
officers liability insurance, directors fees and legal fees. As of September 30, 2009, we had no
outstanding debt.
We will experience a relative increase in liquidity as additional subscriptions for shares of
our common stock are received and a relative decrease in liquidity as net offering proceeds are
expended in connection with the acquisition, management and operation of our investments in real
estate and real estate-related investments.
Our sources of funds will primarily be the net proceeds of our offering, operating cash flows
and borrowings. We believe that these cash resources will be sufficient to satisfy our cash
requirements for the foreseeable future, and we do not anticipate a need to raise funds from other
than these sources within the next 12 months.
Our principal demands for funds will be for acquisitions of real estate and real
estate-related investments, to pay operating expenses and interest on our future indebtedness and
to pay distributions to our stockholders. In addition, we will require resources to make certain
payments to our advisor and our dealer manager, which during our offering include payments to our
advisor and its affiliates for reimbursement of other organizational and offering expenses and to
our dealer manager and its affiliates for selling commissions and dealer manager fees.
Generally, cash needs for items other than acquisitions of real estate and real estate-related
investments will be met from operations, borrowing, and the net proceeds of our offering. However,
there may be a delay between the sale of our shares of common stock and our investments in real
estate and real estate-related investments, which could result in a delay in the benefits to our
stockholders, if any, of returns generated from our investment operations.
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Our advisor will evaluate potential investments and will engage in negotiations with real
estate sellers, developers, brokers, investment managers, lenders and others on our behalf.
Investors should be aware that after a purchase contract for a property is executed that contains
specific terms, the property will not be purchased until the successful completion of due
diligence, which includes review of the title insurance commitment, market evaluation, review of
leases, review of financing options and an environmental analysis. In some instances, the proposed
acquisition will require the negotiation of final binding agreements, which may include
financing documents. Until we invest the proceeds of our offering in real estate and real
estate-related investments, we may invest in short-term, highly liquid or other authorized
investments. Such short-term investments will not earn significant returns, and we cannot predict
how long it will take to fully invest the proceeds in real estate and real estate-related
investments. The number of properties we may acquire and other investments we will make will depend
upon the number of shares of our common stock sold and the resulting amount of the net proceeds
available for investment as well as our ability to arrange debt financing.
When we acquire a property, our advisor will prepare a capital plan that contemplates the
estimated capital needs of that investment. In addition to operating expenses, capital needs may
also include costs of refurbishment, tenant improvements or other major capital expenditures. The
capital plan will also set forth the anticipated sources of the necessary capital, which may
include a line of credit or other loan established with respect to the investment, operating cash
generated by the investment, additional equity investments from us or joint venture partners or,
when necessary, capital reserves. Any capital reserve would be established from the gross proceeds
of our offering, proceeds from sales of other investments, operating cash generated by other
investments or other cash on hand. In some cases, a lender may require us to establish capital
reserves for a particular investment. The capital plan for each investment will be adjusted through
ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional
capital needs.
Distributions
We have not paid any distributions as of September 30, 2009. The amount of the distributions
to our stockholders will be determined quarterly by our board of directors and are dependent on a
number of factors, including funds available for payment of distributions, our financial condition,
capital expenditure requirements and annual distribution requirements needed to maintain our status
as a REIT under the Code. We have not established any limit on the amount of offering proceeds that may be used to fund distributions, except that, in
accordance with our organizational documents and Maryland law, we may not make distributions that would (1) cause us to be
unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of
our total liabilities plus senior liquidation preferences; or (3) jeopardize our ability to maintain our qualification as a REIT.
Financing
We intend to finance a portion of the purchase price of our investments in real estate and
real estate-related investments by borrowing funds. We anticipate that, after an initial phase of
our operations (prior to the investment of all of the net proceeds of our offering) when we may
employ greater amounts of leverage to enable us to purchase properties more quickly and therefore
generate distributions for our stockholders sooner, our overall leverage will not exceed 60.0% of
the combined market value of our real estate and real estate-related investments, as determined at
the end of each calendar year beginning with our first full year of operations. For these purposes,
the fair market value of each asset will be equal to the purchase price paid for the asset or, if
the asset was appraised subsequent to the date of purchase, then the fair market value will be
equal to the value reported in the most recent independent appraisal of the asset. Our policies do
not limit the amount we may borrow with respect to any individual investment.
Under our charter, we have a limitation on borrowing that precludes us from borrowing in
excess of 300% of our net assets, without the approval of a majority of our independent directors.
Net assets for purposes of this calculation are defined to be our total assets (other than
intangibles), valued at cost prior to deducting depreciation, amortization, bad debt and other
non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to
approximate 75.0% of the aggregate cost of our real estate and real estate-related investments
before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we
may incur mortgage debt and pledge some or all of our real properties as security for that debt to
obtain funds to acquire additional real properties or for working capital. We may also borrow funds
to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual
REIT taxable income to our stockholders. Furthermore, we may borrow if we otherwise deem it
necessary or advisable to ensure that we qualify, or maintain our qualification, as a REIT for
federal income tax purposes.
As of September 30, 2009, we have neither purchased nor contracted to purchase any
investments, thus consequently, we have not incurred any debt.
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Commitments and Contingencies
For a discussion of our commitments and contingencies, see Note 3, Commitments and
Contingencies, to our accompanying condensed consolidated financial statements.
Debt Service Requirements
As of September 30, 2009, we did not have any outstanding debt.
Contractual Obligations
As of September 30, 2009, we did not have any contractual obligations.
Off-Balance Sheet Arrangements
As of September 30, 2009, we had no off-balance sheet transactions nor do we currently have
any such arrangements or obligations.
Inflation
We expect to be exposed to inflation risk as income from future long-term leases will be the
primary source of our cash flows from operations. We expect there to be provisions in the majority
of our tenant leases that will protect us from the impact of inflation. These provisions will
include negotiated rental increases, reimbursement billings for operating expense pass-through
charges, and real estate tax and insurance reimbursements on a per square foot allowance. However,
due to the long-term nature of the anticipated leases, among other factors, the leases may not
re-set frequently enough to cover inflation.
Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated
by our operations. Due to certain unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has
promulgated a measure known as Funds From Operations, or FFO, which it believes more accurately
reflects the operating performance of a REIT. FFO is not equivalent to our net income or loss as
determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White
Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the
White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP,
excluding gains or losses from sales of property but including asset impairment writedowns, plus
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect
FFO.
Although we have not acquired any real estate properties or real estate-related investments as
of September 30, 2009, we are disclosing FFO and intend to disclose FFO in future filings because
we consider FFO to be an appropriate supplemental measure of a REITs operating performance as it
is based on a net income analysis of property portfolio performance that excludes non-cash items
such as depreciation. The historical accounting convention used for real estate assets requires
straight-line depreciation of buildings and improvements, which implies that the value of real
estate assets diminishes predictably over time. Since real estate values historically rise and fall
with market conditions, presentations of operating results for a REIT, using historical accounting
for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as
a supplemental performance measure.
Presentation of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs calculate FFO the
same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not
necessarily indicative of cash flow available to fund cash needs and should not be considered as an
alternative to net income as an indication of our performance. Our FFO reporting complies with
NAREITs policy described above.
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The following is the calculation of FFO for the three months ended September 30, 2009 and for
the period from January 7, 2009 (Date of Inception) through September 30, 2009.
Period from January 7, 2009 | ||||||||
Three Months Ended | (Date of Inception) through | |||||||
September 30, | September 30, | |||||||
2009 | 2009 | |||||||
Net loss |
$ | (62,000 | ) | $ | (62,000 | ) | ||
Add: |
||||||||
Net loss attributable to noncontrolling interests |
| | ||||||
Depreciation and amortization |
| | ||||||
FFO |
$ | (62,000 | ) | $ | (62,000 | ) | ||
FFO per share basic and diluted |
$ | (3.10 | ) | $ | (3.46 | ) | ||
Weighted average common shares outstanding
basic and diluted |
20,000 | 17,895 | ||||||
Net Operating Income
Although we have not acquired any real estate properties or real estate-related investments as
of September 30, 2009, we are disclosing net operating income and intend to disclose net operating
income in future filings because we believe that net operating income provides an accurate measure
of the operating performance of our operating assets because net operating income excludes certain
items that are not associated with management of the properties. Net operating income is a non-GAAP
financial measure that is defined as net income (loss), computed in accordance with GAAP, generated
from properties before interest expense, general and administrative expenses, depreciation,
amortization and interest and dividend income. Additionally, we believe that net operating income
is a widely accepted measure of comparative operating performance in the real estate community.
However, our use of the term net operating income may not be comparable to that of other real
estate companies as they may have different methodologies for computing this amount.
To facilitate understanding of this financial measure, the following is a reconciliation of
net loss to net operating income for the three months ended September 30, 2009 and for the period
from January 7, 2009 (Date of Inception) through September 30, 2009.
Period from January 7, 2009 | ||||||||
Three Months Ended | (Date of Inception) through | |||||||
September 30, | September 30, | |||||||
2009 | 2009 | |||||||
Net loss |
$ | (62,000 | ) | $ | (62,000 | ) | ||
Add: |
||||||||
General and administrative |
62,000 | 62,000 | ||||||
Depreciation and amortization |
| | ||||||
Interest expense |
| | ||||||
Less: |
||||||||
Interest and dividend income |
| | ||||||
Net operating income |
$ | | $ | | ||||
Subsequent Events
For a discussion of subsequent events, see Note 8, Subsequent Events, to our accompanying
condensed consolidated financial statements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, we expect that the primary market risk to
which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of long-term
debt used to 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,
prepayment penalties and cash flows and to lower overall borrowing costs while taking into account
variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable
rates. We may also enter into derivative financial instruments such as interest rate swaps and caps
in order to mitigate our interest rate risk on a related financial instrument. We will not enter
into derivative or interest rate transactions for speculative purposes. Because we had not
commenced real estate operations as of September 30, 2009, we had limited exposure to financial
market risks.
In addition to changes in interest rates, the value of our future investments is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
Item 4. | Controls and Procedures. |
Not applicable.
Item 4T. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to us, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, we recognize that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and we necessarily were
required to apply our judgment in evaluating whether the benefits of the controls and procedures
that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2009 was conducted under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures, as of September 30, 2009, were effective for
the purposes stated above.
(b) Changes in internal control over financial reporting. This quarterly report does not
include disclosure of changes in internal control over financial reporting due to a transition
period established by rules of the SEC for newly public companies.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
None.
Item 1A. | Risk Factors. |
The use of the words we, us or our refers to Grubb & Ellis Healthcare REIT II, Inc. and
our subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context
otherwise requires.
Investment Risks
There is no public market for the shares of our common stock. Therefore, it will be difficult for
our stockholders to sell their shares of our common stock and, if our stockholders are able to sell
their shares of our common stock, they will likely sell them at a substantial discount.
There currently is no public market for shares of our common stock. We do not expect a public
market for our stock to develop prior to the listing of the shares of our common stock on a
national securities exchange, which we do not expect to occur in the near future and which may not
occur at all. Additionally, our charter contains restrictions on the ownership and transfer of
shares of our stock, and these restrictions may inhibit our stockholders ability to sell their
shares of our common stock. Our charter provides that no person may own more than 9.9% in value of
our issued and outstanding shares of capital stock or more than 9.9% in value or in number of
shares, whichever is more restrictive, of the issued and outstanding shares of our common stock.
Any purported transfer of the shares of our common stock that would result in a violation of either
of these limits will result in such shares being transferred to a trust for the benefit of a
charitable beneficiary or such transfer being declared null and void. We have adopted a share
repurchase plan but it is limited in terms of the amount of shares of our common stock which may be
repurchased annually and subject to our board of directors discretion. Our board of directors may
also amend, suspend or terminate our share repurchase plan upon 30 days written notice. Therefore,
it will be difficult for our stockholders to sell their shares of our common stock promptly or at
all. If our stockholders are able to sell their shares of our common stock, they may only be able
to sell them at a substantial discount from the price they paid. This may be the result, in part,
of the fact that, at the time we make our investments, the amount of funds available for investment
may be reduced by up to 11.0% of the gross offering proceeds, which will be used to pay selling
commissions, a dealer manager fee and other organizational and offering expenses. We also will be
required to use gross offering proceeds from our best efforts initial public offering, or our
offering, to pay acquisition fees, acquisition expenses and asset management fees. Unless our
aggregate investments increase in value to compensate for these fees and expenses, which may not
occur, it is unlikely that our stockholders will be able to sell their shares of our common stock,
whether pursuant to our share repurchase plan or otherwise, without incurring a substantial loss.
We cannot assure our stockholders that their shares of our common stock will ever appreciate in
value to equal the price they paid for their shares of our common stock. Therefore, our
stockholders should consider the purchase of shares of our common stock as illiquid and a long-term
investment, and they must be prepared to hold their shares of our common stock for an indefinite
length of time.
Our offering may be considered a blind pool offering because we have not identified all of the
real estate or real estate-related investments to acquire with the net proceeds from our offering.
We have not identified all of the real estate or real estate-related investments to acquire
with the net proceeds of our offering. As a result, our offering may be considered a blind pool
offering because investors in our offering are unable to evaluate the manner in which our net
proceeds are invested and the economic merits of our investments prior to subscribing for shares of
our common stock. Additionally, stockholders will not have the opportunity to evaluate the
transaction terms or other financial or operational data concerning the real estate or real
estate-related investments we acquire in the future.
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We have a limited operating history. Therefore, our stockholders may not be able to adequately
evaluate our ability to achieve our investment objectives, and the prior performance of other
investment programs sponsored or managed by Grubb & Ellis Company or its affiliates may not be an
accurate predictor of our future results.
We were formed in January 2009, and we commenced our offering in August 2009, and thus we have
a limited operating history. As a result, an investment in shares of our common stock may entail
more risks than the shares of common stock of a real estate investment trust, or REIT, with a
substantial operating history, and our stockholders should not rely on the past performance of
other investment programs sponsored or managed by Grubb & Ellis Company, or Grubb & Ellis, or our
sponsor, or its affiliates, or the Grubb & Ellis Group, to predict our future results. Our
stockholders should consider our prospects in light of the risks, uncertainties and difficulties
frequently encountered by companies like ours that do not have a substantial operating history,
many of which may be beyond our control. Therefore, to be successful in this market, we must, among
other things:
| identify and acquire investments that further our investment strategy; | ||
| build, expand and maintain our network of licensed securities brokers and other agents; | ||
| attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations; | ||
| respond to competition both for investment opportunities and potential investors in us; and | ||
| build and expand our operations structure to support our business. |
We cannot guarantee that we will succeed in achieving these goals, and our failure to do so
could cause our stockholders to lose all or a portion of their investment.
If
we raise substantially less than 330,000,000 shares of our common stock, or the maximum
offering, we may not be able to invest in a diverse portfolio of real estate and real
estate-related investments, and the value of our stockholders investments may fluctuate more
widely with the performance of specific investments.
We are dependent upon the net proceeds to be received from our offering to conduct our
proposed activities. Our stockholders, rather than us or our affiliates, will incur the bulk of the
risk if we are unable to raise substantial funds. Our offering is being made on a best efforts
basis, whereby Grubb & Ellis Securities, Inc., or our dealer manager, and the broker-dealers
participating in our offering are only required to use their best efforts to sell shares of our
common stock and have no firm commitment or obligation to purchase any of the shares of our common
stock. As a result, we cannot make assurances as to the amount of proceeds that will be raised in
our offering or that we will achieve sales of the maximum offering amount. If we are unable to
raise substantially more than the minimum offering amount, we will have limited diversification in
terms of the number of investments owned, the geographic regions in which our investments are
located and the types of investments that we make. An investment in shares of our common stock will
be subject to greater risk to the extent that we lack a diversified portfolio of investments. In
such event, the likelihood of our profitability being affected by the poor performance of any
single investment will increase. In addition, our fixed operating expenses, as a percentage of
gross income, would be higher, and our financial condition and ability to pay distributions could
be adversely affected if we are unable to raise substantial funds.
If we are unable to find suitable investments, we may not have sufficient cash flows available
for distributions to our stockholders.
Our ability to achieve our investment objectives and to pay distributions to our stockholders
is dependent upon the performance of Grubb & Ellis Healthcare REIT II Advisor, LLC, or our advisor,
in selecting investments for us to acquire, selecting tenants for our properties and securing
financing arrangements. Our stockholders must rely entirely on the management ability of our
advisor and the oversight of our board of directors. Our advisor may not be successful in
identifying suitable investments on financially attractive terms or that, if it identifies suitable
investments, our investment objectives will be achieved. If we, through our advisor, are unable to
find suitable investments, we will hold the net proceeds of our offering in an interest-bearing
account or invest the net proceeds in short-term, investment-grade investments. In such an event,
our ability to pay distributions to our stockholders would be adversely affected.
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We face competition for the acquisition of medical office buildings and other healthcare-related
facilities, which may impede our ability to make acquisitions or may increase the cost of these
acquisitions and may reduce our profitability and could cause our stockholders to experience a
lower return on their investment.
We compete with many other entities engaged in real estate investment activities for
acquisitions of medical office buildings and healthcare-related facilities, including national,
regional and local operators, acquirers and developers of healthcare real estate properties. The
competition for healthcare real estate properties may significantly increase the price we must pay
for medical office buildings and healthcare-related facilities or other assets we seek to acquire,
and our competitors may succeed in acquiring those properties or assets themselves. In addition,
our potential acquisition targets may find our competitors to be more attractive because they may
have greater resources, may be willing to pay more for the properties or may have a more compatible
operating philosophy. In particular, larger healthcare real estate REITs may enjoy significant
competitive advantages that result from, among other things, a lower cost of capital and enhanced
operating efficiencies. In addition, the number of entities and the amount of funds competing for
suitable investment properties may increase. This competition will result in increased demand for
these assets and therefore increased prices paid for them. Due to an increased interest in
single-property acquisitions among tax-motivated individual purchasers, we may pay higher prices if
we purchase single properties in comparison with portfolio acquisitions. If we pay higher prices
for medical office buildings or healthcare-related facilities, our business, financial condition
and results of operations and our ability to pay distributions to our stockholders may be
materially and adversely affected and our stockholders may experience a lower return on their
investment.
Our stockholders may be unable to sell their shares of our common stock because their ability to
have their shares of our common stock repurchased pursuant to our share repurchase plan is subject
to significant restrictions and limitations.
Our share repurchase plan includes significant restrictions and limitations. Except in cases
of death or qualifying disability, our stockholders must hold their shares of our common stock for
at least one year. Requesting stockholders must present at least 25.0% of their shares of our
common stock for repurchase and until they have held their shares of our common stock for at least
four years, repurchases will be made for less than they paid for their shares of our common stock.
Shares of our common stock may be repurchased quarterly, at our discretion, on a pro rata basis,
and are limited during any calendar year to 5.0% of the weighted average number of shares of our
common stock outstanding during the prior calendar year. Funds for the repurchase of shares of our
common stock come exclusively from the cumulative proceeds we receive from the sale of shares of
our common stock pursuant to our distribution reinvestment plan, or the DRIP. In addition, our
board of directors reserves the right to amend, suspend or terminate our share repurchase plan at
any time upon 30 days written notice. Therefore, in making a decision to purchase shares of our
common stock, our stockholders should not assume that they will be able to sell any of their shares
of our common stock back to us pursuant to our share repurchase plan and they also should
understand that the repurchase price will not necessarily correlate to the value of our real estate
holdings or other assets. If our board of directors terminates our share repurchase plan, our
stockholders may not be able to sell their shares of our common stock even if they deem it
necessary or desirable to do so.
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Our advisor may be entitled to receive significant compensation in the event of our liquidation or
in connection with a termination of the Advisory Agreement.
We are externally advised by our advisor pursuant to an advisory agreement, or the Advisory
Agreement, between us and our advisor that has a one-year term that expires August 24, 2010 and is
subject to successive one-year renewals upon the mutual consent of the parties. In the event of a
partial or full liquidation of our assets, our advisor will be entitled to receive an incentive
distribution equal to 15.0% of the net proceeds of the liquidation, after we have received and paid
to our stockholders the sum of the gross proceeds from the sale of shares of our common stock, and
any shortfall in an annual 8.0% cumulative, non-compounded return to stockholders in the aggregate.
In the event of a termination of the Advisory Agreement in connection with the listing of our
common stock, the Advisory Agreement provides that our advisor will receive an incentive
distribution equal to 15.0% of the amount, if any, by which (1) the market value of our outstanding
common stock plus distributions paid by us prior to listing, exceeds (2) the sum of the gross
proceeds from the sale of shares of our common stock plus an annual 8.0% cumulative, non-compounded
return on the gross proceeds from the sale of shares of our common stock. Upon our advisors
receipt of the incentive distribution upon listing, our advisors limited partnership units will be
redeemed and our advisor will not be entitled to receive any further incentive distributions upon sales
of our properties. Further, in connection with the termination of the Advisory Agreement other than
due to a listing of the shares of our common stock on a national securities exchange or due to the
internalization of our advisor in connection with our conversion to a self-administered REIT, our
advisor shall be entitled to receive a distribution equal to the amount that would be payable as an
incentive distribution upon sales of properties, which equals 15.0% of the net proceeds if we
liquidated all of our assets at fair market value, after we have received and paid to our
stockholders the sum of the gross proceeds from the sale of shares of our common stock and any
shortfall in the annual 8.0% cumulative, non-compounded return to our stockholders in the
aggregate. Upon our advisors receipt of this distribution, our advisors limited partnership units
will be redeemed and our advisor will not be entitled to receive any further incentive
distributions upon sales of our properties. Finally, upon the termination of the Advisory Agreement
as a result of the internalization of our advisor into us, the Advisory Agreement provides that a
special committee, comprised of all of our independent directors, and our advisor will negotiate
the compensation to be payable to our advisor pursuant to such termination. In determining such
compensation, the special committee will consider factors including, but not limited to, our
advisors performance compared to the performance of other advisors for similar entities that the
special committee believes are relevant in making the determination, any available valuations for
such advisors and independent legal and financial advice. Any amounts to be paid to our advisor
pursuant to the Advisory Agreement cannot be determined at the present time, but such amounts, if
paid, will reduce cash available for distribution to our stockholders.
We may not effect a liquidity event within our targeted time frame of five years after the
completion of our offering stage, or at all. If we do not effect a liquidity event, our
stockholders may have to hold their investment in shares of our common stock for an indefinite
period of time.
On a limited basis, our stockholders may be able to sell shares of our common stock through
our share repurchase plan. However, in the future we may also consider various forms of liquidity
events, including but not limited to (1) the listing of the shares of our common stock on a
national securities exchange, (2) our sale or merger in a transaction that provides our
stockholders with a combination of cash and/or securities of a publicly traded company, and (3) the
sale of all or substantially all of our real estate and real estate-related investments for cash or
other consideration. We presently intend to effect a liquidity event within five years after the
completion of our offering stage, which we deem to be the completion of our offering and any
subsequent public offerings, or our offerings, excluding any offerings pursuant to the DRIP or that
is limited to any benefit plans. However, we are not obligated, through our charter or otherwise,
to effectuate a liquidity event and may not effect a liquidity event within such time or at all. If
we do not effect a liquidity event, it will be very difficult for our stockholders to have
liquidity for their investment in the shares of our common stock other than limited liquidity
through our share repurchase plan.
Because a portion of the offering price from the sale of shares of our common stock in our
offering is used to pay expenses and fees, the full offering price paid by our stockholders is not
invested in real estate investments. As a result, our stockholders will only receive a full return
of their invested capital if we either (1) sell our assets or our company for a sufficient amount
in excess of the original purchase price of our assets, or (2) the market value of our company
after we list the shares of our common stock on a national securities exchange is substantially in
excess of the original purchase price of our assets.
Our board of directors may change our investment objectives without seeking our stockholders
approval.
Our board of directors may change our investment objectives without seeking our stockholders
approval if our directors, in accordance with their fiduciary duties to our stockholders, determine
that a change is in their best interest. A change in our investment objectives could reduce our
payment of cash distributions to our stockholders or cause a decline in the value of our
investments.
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Risks Related to Our Business
We may not have sufficient cash available from operations to pay distributions, and, therefore, we
may pay distributions from the net proceeds of our offering or from borrowings in anticipation of
future cash flows. Any such distributions may reduce the amount of capital we ultimately invest in
assets and negatively impact the value of our stockholders investment.
Distributions payable to our stockholders may include a return of capital, rather than a
return on capital. We have not established any limit on the amount of proceeds from our offering
that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would
(1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be
less than the sum of our total liabilities plus senior liquidation preferences; or (3) jeopardize our ability to maintain our
qualification as a REIT. We expect to pay monthly distributions to our stockholders, but we have
no plans regarding when distributions will commence. The actual amount and timing of distributions
will be determined by our board of directors in its sole discretion and typically will depend on
the amount of funds available for distribution, which will depend on items such as our financial
condition, current and projected capital expenditure requirements, tax considerations and annual
distribution requirements needed to qualify or maintain our qualification as a REIT. As a result,
our distribution rate and payment frequency may vary from time to time. We expect to have little
cash flows from operations available for distribution until we make substantial investments.
Therefore, we may use the net proceeds from our offering or borrowed funds to pay cash
distributions to our stockholders in order to qualify or maintain our qualification as a REIT,
which may reduce the amount of proceeds available for investment and operations or cause us to
incur additional interest expense as a result of borrowed funds. As a result, the amount of net
proceeds available for investment and operations would be reduced, or we may incur additional
interest expense as a result of borrowed funds. Further, if the aggregate amount of cash
distributed in any given year exceeds the amount of our REIT taxable income generated during the
year, the excess amount will be deemed a return of capital.
We may suffer from delays in locating suitable investments, which could reduce our ability to pay
distributions to our stockholders and reduce their return on their investment.
There may be a substantial period of time before the proceeds of our offering are invested in
suitable investments, particularly as a result of the current economic environment and capital
constraints. Because we are conducting our offering on a best efforts basis over time, our
ability to commit to purchase specific assets will also depend, in part, on the amount of proceeds
we have received at a given time. If we are delayed or unable to find additional suitable
investments, we may not be able to achieve our investment objectives or pay distributions to our
stockholders.
The availability and timing of cash distributions to our stockholders is uncertain. If we fail to
pay distributions, our stockholders investment in shares of our common stock could suffer.
We expect to pay monthly distributions to our stockholders. However, we bear all expenses
incurred in our operations, which are deducted from cash flows generated by operations prior to
computing the amount of cash distributions to our stockholders. In addition, our board of
directors, in its discretion, may retain any portion of such funds for working capital. We cannot
assure our stockholders that sufficient cash will be available to pay distributions to them or that
the amount of distributions will increase over time. Should we fail for any reason to distribute at
least 90.0% of our REIT taxable income, we would not qualify for the favorable tax treatment
accorded to REITs.
We are uncertain of our sources of debt or equity for funding our capital needs. If we cannot
obtain funding on acceptable terms, our ability to acquire, and make necessary capital improvements
to, properties may be impaired or delayed.
We intend to use the gross proceeds of our offering to buy a diversified portfolio of real
estate and real estate-related investments and to pay various fees and expenses. In addition, to
qualify as a REIT, we generally must distribute to our stockholders at least 90.0% of our taxable
income each year, excluding capital gains. Because of this distribution requirement, it is not
likely that we will be able to fund a significant portion of our capital needs from retained
earnings. We have not identified any sources of debt or equity for funding, and such sources of
funding may not be available to us on favorable terms or at all. If we do not have access to
sufficient funding in the future, we may not be able to acquire, and make necessary capital
improvements to, properties, pay other expenses or expand our business.
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We intend to incur mortgage indebtedness and other borrowings, which may increase our business
risks, could hinder our ability to pay distributions and could decrease the value of our
stockholders investment.
We intend to finance a portion of the purchase price of our investments in real estate and
real estate-related investments by borrowing funds. We anticipate that, after an initial phase of
our operations (prior to the investment of all of the net proceeds of our offerings of shares of our common stock) when we may employ
greater amounts of leverage to enable us to purchase properties more quickly and, therefore,
generate distributions for our stockholders sooner, our overall leverage will not exceed 60.0% of
the combined market value of our real estate and real estate-related investments, as determined at
the end of each calendar year beginning with our first full year of operations. For these purposes,
the fair market value of each asset will be equal to the purchase price paid for the asset or, if
the asset was appraised subsequent to the date of purchase, then the fair market value will be
equal to the value reported in the most recent independent appraisal of the asset. Under our
charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300% of
our net assets, without the approval of a majority of our independent directors. Net assets for
purposes of this calculation are defined to be our total assets (other than intangibles), valued at
cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less
total liabilities. Generally speaking, the preceding calculation is expected to approximate 75.0%
of the aggregate cost of our real estate and real estate-related investments before depreciation,
amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt
and pledge some or all of our real properties as security for that debt to obtain funds to acquire
additional real properties or for working capital. We may also borrow funds to satisfy the REIT tax
qualification requirement that we distribute at least 90.0% of our annual REIT taxable income to
our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to
ensure that we qualify, or maintain our qualification, as a REIT for federal income tax purposes.
High debt levels may cause us to incur higher interest charges, which would result in higher
debt service payments and could be accompanied by restrictive covenants. If there is a shortfall
between the cash flows from a property and the cash flows needed to service mortgage debt on that
property, then the amount available for distributions to our stockholders may be reduced. In
addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured
by a property may result in lenders initiating foreclosure actions. In that case, we could lose the
property securing the loan that is in default, thus reducing the value of our stockholders
investment. For tax purposes, a foreclosure on any of our properties will be treated as a sale of
the property for a purchase price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we will recognize taxable income on foreclosure, but we would not receive any cash
proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that
own our properties. When we give a guaranty on behalf of an entity that owns one of our properties,
we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity.
If any mortgage contains cross collateralization or cross default provisions, a default on a single
property could affect multiple properties. If any of our properties are foreclosed upon due to a
default, our ability to pay cash distributions to our stockholders will be adversely affected.
Higher mortgage rates may make it more difficult for us to finance or refinance properties, which
could reduce the number of properties we can acquire and the amount of cash available for
distribution to our stockholders.
If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or
other factors, we may not be able to finance the initial purchase of properties. In addition, if we
place mortgage debt on properties, we run the risk of being unable to refinance such debt when the
loans come due, or of being unable to refinance on favorable terms. If interest rates are higher
when we refinance debt, our income could be reduced. We may be unable to refinance debt at
appropriate times, which may require us to sell properties on terms that are not advantageous to
us, or could result in the foreclosure of such properties. If any of these events occur, our cash
flows would be reduced. This, in turn, would reduce cash available for distribution to our
stockholders and may hinder our ability to raise more capital by issuing securities or by borrowing
more money.
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The recent market disruptions may adversely affect our operating results and financial condition.
The global financial markets are currently undergoing pervasive and fundamental disruptions.
The continuation or intensification of any such volatility may have an adverse impact on the
availability of credit to businesses generally and could lead to a further weakening of the United
States of America, or the U.S., and global economies. To the extent that turmoil in the financial
markets continues and/or intensifies, it has the potential to materially affect the value of our
properties and other investments, the availability or the terms of financing that we may anticipate
utilizing, our ability to make principal and interest payments on, or refinance, any outstanding
debt when due and/or the ability of our tenants to enter into new leasing transactions or satisfy
rental payments under existing leases. The current market disruption could also affect our operating results and
financial condition as follows:
| Debt and Equity Markets Our results of operations are sensitive to the volatility of the credit markets. The real estate debt markets are currently experiencing volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold commercial mortgage-backed securities in the market. Credit spreads for major sources of capital have widened significantly as investors have demanded a higher risk premium. This is resulting in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions, developments and property contributions. This may result in our property operations generating lower overall economic returns and a reduced level of cash flows, which could potentially impact our ability to pay distributions to our stockholders. In addition, the recent dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (1) limits the ability of real estate investors to benefit from reduced real estate values or to realize enhanced returns on real estate investments; (2) has slowed real estate transaction activity; and (3) may result in an inability to refinance debt as it becomes due, all of which may reasonably be expected to have a material impact, favorable or unfavorable, on revenues, income and/or cash flows from the acquisition and operations of real estate and mortgage loans. In addition, the state of the debt markets could have an impact on the overall amount of capital being invested in real estate, which may result in price or value decreases of real estate assets and impact our ability to raise equity capital. | ||
| Valuations The recent market volatility will likely make the valuation of our properties more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties that could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge in earnings. | ||
| Government Intervention The pervasive and fundamental disruptions that the global financial markets are currently undergoing have led to extensive and unprecedented governmental intervention. Although the government intervention is intended to stimulate the flow of capital and to undergird the U.S. economy in the short term, it is impossible to predict the actual effect of the government intervention and what effect, if any, additional interim or permanent governmental intervention may have on the financial markets and/or the effect of such intervention on us and our results of operations. In addition, there is a high likelihood that regulation of the financial markets will be significantly increased in the future, which could have a material impact on our operating results and financial condition. |
Increasing vacancy rates for commercial real estate resulting from recent disruptions in the
financial markets and deteriorating economic conditions could reduce revenue and the resale value
of our properties.
We will depend upon tenants for a majority of our revenue from real property investments.
Recent disruptions in the financial markets and deteriorating economic conditions have resulted in
a trend toward increasing vacancy rates for virtually all classes of commercial real estate,
including medical office buildings and healthcare-related facilities, due to generally lower demand
for rentable space, as well as potential oversupply of rentable space. Increased unemployment rates
have led to reduced demand for medical services, causing physician groups and hospitals to delay
expansion plans, leaving a growing number of vacancies in new buildings. According to AMNews, a
publication of the American Medical Association, medical office vacancies rose by one percentage
point, to 11.0%, in 2008. Reduced demand for medical office buildings and healthcare-related
facilities could require us to increase concessions, tenant improvement expenditures or reduce
rental rates to maintain occupancies beyond those anticipated at the time we acquire the property.
In addition, the market value of a particular property could be diminished by prolonged vacancies.
The continuation of disruptions in the financial markets and deteriorating economic conditions
could impact certain of the properties we acquire and such properties could experience higher
levels of vacancy than anticipated at the time we acquire them. The value of our real estate
investments could decrease below the amounts we paid for the investments. Revenues from properties
could decrease due to lower occupancy rates, reduced rental rates and potential increases in
uncollectible rent. We will incur expenses, such as for maintenance costs, insurance costs and
property taxes, even though a property is vacant. The longer the period of
significant vacancies for a property, the greater the potential negative impact on our
revenues and results of operations.
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We are dependent on tenants for our revenue, and lease terminations could reduce our distributions
to our stockholders.
The successful performance of our real estate investments is materially dependent on the
financial stability of our tenants. Lease payment defaults by tenants would cause us to lose the
revenue associated with such leases and could cause us to reduce the amount of distributions to our
stockholders. If the property is subject to a mortgage, a default by a significant tenant on its
lease payments to us may result in a foreclosure on the property if we are unable to find an
alternative source of revenue to meet mortgage payments. In the event of a tenant default, we may
experience delays in enforcing our rights as landlord and may incur substantial costs in protecting
our investment and re-leasing our property. Further, we cannot assure our stockholders that we will
be able to re-lease the property for the rent previously received, if at all, or that lease
terminations will not cause us to sell the property at a loss.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of one of our tenants lease obligations, could be
subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the U.S. Such a
bankruptcy filing would bar us from attempting to collect pre-bankruptcy debts from the bankrupt
tenant or its properties unless we receive an enabling order from the bankruptcy court.
Post-bankruptcy debts would be paid currently. If we assume a lease, all pre-bankruptcy balances
owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would
have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive
any payments from the tenant because our claim would be capped at the rent reserved under the
lease, without acceleration, for the greater of one year or 15.0% of the remaining term of the
lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid
only in the event funds were available, and then only in the same percentage as that realized on
other unsecured claims.
The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due
balances under the relevant lease, and could ultimately preclude full collection of these sums.
Such an event also could cause a decrease or cessation of current rental payments, reducing our
cash flows and the amount available for distributions to our stockholders. In the event a tenant or
lease guarantor declares bankruptcy, the tenant or its trustee may not assume our lease or its
guaranty. If a given lease or guaranty is not assumed, our cash flows and the amounts available for
distributions to our stockholders may be adversely affected.
Long-term leases may not result in fair market lease rates over time; therefore, our income and our
distributions could be lower than if we did not enter into long-term leases.
We may enter into long-term leases with tenants of certain of our properties. Our long-term
leases would likely provide for rent to increase over time. However, if we do not accurately judge
the potential for increases in market rental rates, we may set the terms of these long-term leases
at levels such that even after contractual rental increases, the rent under our long-term leases is
less than then-current market rental rates. Further, we may have no ability to terminate those
leases or to adjust the rent to then-prevailing market rates. As a result, our income and
distributions could be lower than if we did not enter into long-term leases.
We may incur additional costs in acquiring or re-leasing properties, which could adversely affect
the cash available for distribution to our stockholders.
We may invest in properties designed or built primarily for a particular tenant of a specific
type of use known as a single-user facility. If the tenant fails to renew its lease or defaults on
its lease obligations, we may not be able to readily market a single-user facility to a new tenant
without making substantial capital improvements or incurring other significant re-leasing costs. We
also may incur significant litigation costs in enforcing our rights as a landlord against the
defaulting tenant. These consequences could adversely affect our revenues and reduce the cash
available for distribution to our stockholders.
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We may be unable to secure funds for future tenant or other capital improvements, which could limit
our ability to attract or replace tenants and decrease our stockholders return on their
investment.
When tenants do not renew their leases or otherwise vacate their space, it is common that, in
order to attract replacement tenants, we will be required to expend substantial funds for tenant
improvements and leasing commissions related to the vacated space. Such tenant improvements may
require us to incur substantial capital expenditures. If we have not established capital reserves
for such tenant or other capital improvements, we will have to obtain financing from other sources
and we have not identified any sources for such financing. We may also have future financing needs
for other capital improvements to refurbish or renovate our properties. If we need to secure
financing sources for tenant improvements or other capital improvements in the future, but are
unable to secure such financing or are unable to secure financing on terms we feel are acceptable,
we may be unable to make tenant and other capital improvements or we may be required to defer such
improvements. If this happens, it may cause one or more of our properties to suffer from a greater
risk of obsolescence or a decline in value, or a greater risk of decreased cash flows as a result
of fewer potential tenants being attracted to the property or existing tenants not renewing their
leases. If we do not have access to sufficient funding in the future, we may not be able to make
necessary capital improvements to our properties, pay other expenses or pay distributions to
stockholders.
We may structure acquisitions of property in exchange for limited partnership units in our
operating partnership on terms that could limit our liquidity or our flexibility.
We may acquire properties by issuing limited partnership units in Grubb & Ellis Healthcare
REIT II Holdings, LP, or our operating partnership, in exchange for a property owner contributing
property to the partnership. If we enter into such transactions, in order to induce the
contributors of such properties to accept units in our operating partnership, rather than cash, in
exchange for their properties, it may be necessary for us to provide them additional incentives.
For instance, our operating partnerships limited partnership agreement provides that any holder of
units may exchange limited partnership units on a one-for-one basis for shares of our common stock,
or, at our option, cash equal to the value of an equivalent number of shares of our common stock.
We may, however, enter into additional contractual arrangements with contributors of property under
which we would agree to redeem a contributors units for shares of our common stock or cash, at the
option of the contributor, at set times. If the contributor required us to redeem units for cash
pursuant to such a provision, it would limit our liquidity and thus our ability to use cash to make
other investments, satisfy other obligations or pay distributions to our stockholders. Moreover, if
we were required to redeem units for cash at a time when we did not have sufficient cash to fund
the redemption, we might be required to sell one or more properties to raise funds to satisfy this
obligation. Furthermore, we might agree that if distributions the contributor received as a limited
partner in our operating partnership did not provide the contributor with a defined return, then
upon redemption of the contributors units we would pay the contributor an additional amount
necessary to achieve that return. Such a provision could further negatively impact our liquidity
and flexibility. Finally, in order to allow a contributor of a property to defer taxable gain on
the contribution of property to our operating partnership, we might agree not to sell a contributed
property for a defined period of time or until the contributor exchanged the contributors units
for cash or shares of our common stock. Such an agreement would prevent us from selling those
properties, even if market conditions made such a sale favorable to us.
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Our success is dependent on the performance of our advisor and certain key personnel.
Our ability to achieve our investment objectives and to conduct our operations is dependent
upon the performance of our advisor in identifying and acquiring investments, the determination of
any financing arrangements, the asset management of our investments and the management of our
day-to-day activities. Our advisor has broad discretion over the use of proceeds from our offering
and our stockholders will have no opportunity to evaluate the terms of transactions or other
economic or financial data concerning our investments that are not described in our periodic
filings with the United States Securities and Exchange Commission, or the SEC. We rely on the
management ability of our advisor, subject to the oversight and approval of our board of directors.
Accordingly, investors should not purchase shares of our common stock unless they are willing to
entrust all aspects of our day-to-day management to our advisor. If our advisor suffers or is
distracted by adverse financial or operational problems in connection with its own operations or
the operations of our sponsor unrelated to us, our advisor may be unable to allocate time and/or
resources to our operations. If our advisor is unable to allocate sufficient resources to oversee
and perform our operations for any reason, we may be unable to achieve our
investment objectives or to pay distributions to our stockholders. In addition, our success
depends to a significant degree upon the continued contributions of our advisors officers and
certain of the officers and employees of our sponsor, who manage our advisor, in particular Mr.
Hanson, Mr. Prosky and Ms. Biller, each of whom would be difficult to replace. Mr. Hanson, Mr.
Prosky and Ms. Biller currently serve as executive officers of our company, and Mr. Hanson and Mr.
Prosky currently serve as two of our directors. Each of Mr. Hanson, Mr. Prosky and Ms. Biller have
irrevocably agreed that they will resign from their respective positions with the company in the
event that the respective person is no longer employed by our sponsor or its successors. Each of
Mr. Hansons and Ms. Billers employment agreement with our sponsor expires in mid-November, and
Mr. Prosky does not have an employment agreement with our sponsor. In the event that our sponsor
does not continue to employ either Mr. Hanson or Ms. Biller after the expiration of their
respective employment agreement, such person would automatically resign from our company.
Similarly, if Mr. Hanson, Mr. Prosky or Ms. Biller are no longer employed by our sponsor, for any
reason, such person would automatically resign from our company. The termination of Mr. Hansons,
Mr. Proskys or Ms. Billers employment with our sponsor could have a materially adverse effect on
our success and our sponsor may not be able to attract and hire as capable individuals to replace
Mr. Hanson, Mr. Prosky and/or Ms. Biller. We do not have key man life insurance on any of our
sponsors key personnel. If our advisor or our sponsor were to lose the benefit of the experience,
efforts and abilities of one or more of these individuals, our operating results could suffer.
The fees we will pay our advisor under the Advisory Agreement and the distributions payable to our
advisor under our operating partnership agreement will not be determined on an arms-length basis
and therefore may not be on the same terms as those we could negotiate with an unrelated party.
Our independent directors relied on information and recommendations provided by our advisor to
determine the fees and distributions payable to our advisor and its affiliates under the Advisory
Agreement and pursuant to the subordinated participation interest in our operating partnership. As
a result, these fees and distributions cannot be viewed as having been determined on an
arms-length basis and we cannot assure our stockholders that an unaffiliated party would not be
willing and able to provide to us the same services at a lower price.
Our advisor may terminate the Advisory Agreement, which could require us to pay substantial fees
and may require us to find a new advisor.
Either we or our advisor can terminate the Advisory Agreement upon 60 days written notice to
the other party. However, if the Advisory Agreement is terminated in connection with the listing of
our common stock on a national securities exchange, the Advisory Agreement provides that our
advisor will receive an incentive distribution equal to 15.0% of the amount, if any, by which (1)
the market value of the outstanding shares of our common stock plus distributions paid by us prior
to listing, exceeds (2) the sum of the gross proceeds from the sale of shares of our common stock
plus an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares
of our common stock. Upon our advisors receipt of the incentive distribution upon listing, our
advisors limited partnership units will be redeemed and our advisor will not be entitled to
receive any further incentive distributions upon sales of our properties. Further, in connection
with the termination of the Advisory Agreement other than due to a listing of the shares of our
common stock on a national securities exchange or due to the internalization of our advisor in
connection with our conversion to a self-administered REIT, our advisor shall be entitled to
receive a distribution equal to the amount that would be payable to our advisor pursuant to the
incentive distribution upon sales if we liquidated all of our assets for their fair market value.
Upon our advisors receipt of this distribution, our advisors limited partnership units will be
redeemed and our advisor will not be entitled to receive any further incentive distributions upon
sales of our properties. Finally, upon the termination of the Advisory Agreement as a result of our
advisors internalization into us, the Advisory Agreement provides that a special committee,
comprised of all of our independent directors, and our advisor will agree on the compensation
payable to our advisor pursuant to such termination. In determining such compensation, the special
committee will consider factors including, but not limited to, our advisors performance compared
to the performance of other advisors for similar entities that the special committee believes are
relevant in making the determination, any available valuations for such advisors and independent
legal and financial advice. Any amounts to be paid to our advisor pursuant to the Advisory
Agreement cannot be determined at the present time.
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If our advisor was to terminate the Advisory Agreement, we would need to find another advisor
to provide us with day-to-day management services or have employees to provide these services
directly to us. There can be no assurances that we would be able to find a new advisor or employees or enter into agreements
for such services on acceptable terms.
If we internalize our management functions, our stockholders interest in us could be diluted, and
we could incur other significant costs associated with being self-managed.
Our strategy may involve internalizing our management functions. If we internalize our
management functions, we may elect to negotiate to acquire our advisors assets and personnel. At
this time, we cannot be sure of the form or amount of consideration or other terms relating to any
such acquisition. Such consideration could take many forms, including cash payments, promissory
notes and shares of our common stock. The payment of such consideration could result in dilution of
our stockholders interests and could reduce the net income per share and funds from operations per
share attributable to their investment.
In addition, while we would no longer bear the costs of the various fees and expenses we
expect to pay to our advisor under the Advisory Agreement, our direct expenses would include
general and administrative costs, including legal, accounting, and other expenses related to
corporate governance, SEC reporting and compliance. We would also incur the compensation and
benefits costs of our officers and other employees and consultants that are now paid by our advisor
or its affiliates. In addition, we may issue equity awards to officers, employees and consultants,
which awards would decrease net income and funds from operations and may further dilute our
stockholders investment. We cannot reasonably estimate the amount of fees to our advisor we would
save and the costs we would incur if we became self-managed. If the expenses we assume as a result
of an internalization are higher than the expenses we avoid paying to our advisor, our net income
per share and funds from operations per share would be lower as a result of the internalization
than it otherwise would have been, potentially decreasing the amount of funds available to
distribute to our stockholders and the value of shares of our common stock.
As currently organized, we do not directly have any employees. If we elect to internalize our
operations, we would employ personnel and would be subject to potential liabilities commonly faced
by employers, such as workers disability and compensation claims, potential labor disputes and
other employee-related liabilities and grievances. Upon any internalization of our advisor, certain
key personnel of our advisor may not be employed by us, but instead may remain employees of our
sponsor or its affiliates.
If we internalize our management functions, we could have difficulty integrating these
functions as a stand-alone entity. Currently, our advisor and its affiliates perform asset
management and general and administrative functions, including accounting and financial reporting,
for multiple entities. They have a great deal of know-how and can experience economies of scale. We
may fail to properly identify the appropriate mix of personnel and capital needs to operate as a
stand-alone entity. An inability to manage an internalization transaction effectively could thus
result in our incurring excess costs and/or suffering deficiencies in our disclosure controls and
procedures or our internal control over financial reporting. Such deficiencies could cause us to
incur additional costs, and our managements attention could be diverted from most effectively
managing our properties.
Our success is dependent on the performance of our sponsor.
Our ability to achieve our investment objectives and to conduct our operations is dependent
upon the performance of our advisor, which is a subsidiary of our sponsor, Grubb & Ellis. Our
sponsors business is sensitive to trends in the general economy, as well as the commercial real
estate and credit markets. The current macroeconomic environment and accompanying credit crisis has
negatively impacted the value of commercial real estate assets, contributing to a general slow down
in our sponsors industry. A prolonged and pronounced recession could continue or accelerate the
reduction in overall transaction volume and size of sales and leasing activities that our sponsor
has already experienced, and would continue to put downward pressure on our sponsors revenues and
operating results. To the extent that any decline in our sponsors revenues and operating results
impacts the performance of our advisor, our results of operations, and financial condition could
also suffer.
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Our results of operations, our ability to pay distributions to our stockholders and our ability to
dispose of our investments are subject to international, national and local economic factors we
cannot control or predict.
Our results of operations are subject to the risks of an international or national economic
slowdown or downturn and other changes in international, national and local economic conditions.
The following factors may affect income from our properties, our ability to acquire and dispose of
properties, and yields from our properties:
| poor economic times may result in defaults by tenants of our properties due to bankruptcy, lack of liquidity, or operational failures. We may also be required to provide rent concessions or reduced rental rates to maintain or increase occupancy levels; | ||
| reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; | ||
| the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, the dislocation of the markets for our short-term investments, increased volatility in market rates for such investment or other factors; | ||
| one or more lenders under our lines of credit could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all; | ||
| one or more counterparties to our interest rate swaps could default on their obligations to us or could fail, increasing the risk that we may not realize the benefits of these instruments; | ||
| increases in supply of competing properties or decreases in demand for our properties may impact our ability to maintain or increase occupancy levels and rents; | ||
| constricted access to credit may result in tenant defaults or non-renewals under leases; | ||
| job transfers and layoffs may cause vacancies to increase and a lack of future population and job growth may make it difficult to maintain or increase occupancy levels; and | ||
| increased insurance premiums, real estate taxes or energy or other expenses may reduce funds available for distribution or, to the extent such increases are passed through to tenants, may lead to tenant defaults. Also, any such increased expenses may make it difficult to increase rents to tenants on turnover, which may limit our ability to increase our returns. |
The length and severity of any economic slow down or downturn cannot be predicted. Our results
of operations, our ability to pay distributions to our stockholders and our ability to dispose of
our investments may be negatively impacted to the extent an economic slowdown or downturn is
prolonged or becomes more severe.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have
available to pay distributions and make additional investments.
We intend to diversify our cash and cash equivalents among several banking institutions in an
attempt to minimize exposure to any one of these entities. We expect that we will have cash and
cash equivalents and restricted cash deposited in certain financial institutions in excess of
federally-insured levels. If any banking institution in which we have deposited funds ultimately
fails, we may lose the amount of our deposits over any federally-insured amount. The loss of our
deposits could reduce the amount of cash we have available to distribute or invest and could result
in a decline in the value of our stockholders investment.
Our advisor and its affiliates have no obligation to defer or forgive fees or loans or advance any
funds to us, which could reduce our ability to acquire investments or pay distributions.
In the past, our sponsor or its affiliates have, in certain circumstances, deferred or
forgiven fees and loans payable by programs sponsored or managed by our sponsor or its affiliates.
Our advisor and its affiliates, including our sponsor, have no obligation to defer or forgive fees owed by us to our advisor or its
affiliates or to advance any funds to us. As a result, we may have less cash available to acquire
investments or pay distributions.
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Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of relationships among us, our officers,
our advisor and its affiliates, including the material conflicts discussed below.
We may compete with other Grubb & Ellis Group programs for investment opportunities. As a result,
our advisor may not cause us to invest in favorable investment opportunities which may reduce our
returns on our investments.
Our sponsor, Grubb & Ellis, or its affiliates, have sponsored existing programs with
investment objectives and strategies similar to ours, and may sponsor other similar programs in the
future. As a result, we may be buying properties at the same time as one or more of the other Grubb
& Ellis Group programs managed or advised by affiliates of our advisor. Officers and employees of
our advisor may face conflicts of interest in allocating investment opportunities between us and
these other programs. For instance, our advisor may select properties for us that provide lower
returns to us than properties that its affiliates select to be purchased by another Grubb & Ellis
Group program. We cannot be sure that officers and employees acting for or on behalf of our advisor
and on behalf of managers of other Grubb & Ellis Group programs will act in our best interest when
deciding whether to allocate any particular investment to us. We are subject to the risk that as a
result of the conflicts of interest between us, our advisor and other entities or programs managed
by its affiliates, our advisor may not cause us to invest in favorable investment opportunities
that our advisor locates when it would be in our best interest to make such investments. As a
result, we may invest in less favorable investments, which may reduce our returns on our
investments and ability to pay distributions.
We will rely on our advisor and its affiliates as a source for all or a portion of our investment
opportunities. Grubb & Ellis Realty Investors, LLC, an affiliate of our advisor, has entered into
an agreement with Healthcare Trust of America, Inc. (formerly Grubb & Ellis Healthcare REIT, Inc.)
pursuant to which Healthcare Trust of America, Inc. will have a right of first refusal with respect
to certain investment opportunities identified by Grubb & Ellis Realty Investors, LLC.
We will rely on our advisor and its affiliates as a source for all or a portion of our
investment opportunities. Pursuant to an agreement between Grubb & Ellis Realty Investors, LLC, or
Grubb & Ellis Realty Investors, an affiliate of our advisor, and Healthcare Trust of America, Inc.,
in the event that Grubb & Ellis Realty Investors identifies an investment opportunity for which
greater than 50.0% of the gross rentable space at such property is leased to, or is reasonably
expected to be leased to, one or more medical or healthcare-related tenants, which we refer to as a
qualified investment opportunity, Healthcare Trust of America, Inc. will have the first opportunity
to invest in such qualified investment opportunity. Our advisor and its affiliates intend to
provide qualified investment opportunities to Grubb & Ellis Realty Investors to present to
Healthcare Trust of America, Inc. pursuant to this right of first refusal, such that qualified
investment opportunities may be rendered unavailable for acquisition by us. This right of first
refusal will remain in effect so long as monies raised for Healthcare Trust of America, Inc. by an
affiliate of our advisor through August 28, 2009 are available for funding new acquisitions of
qualified investment opportunities by Healthcare Trust of America, Inc.
The conflicts of interest faced by our officers may cause us not to be managed solely in our
stockholders best interest, which may adversely affect our results of operations and the value of
our stockholders investment.
All of our officers also are officers or employees of our sponsor, our advisor, and other
affiliated entities that will receive fees in connection with our offering and our operations. In
addition, Mr. Hanson, Mr. Prosky, Ms. Biller, Ms. Johnson and Ms. Lo each own a less than 1.0%
interest in our sponsor. In addition, Mr. Hanson, Mr. Prosky, Ms. Biller, Ms. Johnson and Ms. Lo
each hold options to purchase a de minimis amount of our sponsors outstanding common stock. Mr.
Hanson and Ms. Biller each own a de minimis interest in several other Grubb & Ellis Group programs.
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Some of the Grubb & Ellis Group programs in which our officers have invested and to which they
provide services, have investment objectives similar to our investment objectives. These
individuals have legal and fiduciary obligations to these entities which are similar to those they
owe to us and our stockholders. Their loyalties to these other entities could result in actions or
inactions that are detrimental to our business, which could harm the implementation of our
investment strategy and our investment opportunities. Furthermore, they may have conflicts of
interest in allocating their time and resources between our business and these other activities.
During times of intense activity in other programs, the time they devote to our business may
decline and be less than we require. If our officers, for any reason, are not able to provide
sufficient resources to manage our business, our business will suffer and this may adversely affect
our results of operations and the value of our stockholders investment.
Our advisors officers will face conflicts of interest relating to the allocation of their time and
other resources among the various entities that they serve or have interests in, and such conflicts
may not be resolved in our favor.
Certain of the officers of our advisor will face competing demands relating to their time and
resources because they are also affiliated with entities with investment programs similar to ours,
and they may have other business interests as well, including business interests that currently
exist and business interests they develop in the future. Because these persons have competing
interests for their time and resources, they may have conflicts of interest in allocating their
time between our business and these other activities. Further, during times of intense activity in
other programs, those executives may devote less time and fewer resources to our business than are
necessary or appropriate to manage our business. Poor or inadequate management of our business
would adversely affect our results of operations and the value of ownership of shares of our common
stock.
Our advisor will face conflicts of interest relating to its compensation structure, which could
result in actions that are not necessarily in our stockholders long-term best interest.
Under the Advisory Agreement and pursuant to the subordinated participation interest our
advisor holds in our operating partnership, our advisor will be entitled to fees and distributions
that are structured in a manner intended to provide incentives to our advisor to perform in both
our and our stockholders long-term best interest. The fees to which our advisor or its affiliates
will be entitled include acquisition fees, asset management fees, property management fees,
disposition fees and other fees as disclosed in our prospectus. The distributions our advisor may
become entitled to receive would be payable upon distribution of net sales proceeds to our
stockholders, the listing of the shares of our common stock, certain merger transactions or the
termination of the Advisory Agreement. However, because our advisor does not maintain a significant
equity interest in us and is entitled to receive substantial minimum compensation regardless of our
performance, our advisors interests may not be wholly aligned with our stockholders. In that
regard, our advisor or its affiliates receives an asset management fee with respect to the ongoing
operation and management of properties based on the amount of our initial investment and not the
performance of those investments, which could result in our advisor not having adequate incentive
to manage our portfolio to provide profitable operations during the period we hold our investments.
On the other hand, our advisor could be motivated to recommend riskier or more speculative
investments in order to increase the fees payable to our advisor or for us to generate the
specified levels of performance or net sales proceeds that would entitle our advisor to fees or
distributions.
Our advisor may receive economic benefits from its status as a limited partner without bearing any
of the investment risk.
Our advisor is a limited partner in our operating partnership. Our advisor is entitled to
receive an incentive distribution equal to 15.0% of net sales proceeds of properties after we have
received and paid to our stockholders a return of their invested capital and an annual 8.0%
cumulative, non-compounded return on the gross proceeds of the sale of shares of our common stock.
We bear all of the risk associated with the properties but, as a result of the incentive
distributions to our advisor, we are not entitled to all of our operating partnerships proceeds
from property dispositions.
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The distribution payable to our advisor may influence our decisions about listing the shares of our
common stock on a national securities exchange, merging our company with another company and
acquisition or disposition of our investments.
Our advisors entitlement to fees upon the sale of our assets and to participate in net sales
proceeds could result in our advisor recommending sales of our investments at the earliest possible
time at which sales of investments would produce the level of return which would entitle our
advisor to compensation relating to such sales, even if continued ownership of those investments
might be in our stockholders long-term best interest. The subordinated participation interest may
require our operating partnership to make a distribution to our advisor upon the listing of the
shares of our common stock on a national securities exchange or the merger of our company with
another company in which our stockholders receive shares that are traded on a national securities
exchange, if our advisor meets the performance thresholds included in our operating partnerships
limited partnership agreement even if our advisor is no longer serving as our advisor. To avoid
making this distribution, our independent directors may decide against listing the shares of our
common stock or merging with another company even if, but for the requirement to make this
distribution, such listing or merger would be in our stockholders best interest. In addition, the
requirement to pay these fees could cause our independent directors to make different investment or
disposition decisions than they would otherwise make, in order to satisfy our obligation to the
advisor.
We may acquire assets from, or dispose of assets to, affiliates of our advisor, which could result
in us entering into transactions on less favorable terms than we would receive from a third party
or that negatively affect the publics perception of us.
We may acquire assets from affiliates of our advisor. Further, we may also dispose of assets
to affiliates of our advisor. Affiliates of our advisor may make substantial profits in connection
with such transactions and may owe fiduciary and/or other duties to the selling or purchasing
entity in these transactions, and conflicts of interest between us and the selling or purchasing
entities could exist in such transactions. Because our independent directors would rely on our
advisor in identifying and evaluating any such transaction, these conflicts could result in
transactions based on terms that are less favorable to us than we would receive from a third party.
Also, the existence of conflicts, regardless of how they are resolved, might negatively affect the
publics perception of us.
If we enter into joint ventures with affiliates, we may face conflicts of interest or disagreements
with our joint venture partners that may not be resolved as quickly or on terms as advantageous to
us as would be the case if the joint venture had been negotiated at arms length with an
independent joint venture partner.
In the event that we enter into a joint venture with any other program sponsored or advised by
our sponsor or one of its affiliates, we may face certain additional risks and potential conflicts
of interest. For example, securities issued by the other Grubb & Ellis Group programs may never
have an active trading market. Therefore, if we were to become listed on a national securities
exchange, we may no longer have similar goals and objectives with respect to the resale of
properties in the future. Joint ventures between us and other Grubb & Ellis Group programs will not
have the benefit of arms-length negotiation of the type normally conducted between unrelated
co-venturers. Under these joint venture agreements, none of the co-venturers may have the power to
control the venture, and an impasse could occur regarding matters pertaining to the joint venture,
including determining when and whether to buy or sell a particular property and the timing of a
liquidation, which might have a negative impact on the joint venture and decrease returns to our
stockholders.
Risks Related to Our Organizational Structure
Several potential events could cause our stockholders investment in us to be diluted, which may
reduce the overall value of their investment.
Our stockholders investment in us could be diluted by a number of factors, including:
| future offerings of our securities, including issuances pursuant to the DRIP and up to 200,000,000 shares of any preferred stock that our board of directors may authorize; | ||
| private issuances of our securities to other investors, including institutional investors; | ||
| issuances of our securities pursuant to the 2009 Incentive Plan; or | ||
| redemptions of units of limited partnership interest in our operating partnership in exchange for shares of our common stock. |
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To the extent we issue additional equity interests after our stockholders purchase shares of our
common stock in our offering, their percentage ownership interest in us will be diluted. In
addition, depending upon the terms and pricing of any additional offerings and the value of our
real estate and real estate-related investments, our stockholders may also experience dilution in
the book value and fair market value of their shares of our common stock.
Our ability to issue preferred stock may include a preference in distributions superior to our
common stock and also may deter or prevent a sale of shares of our common stock in which our
stockholders could profit.
Our charter authorizes our board of directors to issue up to 200,000,000 shares of preferred
stock. Our board of directors has the discretion to establish the preferences and rights, including
a preference in distributions superior to our common stockholders, of any issued preferred stock.
If we authorize and issue preferred stock with a distribution preference over our common stock,
payment of any distribution preferences of outstanding preferred stock would reduce the amount of
funds available for the payment of distributions on our common stock. Further, holders of preferred
stock are normally entitled to receive a preference payment in the event we liquidate, dissolve or
wind up before any payment is made to our common stockholders, likely reducing the amount our
common stockholders would otherwise receive upon such an occurrence. In addition, under certain
circumstances, the issuance of preferred stock or a separate class or series of common stock may
render more difficult or tend to discourage:
| a merger, tender offer or proxy contest; | ||
| assumption of control by a holder of a large block of our securities; or | ||
| removal of incumbent management. |
The limit on the percentage of shares of our common stock that any person may own may discourage a
takeover or business combination that may have benefited our stockholders.
Our charter restricts the direct or indirect ownership by one person or entity to no more than
9.9% of the value of our then outstanding capital stock (which includes common stock and any
preferred stock we may issue) and no more than 9.9% of the value or number of shares, whichever is
more restrictive, of our then outstanding common stock. This restriction may discourage a change of
control of us and may deter individuals or entities from making tender offers for shares of our
stock on terms that might be financially attractive to our stockholders or which may cause a change
in our management. This ownership restriction may also prohibit business combinations that would
have otherwise been approved by our board of directors and our stockholders. In addition to
deterring potential transactions that may be favorable to our stockholders, these provisions may
also decrease their ability to sell their shares of our common stock.
Our stockholders ability to control our operations is severely limited.
Our board of directors determines our major strategies, including our strategies regarding
investments, financing, growth, debt capitalization, REIT qualification and distributions. Our
board of directors may amend or revise these and other strategies without a vote of the
stockholders. Our charter sets forth the stockholder voting rights required to be set forth therein
under the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American
Securities Administrators Association, or the NASAA Guidelines. Under our charter and Maryland law,
our stockholders have a right to vote only on the following matters:
| the election or removal of directors; | ||
| any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to change our name or the name of other designation or the par value of any class or series of our stock and the aggregate par value of our stock, increase or decrease the aggregate number of our shares of stock, increase or decrease the number of our shares of any class or series that we have the authority to issue, effect certain reverse stock splits, or qualify as a real estate investment trust under the Internal Revenue Code; |
| our dissolution; and | ||
| certain mergers, consolidations and sales or other dispositions of all or substantially all of our assets. |
All other matters are subject to the discretion of our board of directors.
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Limitations on share ownership and transfer may deter a sale of our common stock in which our
stockholders could profit.
The limits on ownership and transfer of our equity securities in our charter may have the
effect of delaying, deferring or preventing a transaction or a change in control that might involve
a premium price for our stockholders common stock. The ownership limits and restrictions on
transferability will continue to apply until our board of directors determines that it is no longer
in our best interest to continue to qualify as a REIT.
Maryland takeover statutes may deter others from seeking to acquire us and prevent our stockholders
from making a profit in such transaction.
The Maryland General Corporation Law, or the MGCL, contains many provisions, such as the
business combination statute and the control share acquisition statute, that are designed to
prevent, or have the effect of preventing, someone from acquiring control of us. Our bylaws exempt
us from the control share acquisition statute (which eliminates voting rights for certain levels of
shares that could exercise control over us) and our board of directors has adopted a resolution
opting out of the business combination statute (which, among other things, prohibits a merger or
consolidation with a 10.0% stockholder for a period of time) with respect to our affiliates.
However, if the bylaw provisions exempting us from the control share acquisition statute or our
board resolution opting out of the business combination statute were repealed, these provisions of
Maryland law could delay or prevent offers to acquire us and increase the difficulty of
consummating any such offers, even if such a transaction would be in our stockholders best
interest.
The MGCL and our organizational documents limit our stockholders right to bring claims against our
officers and directors.
The MGCL provides that a director will not have any liability as a director so long as he or
she performs his or her duties in good faith, in a manner he or she reasonably believes to be in
our best interest, and with the care that an ordinarily prudent person in a like position would use
under similar circumstances. In addition, our charter provides that, subject to the applicable
limitations set forth therein or under the MGCL, no director or officer will be liable to us or our
stockholders for monetary damages. Our charter also provides that we will generally indemnify our
directors, our officers, our advisor and its affiliates for losses they may incur by reason of
their service in those capacities unless (1) their act or omission was material to the matter
giving rise to the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (2) they actually received an improper personal benefit in money, property
or services, or (3) in the case of any criminal proceeding, they had reasonable cause to believe
the act or omission was unlawful. Moreover, we have entered into separate indemnification
agreements with each of our directors and executive officers. As a result, we and our stockholders
may have more limited rights against these persons than might otherwise exist under common law. In
addition, we may be obligated to fund the defense costs incurred by these persons in some cases.
However, our charter also provides that we may not indemnify or hold harmless our directors, our
advisor and its affiliates unless they have determined that the course of conduct that caused the
loss or liability was in our best interest, they were acting on our behalf or performing services
for us, the liability was not the result of negligence or misconduct by our non-independent
directors, our advisor and its affiliates or gross negligence or willful misconduct by our
independent directors, and the indemnification is recoverable only out of our net assets or the
proceeds of insurance and not from our stockholders.
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Maryland law prohibits certain business combinations, which may make it more difficult for us to be
acquired and may limit our stockholders ability to dispose of their shares of our common stock.
Under Maryland law, business combinations between a Maryland corporation and an interested
stockholder or an affiliate of an interested stockholder are prohibited for five years after the
most recent date on which the interested stockholder becomes an interested stockholder. These
business combinations include a merger, consolidation, share exchange or, in circumstances
specified in the statute, an asset transfer or issuance or reclassification of equity securities.
An interested stockholder is defined as:
| any person who beneficially owns 10.0% or more of the voting power of the corporations outstanding voting stock; or | ||
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10.0% or more of the voting power of the then outstanding stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved
in advance the transaction by which he or she otherwise would have become an interested
stockholder. However, in approving a transaction, the board of directors may provide that its
approval is subject to compliance, at or after the time of approval, with any terms and conditions
determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and
an interested stockholder generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
| 80.0% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and | ||
| two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares of stock held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporations common stockholders
receive a minimum price, as defined under Maryland law, for their shares of our common stock in the
form of cash or other consideration in the same form as previously paid by the interested
stockholder for its shares of our common stock. The business combination statute permits various
exemptions from its provisions, including business combinations that are exempted by the board of
directors prior to the time that the interested stockholder becomes an interested stockholder. Our
board of directors has adopted a resolution providing that any business combination between us and
any other person is exempted from this statute, provided that such business combination is first
approved by our board. This resolution, however, may be altered or repealed in whole or in part at
any time. If this resolution is repealed or our board of directors fails to first approve the
business combination, the business combination statute may discourage others from trying to acquire
control of us and increase the difficulty of consummating any offer.
Our charter includes a provision that may discourage a stockholder from launching a tender offer
for shares of our common stock.
Our charter requires that any tender offer made by a person, including any mini-tender
offer, must comply with Regulation 14D of the Securities Exchange Act of 1934, as amended. The
offeror must provide our company notice of the tender offer at least ten business days before
initiating the tender offer. If the offeror does not comply with these requirements, we will have
the right to repurchase that persons shares of our stock and any shares of our stock acquired in
such tender offer. In addition, the non-complying offeror shall be responsible for all of our
expenses in connection with that stockholders noncompliance. This provision of our charter may
discourage a person from initiating a tender offer for shares of our common stock and prevent our
stockholders from receiving a premium price for their shares of our common stock in such a
transaction.
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Our stockholders investment return may be reduced if we are required to register as an investment
company under the Investment Company Act. To avoid registration as an investment company, we may
not be able to operate our business successfully. If we become subject to registration under the
Investment Company Act, we may not be able to continue our business.
We are not registered, and do not intend to register, as an investment company under the
Investment Company Act. If for any reason, we were required to register as an investment company,
we would have to comply with a variety of substantive requirements under the Investment Company Act
imposing, among other things:
| limitations on capital structure; | ||
| restrictions on specified investments; | ||
| prohibitions on transactions with affiliates; and | ||
| compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations. |
In order for us not to be subject to regulation under the Investment Company Act, we intend to
engage, through our operating partnership and subsidiaries, primarily in the business of buying
real estate. Currently, neither we, nor our operating partnership, nor any of our subsidiaries,
have any assets. We expect that investments in real estate will represent the substantial majority
of our total asset mix, which would not subject us to the Investment Company Act by virtue of the
definition of investment company provided in Section 3(a)(1) of the Investment Company Act.
In the event that any of our subsidiaries are deemed to be an investment company pursuant to
Section 3(a)(1) of the Investment Company Act, such subsidiaries would have to rely on the
exclusion from the definition of investment company provided by Section 3(c)(5)(C) of the
Investment Company Act. To rely upon Section 3(c)(5)(C) of the Investment Company Act such
subsidiaries would have to invest at least 55.0% of its respective portfolio in mortgage and other
liens on and interests in real estate, which we refer to as qualifying real estate investments
and maintain an additional 25.0% of assets in qualifying real estate investments or other real
estate-related assets. The remaining 20.0% of the portfolios assets can consist of miscellaneous
assets. What we buy and sell is therefore limited to these criteria. How we classify our assets for
purposes of the Investment Company Act will be based in large measure upon no-action letters issued
by the SEC staff in the past and other SEC interpretive guidance. These no-action positions were
issued in accordance with factual situations that may be substantially different from the factual
situations we may face, and a number of these no-action positions were issued more than ten years
ago. Pursuant to this guidance, and depending on the characteristics of the specific investments,
certain mortgage loans, participations in mortgage loans, mortgage-backed securities, mezzanine
loans, joint venture investments and the equity securities of other entities may not constitute
qualifying real estate assets and therefore investments in these types of assets may be limited.
The SEC may not concur with our classification of our assets. Future revisions to the Investment
Company Act or further guidance from the SEC may cause us to lose our exclusion from registration
or force us to re-evaluate our portfolio and our investment strategy. Such changes may prevent us
from operating our business successfully.
We may determine to operate through our majority owned operating partnership or other wholly
owned or majority owned subsidiaries. If so, our subsidiaries will be subject to investment
restrictions so that the respective majority owned or wholly owned subsidiary does not come within
the definition of an investment company, or cause us to come within the definition of an investment
company, under the Investment Company Act.
To ensure that neither we, nor our operating partnership, nor any of our other wholly owned or
majority owned subsidiaries are required to register as an investment company, each entity may be
unable to sell assets we would otherwise want to sell and may need to sell assets we would
otherwise wish to retain. In addition, we, our operating partnership or any of our other wholly
owned or majority owned subsidiaries may be required to acquire additional income- or
loss-generating assets that we might not otherwise acquire or forego opportunities to acquire
interests in companies that we would otherwise want to acquire. Although we intend to monitor our
portfolio periodically and prior to each acquisition, any of these entities may not be able to
maintain an exclusion from registration as an investment company. If we, our operating partnership
or any of our other subsidiaries are required to register as an investment company but fail to do
so, the unregistered entity would be prohibited from engaging in our business, and criminal and
civil actions could be brought against such entity. In addition, the contracts of such entity would
be unenforceable unless a court required enforcement, and a court could appoint a receiver to take
control of the entity and liquidate its business.
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As part of our advisors obligations under the Advisory Agreement, our advisor will agree to
refrain from taking any action which, in its sole judgment made in good faith, would subject us to
regulation under the Investment Company Act. Failure to maintain an exclusion from registration
under the Investment Company Act would require us to significantly restructure our business plan.
For example, because affiliate transactions generally are prohibited under the Investment Company
Act, we would not be able to enter into transactions with any of our affiliates if we are required
to register as an investment company, and we may be required to terminate our Advisory Agreement
and any other agreements with affiliates, which could have a material adverse effect on our ability
to operate our business and pay distributions.
Risks Related to Investments in Real Estate
Changes in national, regional or local economic, demographic or real estate market conditions may
adversely affect our results of operations and our ability to pay distributions to our stockholders
or reduce the value of their investment.
We are subject to risks generally incidental to the ownership of real estate, including
changes in national, regional or local economic, demographic or real estate market conditions. We
are unable to predict future changes in national, regional or local economic, demographic or real
estate market conditions. For example, a recession or rise in interest rates could make it more
difficult for us to lease real properties or dispose of them. In addition, rising interest rates
could also make alternative interest-bearing and other investments more attractive and therefore
potentially lower the relative value of our existing real estate investments. These conditions, or
others we cannot predict, may adversely affect our results of operations, our ability to pay
distributions to our stockholders or reduce the value of their investment.
If we acquire real estate at a time when the real estate market is experiencing substantial
influxes of capital investment and competition for income producing properties, such real estate
investments may not appreciate or may decrease in value.
Although the real estate market currently is experiencing severe dislocations, in the future
the market may experience a substantial influx of capital from investors. Any substantial flow of
capital, combined with significant competition for income producing real estate, may result in
inflated purchase prices for such assets. To the extent we purchase real estate in such an
environment in the future, we will be subject to the risk that the value of such investments may
not appreciate or may decrease significantly below the amount we paid for such investment.
We may obtain only limited warranties when we purchase a property and would have only limited
recourse in the event our due diligence did not identify any issues that lower the value of our
property.
The seller of a property often sells such property in its as is condition on a where is
basis and with all faults, without any warranties of merchantability or fitness for a particular
use or purpose. In addition, purchase and sale agreements may contain only limited warranties,
representations and indemnifications that will only survive for a limited period after the closing.
The purchase of properties with limited warranties increases the risk that we may lose some or all
of our invested capital in the property, as well as the loss of rental income from that property.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect
our operations.
From time to time, we may attempt to acquire multiple properties in a single transaction.
Portfolio acquisitions are more complex and expensive than single property acquisitions, and the
risk that a multiple-property acquisition does not close may be greater than in a single-property
acquisition. Portfolio acquisitions may also result in us owning investments in geographically
dispersed markets, placing additional demands on our ability to manage the properties in the
portfolio. In addition, a seller may require that a group of properties be purchased as a package
even though we may not want to purchase one or more properties in the portfolio. In these
situations, if we are unable to identify another person or entity to acquire the unwanted
properties, we may be required to operate or attempt to dispose of these properties. To acquire
multiple properties in a single transaction, we may be required to accumulate a large amount of
cash. We would expect the returns that we earn on such cash to be less than the
ultimate returns on real property; therefore accumulating such cash could reduce our funds
available for distributions to our stockholders. Any of the foregoing events may have an adverse
effect on our operations.
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Uninsured losses relating to real estate and lender requirements to obtain insurance may reduce our
stockholders returns.
There are types of losses relating to real estate, generally catastrophic in nature, such as
losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental
matters, for which we do not intend to obtain insurance unless we are required to do so by mortgage
lenders. If any of our properties incurs a casualty loss that is not fully covered by insurance,
the value of our assets will be reduced by any such uninsured loss. In addition, other than any
reserves we may establish, we have no source of funding to repair or reconstruct any uninsured
damaged property, and we cannot assure our stockholders that any such sources of funding will be
available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large
amounts for uninsured losses, we could suffer reduced earnings that would result in less cash to be
distributed to our stockholders. In cases where we are required by mortgage lenders to obtain
casualty loss insurance for catastrophic events or terrorism, such insurance may not be available,
or may not be available at a reasonable cost, which could inhibit our ability to finance or
refinance our properties. Additionally, if we obtain such insurance, the costs associated with
owning a property would increase and could have a material adverse effect on the net income from
the property, and, thus, the cash available for distribution to our stockholders.
Terrorist attacks and other acts of violence or war may affect the markets in which we operate and
have a material adverse effect on our financial condition, results of operations and ability to pay
distributions to our stockholders.
Terrorist attacks may negatively affect our operations and our stockholders investment. We
may acquire real estate assets located in areas that are susceptible to attack. These attacks may
directly impact the value of our assets through damage, destruction, loss or increased security
costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage
to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply
increase the premiums we pay for coverage against property and casualty claims. Further, certain
losses resulting from these types of events are uninsurable or not insurable at reasonable costs.
More generally, any terrorist attack, other act of violence or war, including armed conflicts,
could result in increased volatility in, or damage to, the United States and worldwide financial
markets and economy, all of which could adversely affect our tenants ability to pay rent on their
leases or our ability to borrow money or issue capital stock at acceptable prices, which could have
a material adverse effect on our financial condition, results of operations and ability to pay
distributions to our stockholders.
Dramatic increases in insurance rates could adversely affect our cash flows and our ability to pay
distributions to our stockholders.
Recently, prices for insurance coverage have increased dramatically. We may not be able to
obtain insurance coverage at reasonable rates due to high premium and/or deductible amounts. As a
result, our cash flows could be adversely impacted due to these higher costs, which would adversely
affect our ability to pay distributions to our stockholders.
Delays in the acquisition, development and construction of real properties may have adverse effects
on our results of operations and our ability to pay distributions to our stockholders.
Delays we encounter in the selection, acquisition and development of real properties could
adversely affect our stockholders returns. Where properties are acquired prior to the start of
construction or during the early stages of construction, it will typically take several months to
complete construction and rent available space. Therefore, our stockholders could suffer delays in
the receipt of cash distributions attributable to those particular real properties. Delays in
completion of construction could give tenants the right to terminate preconstruction leases for
space at a newly developed project. We may incur additional risks when we make periodic progress
payments or other advances to builders prior to completion of construction. Each of those factors
could result in increased costs of a project or loss of our investment. In addition, we are subject
to normal lease-up risks relating to newly constructed projects. Furthermore, the price we agree to for a real property will be based on our
projections of rental income and expenses and estimates of the fair market value of real property
upon completion of construction. If our projections are inaccurate, we may pay too much for a
property.
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Our operating results may be negatively affected by potential development and construction delays
and resultant increased costs and risks.
While we do not currently intend to do so, we may use proceeds from our offering to acquire
properties upon which we will construct improvements. If we engage in development or construction
projects, we will be subject to uncertainties associated with re-zoning for development,
environmental concerns of governmental entities and/or community groups, and our builders ability
to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder
fails to perform, we may resort to legal action to rescind the purchase or the construction
contract or to compel performance. A builders performance may also be affected or delayed by
conditions beyond the builders control. Delays in completion of construction could also give
tenants the right to terminate preconstruction leases. We may incur additional risks if we make
periodic progress payments or other advances to builders before they complete construction. These
and other such factors can result in increased costs of a project or loss of our investment. In
addition, we will be subject to normal lease-up risks relating to newly constructed projects. We
also must rely on rental income and expense projections and estimates of the fair market value of
property upon completion of construction when agreeing upon a price at the time we acquire the
property. If our projections are inaccurate, we may pay too much for a property, and our return on
our investment could suffer.
While we do not currently intend to do so, we may invest in unimproved real property. Returns
from development of unimproved properties are also subject to risks associated with re-zoning the
land for development and environmental concerns of governmental entities and/or community groups.
Although we intend to limit any investment in unimproved real property to real property we intend
to develop, our stockholders investment, nevertheless, is subject to the risks associated with
investments in unimproved real property.
If we contract with a development company for newly developed property, our earnest money deposit
made to the development company may not be fully refunded.
We may acquire one or more properties under development. We anticipate that if we do acquire
properties that are under development, we will be obligated to pay a substantial earnest money
deposit at the time of contracting to acquire such properties, and that we will be required to
close the purchase of the property upon completion of the development of the property. We may enter
into such a contract with the development company even if at the time we enter into the contract,
we have not yet raised sufficient proceeds in our offering to enable us to close the purchase of
such property. However, we may not be required to close a purchase from the development company,
and may be entitled to a refund of our earnest money, in the following circumstances:
| the development company fails to develop the property; | ||
| all or a specified portion of the pre-leased tenants fail to take possession under their leases for any reason; or | ||
| we are unable to raise sufficient proceeds from our offering to pay the purchase price at closing. |
The obligation of the development company to refund our earnest money deposit will be
unsecured, and we may not be able to obtain a refund of such earnest money deposit from it under
these circumstances since the development company may be an entity without substantial assets or
operations.
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Uncertain market conditions relating to the future disposition of properties could cause us to sell
our properties at a loss in the future.
We intend to hold our various real estate investments until such time as our advisor
determines that a sale or other disposition appears to be advantageous to achieve our investment
objectives. Our advisor, subject to the oversight and approval of our board of directors, may
exercise its discretion as to whether and when to sell a property, and we will have no obligation
to sell properties at any particular time. We generally intend to hold properties for an extended
period of time, and we cannot predict with any certainty the various market conditions
affecting real estate investments that will exist at any particular time in the future.
Because of the uncertainty of market conditions that may affect the future disposition of our
properties, we cannot assure our stockholders that we will be able to sell our properties at a
profit in the future. Additionally, we may incur prepayment penalties in the event we sell a
property subject to a mortgage earlier than we otherwise had planned. Accordingly, the extent to
which our stockholders will receive cash distributions and realize potential appreciation on our
real estate investments will, among other things, be dependent upon fluctuating market conditions.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay
cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates, supply and demand, and other factors that are beyond our
control. We cannot predict whether we will be able to sell any property for the price or on the
terms set by us, or whether any price or other terms offered by a prospective purchaser would be
acceptable to us. We may be required to expend funds to correct defects or to make improvements
before a property can be sold. We may not have adequate funds available to correct such defects or
to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that
prohibit the sale of that property for a period of time or impose other restrictions, such as a
limitation on the amount of debt that can be placed or repaid on that property. We cannot predict
the length of time needed to find a willing purchaser and to close the sale of a property. Our
inability to sell a property when we desire to do so may cause us to reduce our selling price for
the property. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a
property could adversely impact our ability to pay distributions to our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would
adversely affect our cash flows from operations.
If we decide to sell any of our properties, we intend to use our best efforts to sell them for
cash. However, in some instances we may sell our properties by providing financing to purchasers.
When we provide financing to purchasers, we will bear the risk that the purchaser may default on
its obligations under the financing, which could negatively impact cash flows from operations. Even
in the absence of a purchaser default, the distribution of sale proceeds, or their reinvestment in
other assets, will be delayed until the promissory notes or other property we may accept upon the
sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive
initial down payments in cash and other property in the year of sale in an amount less than the
selling price, and subsequent payments will be spread over a number of years. If any purchaser
defaults under a financing arrangement with us, it could negatively impact our ability to pay cash
distributions to our stockholders.
Our stockholders may not receive any profits resulting from the sale of one of our properties, or
receive such profits in a timely manner, because we may provide financing to the purchaser of such
property.
If we sell one of our properties during liquidation, our stockholders may experience a delay
before receiving their share of the proceeds of such liquidation. In a forced or voluntary
liquidation, we may sell our properties either subject to or upon the assumption of any then
outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a
purchase money obligation secured by a mortgage as partial payment. We do not have any limitations
or restrictions on our taking such purchase money obligations. To the extent we receive promissory
notes or other property instead of cash from sales, such proceeds, other than any interest payable
on those proceeds, will not be included in net sale proceeds until and to the extent the promissory
notes or other property are actually paid, sold, refinanced or otherwise disposed of. In many
cases, we will receive initial down payments in the year of sale in an amount less than the selling
price and subsequent payments will be spread over a number of years. Therefore, our stockholders
may experience a delay in the distribution of the proceeds of a sale until such time.
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We face possible liability for environmental cleanup costs and damages for contamination related to
properties we acquire, which could substantially increase our costs and reduce our liquidity and
cash distributions to our stockholders.
Because we intend to own and operate real estate, we will be subject to various federal, state
and local environmental laws, ordinances and regulations. Under these laws, ordinances and
regulations, a current or previous owner or operator of real estate may be liable for the cost of
removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be
substantial. Such laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses may be operated, and
these restrictions may require substantial expenditures. Environmental laws provide for sanctions
in the event of noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law principles could be
used to impose liability for release of and exposure to hazardous substances, including the release
of asbestos-containing materials into the air, and third parties may seek recovery from owners or
operators of real estate for personal injury or property damage associated with exposure to
released hazardous substances. In addition, new or more stringent laws or stricter interpretations
of existing laws could change the cost of compliance or liabilities and restrictions arising out of
such laws. The cost of defending against these claims, complying with environmental regulatory
requirements, conducting remediation of any contaminated property, or of paying personal injury
claims could be substantial, which would reduce our liquidity and cash available for distribution
to our stockholders. In addition, the presence of hazardous substances on a property or the failure
to meet environmental regulatory requirements may materially impair our ability to use, lease or
sell a property, or to use the property as collateral for borrowing.
Our real estate investments may be concentrated in medical office or other healthcare-related
facilities, making us more vulnerable economically than if our investments were diversified.
As a REIT, we will invest primarily in real estate. Within the real estate industry, we intend
to primarily acquire or selectively develop and own medical office buildings and healthcare-related
facilities. We are subject to risks inherent in concentrating investments in real estate. These
risks resulting from a lack of diversification become even greater as a result of our business
strategy to invest to a substantial degree in healthcare-related facilities.
A downturn in the commercial real estate industry generally could significantly adversely
affect the value of our properties. A downturn in the healthcare industry could negatively affect
our lessees ability to make lease payments to us and our ability to pay distributions to our
stockholders. These adverse effects could be more pronounced than if we diversified our investments
outside of real estate or if our portfolio did not include a substantial concentration in medical
office buildings and healthcare-related facilities.
A high concentration of our properties in a particular geographic area would magnify the effects of
downturns in that geographic area.
We expect that the South and West regions of the U.S. will experience the greatest levels of
population growth in the foreseeable future. As population in key states in the South and West
grows, the need for more healthcare facilities and properties in those regions may also increase.
Although we intend to acquire real estate throughout the U.S., it is likely that a significant
portion of our portfolio will be located in Southern and Western states. In the event that we have
a concentration of properties in any particular geographic area, any adverse situation that
disproportionately effects that geographic area would have a magnified adverse effect on our
portfolio.
Certain of our properties may not have efficient alternative uses, so the loss of a tenant may
cause us not to be able to find a replacement or cause us to spend considerable capital to adapt
the property to an alternative use.
Some of the properties we will seek to acquire are specialized medical facilities. If we or
our tenants terminate the leases for these properties or our tenants lose their regulatory
authority to operate such properties, we may not be able to locate suitable replacement tenants to
lease the properties for their specialized uses. Alternatively, we may be required to spend
substantial amounts to adapt the properties to other uses. Any loss of revenues or additional
capital expenditures required as a result may have a material adverse effect on our business,
financial condition and results of operations and our ability to pay distributions to our
stockholders.
Our medical office buildings, healthcare-related facilities and tenants may be unable to compete
successfully.
Our medical office buildings and healthcare-related facilities often will face competition
from nearby hospitals and other medical office buildings that provide comparable services. Some of
those competing facilities are owned by governmental agencies and supported by tax revenues, and
others are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions. These types of
support are not available to our buildings.
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Similarly, our tenants will face competition from other medical practices in nearby hospitals
and other medical facilities. Our tenants failure to compete successfully with these other
practices could adversely affect their ability to make rental payments, which could adversely
affect our rental revenues. Further, from time to time and for reasons beyond our control, referral
sources, including physicians and managed care organizations, may change their lists of hospitals
or physicians to which they refer patients. This could adversely affect our tenants ability to
make rental payments, which could adversely affect our rental revenues.
Any reduction in rental revenues resulting from the inability of our medical office buildings
and healthcare-related facilities and our tenants to compete successfully may have a material
adverse effect on our business, financial condition and results of operations and our ability to
pay distributions to our stockholders.
Our costs associated with complying with the Americans with Disabilities Act may reduce our cash
available for distributions.
The properties we acquire may be subject to the Americans with Disabilities Act of 1990, as
amended, or the ADA. Under the ADA, all places of public accommodation are required to comply with
federal requirements related to access and use by disabled persons. The ADA has separate compliance
requirements for public accommodations and commercial facilities that generally require that
buildings and services be made accessible and available to people with disabilities. The ADAs
requirements could require removal of access barriers and could result in the imposition of
injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to
acquire properties that comply with the ADA or place the burden on the seller or other third party,
such as a tenant, to ensure compliance with the ADA. However, we cannot assure our stockholders
that we will be able to acquire properties or allocate responsibilities in this manner. If we
cannot, our funds used for ADA compliance may reduce cash available for distributions and the
amount of distributions to our stockholders.
Increased operating expenses could reduce cash flows from operations and funds available to acquire
investments or pay distributions.
Any property that we acquire will be subject to operating risks common to real estate in
general, any or all of which may negatively affect us. If any property is not fully occupied or if
rents are being paid in an amount that is insufficient to cover operating expenses, we could be
required to expend funds with respect to that property for operating expenses. The properties will
be subject to increases in tax rates, utility costs, insurance costs, repairs and maintenance
costs, administrative costs and other operating expenses. While we expect that many of our property
leases will require the tenants to pay all or a portion of these expenses, some of our leases or
future leases may not be negotiated on that basis, in which event we may have to pay these costs.
If we are unable to lease properties on terms that require the tenants to pay all or some of the
properties operating expenses, if our tenants fail to pay these expenses as required or if
expenses we are required to pay exceed our expectations, we could have less funds available for
future acquisitions or cash available for distributions to our stockholders.
Our real properties will be subject to property taxes that may increase in the future, which could
adversely affect our cash flows.
Our real properties will be subject to real and personal property taxes that may increase as
tax rates change and as the real properties are assessed or reassessed by taxing authorities. Some
of our leases generally provide that the property taxes or increases therein are charged to the
tenants as an expense related to the real properties that they occupy, while other leases will
generally provide that we are responsible for such taxes. In any case, as the owner of the
properties, we will be ultimately responsible for payment of the taxes to the applicable government
authorities. If real property taxes increase, our tenants may be unable to make the required tax
payments, ultimately requiring us to pay the taxes even if otherwise stated under the terms of the
lease. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the
real property and the real property may be subject to a tax sale. In addition, we are generally
responsible for real property taxes related to any vacant space.
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Costs of complying with governmental laws and regulations related to environmental protection and
human health and safety may be high.
All real property investments and the operations conducted in connection with such investments
are subject to federal, state and local laws and regulations relating to environmental protection
and human health and safety. Some of these laws and regulations may impose joint and several
liability on customers, owners or operators for the costs to investigate or remediate contaminated
properties, regardless of fault or whether the acts causing the contamination were legal.
Under various federal, state and local environmental laws, a current or previous owner or
operator of real property may be liable for the cost of removing or remediating hazardous or toxic
substances on such real property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous substances, or the failure to properly remediate those
substances, may adversely affect our ability to sell, rent or pledge such real property as
collateral for future borrowings. Environmental laws also may impose restrictions on the manner in
which real property may be used or businesses may be operated. Some of these laws and regulations
have been amended so as to require compliance with new or more stringent standards as of future
dates. Compliance with new or more stringent laws or regulations or stricter interpretation of
existing laws may require us to incur material expenditures. Future laws, ordinances or regulations
may impose material environmental liability. Additionally, our tenants operations, the existing
condition of land when we buy it, operations in the vicinity of our real properties, such as the
presence of underground storage tanks, or activities of unrelated third parties may affect our real
properties. In addition, there are various local, state and federal fire, health, life-safety and
similar regulations with which we may be required to comply, and which may subject us to liability
in the form of fines or damages for noncompliance. In connection with the acquisition and ownership
of our real properties, we may be exposed to such costs in connection with such regulations. The
cost of defending against environmental claims, of any damages or fines we must pay, of compliance
with environmental regulatory requirements or of remediating any contaminated real property could
materially and adversely affect our business, lower the value of our assets or results of
operations and, consequently, lower the amounts available for distribution to our stockholders.
Risks Related to the Healthcare Industry
The healthcare industry is heavily regulated and new laws or regulations, changes to existing laws
or regulations, loss of licensure or failure to obtain licensure could result in the inability of
our tenants to make rent payments to us.
The healthcare industry is heavily regulated by federal, state and local governmental bodies.
Our tenants generally will be subject to laws and regulations covering, among other things,
licensure, certification for participation in government programs, and relationships with
physicians and other referral sources. Changes in these laws and regulations could negatively
affect the ability of our tenants to make lease payments to us and our ability to pay distributions
to our stockholders.
Many of our medical properties and their tenants may require a license or certificate of need,
or CON, to operate. Failure to obtain a license or CON, or loss of a required license or CON would
prevent a facility from operating in the manner intended by the tenant. These events could
materially adversely affect our tenants ability to make rent payments to us. State and local laws
also may regulate expansion, including the addition of new beds or services or acquisition of
medical equipment, and the construction of healthcare-related facilities, by requiring a CON or
other similar approval. State CON laws are not uniform throughout the United States and are subject
to change. We cannot predict the impact of state CON laws on our development of facilities or the
operations of our tenants.
In addition, state CON laws often materially impact the ability of competitors to enter into
the marketplace of our facilities. The repeal of CON laws could allow competitors to freely operate
in previously closed markets. This could negatively affect our tenants abilities to make rent
payments to us.
In limited circumstances, loss of state licensure or certification or closure of a facility
could ultimately result in loss of authority to operate the facility and require new CON
authorization to re-institute operations. As a result, a
portion of the value of the facility may be reduced, which would adversely impact our
business, financial condition and results of operations and our ability to pay distributions to our
stockholders.
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Reductions in reimbursement from third party payors, including Medicare and Medicaid, could
adversely affect the profitability of our tenants and hinder their ability to make rent payments to
us.
Sources of revenue for our tenants may include the federal Medicare program, state Medicaid
programs, private insurance carriers and health maintenance organizations, among others. Efforts by
such payors to reduce healthcare costs will likely continue, which may result in reductions or
slower growth in reimbursement for certain services provided by some of our tenants. In addition,
the failure of any of our tenants to comply with various laws and regulations could jeopardize
their ability to continue participating in Medicare, Medicaid and other government sponsored
payment programs.
The healthcare industry continues to face various challenges, including increased government
and private payor pressure on healthcare providers to control or reduce costs. It is possible that
our tenants will continue to experience a shift in payor mix away from fee-for-service payors,
resulting in an increase in the percentage of revenues attributable to managed care payors, and
general industry trends that include pressures to control healthcare costs. Pressures to control
healthcare costs and a shift away from traditional health insurance reimbursement to managed care
plans have resulted in an increase in the number of patients whose healthcare coverage is provided
under managed care plans, such as health maintenance organizations and preferred provider
organizations. These changes could have a material adverse effect on the financial condition of
some or all of our tenants. The financial impact on our tenants could restrict their ability to
make rent payments to us, which would have a material adverse effect on our business, financial
condition and results of operations and our ability to pay distributions to our stockholders.
Some tenants of our medical office buildings and healthcare-related facilities will be subject to
fraud and abuse laws, the violation of which by a tenant may jeopardize the tenants ability to
make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices
by healthcare providers who participate in, receive payments from or are in a position to make
referrals in connection with government-sponsored healthcare programs, including the Medicare and
Medicaid programs. Our lease arrangements with certain tenants may also be subject to these fraud
and abuse laws.
These laws include:
| the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of any item or service reimbursed by Medicare or Medicaid; | ||
| the Federal Physician Self-Referral Prohibition, which, subject to specific exceptions, restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare or Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship; | ||
| the False Claims Act, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs; and | ||
| the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human Services to impose monetary penalties for certain fraudulent acts. |
Each of these laws includes criminal and/or civil penalties for violations that range from
punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid
payments and/or exclusion from the Medicare and Medicaid programs. Certain laws, such as the False
Claims Act, allow for individuals to bring whistleblower actions on behalf of the government for
violations thereof. Additionally, states in which the facilities are located may have similar fraud
and abuse laws. Investigation by a federal or state governmental body for violation of fraud and
abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize
that tenants ability to operate or to make rent payments, which may have a material adverse
effect on our business, financial condition and results of operations and our ability to pay
distributions to our stockholders.
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Adverse trends in healthcare provider operations may negatively affect our lease revenues and our
ability to pay distributions to our stockholders.
The healthcare industry is currently experiencing:
| changes in the demand for and methods of delivering healthcare services; | ||
| changes in third party reimbursement policies; | ||
| significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; | ||
| increased expense for uninsured patients; | ||
| increased competition among healthcare providers; | ||
| increased liability insurance expense; | ||
| continued pressure by private and governmental payors to reduce payments to providers of services; and | ||
| increased scrutiny of billing, referral and other practices by federal and state authorities. |
These factors may adversely affect the economic performance of some or all of our
healthcare-related tenants and, in turn, our lease revenues and our ability to pay distributions to
our stockholders.
Our healthcare-related tenants may be subject to significant legal actions that could subject them
to increased operating costs and substantial uninsured liabilities, which may affect their ability
to pay their rent payments to us.
As is typical in the healthcare industry, our healthcare-related tenants may often become
subject to claims that their services have resulted in patient injury or other adverse effects.
Many of these tenants may have experienced an increasing trend in the frequency and severity of
professional liability and general liability insurance claims and litigation asserted against them.
The insurance coverage maintained by these tenants may not cover all claims made against them nor
continue to be available at a reasonable cost, if at all. In some states, insurance coverage for
the risk of punitive damages arising from professional liability and general liability claims
and/or litigation may not, in certain cases, be available to these tenants due to state law
prohibitions or limitations of availability. As a result, these types of tenants of our medical
office buildings and healthcare-related facilities operating in these states may be liable for
punitive damage awards that are either not covered or are in excess of their insurance policy
limits. We also believe that there has been, and will continue to be, an increase in governmental
investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false
claims, as well as an increase in enforcement actions resulting from these investigations.
Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or
governmental investigation, whether currently asserted or arising in the future, could have a
material adverse effect on a tenants financial condition. If a tenant is unable to obtain or
maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a
tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable
government enforcement action, the tenant could be exposed to substantial additional liabilities,
which may affect the tenants ability to pay rent, which in turn could have a material adverse
effect on our business, financial condition and results of operations and our ability to pay
distributions to our stockholders.
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Risks Related to Debt Financing
Increases in interest rates could increase the amount of our debt payments and therefore negatively
impact our operating results.
Interest we will pay on our debt obligations will reduce cash available for distributions.
Whenever we incur variable rate debt, increases in interest rates would increase our interest
costs, which would reduce our cash flows and our ability to pay distributions to our stockholders.
If we need to repay existing debt during periods of rising interest rates, we could be required to
liquidate one or more of our investments in properties at times which may not permit realization of
the maximum return on such investments.
To the extent we borrow at fixed rates or enter into fixed interest rate swaps, we will not benefit
from reduced interest expense if interest rates decrease.
We are exposed to the effects of interest rate changes primarily as a result of borrowings
used to maintain liquidity and fund expansion and refinancing of our real estate investment
portfolio and operations. To limit the impact of interest rate changes on earnings, prepayment
penalties and cash flows and to lower overall borrowing costs while taking into account variable
interest rate risk, we may borrow at fixed rates or variable rates depending upon prevailing market
conditions. We may also enter into derivative financial instruments such as interest rate swaps and
caps in order to mitigate our interest rate risk on a related financial instrument.
Hedging activity may expose us to risks.
To the extent that we use derivative financial instruments to hedge against interest rate
fluctuations, we will be exposed to credit risk and legal enforceability risks. In this context,
credit risk is the failure of the counterparty to perform under the terms of the derivative
contract. If the fair value of a derivative contract is positive, the counterparty owes us, which
creates credit risk for us. Legal enforceability risks encompass general contractual risks,
including the risk that the counterparty will breach the terms of, or fail to perform its
obligations under, the derivative contract. If we are unable to manage these risks effectively, our
results of operations, financial condition and ability to pay distributions to our stockholders
will be adversely affected.
Lenders may require us to enter into restrictive covenants relating to our operations, which could
limit our ability to pay distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our ability to
incur additional debt and affect our distribution and operating strategies. Loan documents we enter
into may contain covenants that limit our ability to further mortgage the property, discontinue
insurance coverage, or replace our advisor. These or other limitations may adversely affect our
flexibility and our ability to achieve our investment objectives.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds
available for distribution to our stockholders.
We may finance or refinance our properties using interest-only mortgage indebtedness. During
the interest-only period, the amount of each scheduled payment will be less than that of a
traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be
reduced (except in the case of prepayments) because there are no scheduled monthly payments of
principal during this period. After the interest-only period, we will be required either to make
scheduled payments of amortized principal and interest or to make a lump-sum or balloon payment
at maturity. These required principal or balloon payments will increase the amount of our scheduled
payments and may increase our risk of default under the related mortgage loan. If the mortgage loan
has an adjustable interest rate, the amount of our scheduled payments also may increase at a time
of rising interest rates. Increased payments and substantial principal or balloon maturity payments
will reduce the funds available for distribution to our stockholders because cash otherwise
available for distribution will be required to pay principal and interest associated with these
mortgage loans.
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If we enter into financing arrangements involving balloon payment obligations, it may
adversely affect our ability to refinance or sell properties on favorable terms, and to pay
distributions to our stockholders.
Some of our financing arrangements may require us to make a lump-sum or balloon payment at
maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our
ability to obtain additional financing or our ability to sell the particular property. At the time
the balloon payment is due, we may or may not be
able to refinance the balloon payment on terms as favorable as the original loan or sell the
particular property at a price sufficient to make the balloon payment. The refinancing or sale
could affect the rate of return to our stockholders and the projected time of disposition of our
assets. In an environment of increasing mortgage rates, if we place mortgage debt on properties, we
run the risk of being unable to refinance such debt if mortgage rates are higher at a time a
balloon payment is due. In addition, payments of principal and interest made to service our debts,
including balloon payments, may leave us with insufficient cash to pay the distributions that we
are required to pay to qualify or maintain our qualification as a REIT. Any of these results would
have a significant, negative impact on our stockholders investment.
Risks Related to Real Estate-Related Investments
The mortgage loans in which we may invest and the mortgage loans underlying the mortgage-backed
securities in which we may invest may be impacted by unfavorable real estate market conditions,
which could decrease their value.
If we acquire investments in mortgage loans or mortgage-backed securities, such investments
will involve special risks relating to the particular borrower or issuer of the mortgage-backed
securities and we will be at risk of loss on those investments, including losses as a result of
defaults on mortgage loans. These losses may be caused by many conditions beyond our control,
including economic conditions affecting real estate values, tenant defaults and lease expirations,
interest rate levels and the other economic and liability risks associated with real estate. If we
acquire property by foreclosure following defaults under our mortgage loan investments, we will
have the economic and liability risks as the owner described above. We do not know whether the
values of the property securing any of our real estate-related investments will remain at the
levels existing on the dates we initially make the related investment. If the values of the
underlying properties drop, our risk will increase and the values of our interests may decrease.
Delays in liquidating defaulted mortgage loan investments could reduce our investment returns.
If there are defaults under our mortgage loan investments, we may not be able to foreclose on
or obtain a suitable remedy with respect to such investments. Specifically, we may not be able to
repossess and sell the underlying properties quickly, which could reduce the value of our
investment. For example, an action to foreclose on a property securing a mortgage loan is regulated
by state statutes and rules and is subject to many of the delays and expenses of lawsuits if the
defendant raises defenses or counterclaims. Additionally, in the event of default by a mortgagor,
these restrictions, among other things, may impede our ability to foreclose on or sell the
mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage
loan.
The commercial mortgage-backed securities in which we may invest are subject to several types of risks.
Commercial mortgage-backed securities are bonds which evidence interests in, or are secured
by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the
mortgage-backed securities in which we may invest are subject to all the risks of the underlying
mortgage loans.
In a rising interest rate environment, the value of commercial mortgage-backed securities may
be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting
in the extension of the securitys effective maturity and the related increase in interest rate
sensitivity of a longer-term instrument. The value of commercial mortgage-backed securities may
also change due to shifts in the markets perception of issuers and regulatory or tax changes
adversely affecting the mortgage securities markets as a whole. In addition, commercial
mortgage-backed securities are subject to the credit risk associated with the performance of the
underlying mortgage properties.
Commercial mortgage-backed securities are also subject to several risks created through the
securitization process. Subordinate commercial mortgage-backed securities are paid interest-only to
the extent that there are funds available to make payments. To the extent the collateral pool
includes a large percentage of delinquent loans, there is a risk that interest payments on
subordinate commercial mortgage-backed securities will not be fully paid. Subordinate securities of
commercial mortgage-backed securities are also subject to greater credit risk than those commercial
mortgage-backed securities that are more highly rated.
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The mezzanine loans in which we may invest would involve greater risks of loss than senior
loans secured by income-producing real estate.
We may invest in mezzanine loans that take the form of subordinated loans secured by second
mortgages on the underlying real estate or loans secured by a pledge of the ownership interests of
either the entity owning the real estate or the entity that owns the interest in the entity owning
the real estate. These types of investments involve a higher degree of risk than long-term senior
mortgage lending secured by income producing real estate because the investment may become
unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the
entity providing the pledge of its ownership interests as security, we may not have full recourse
to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our
mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the
event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As
a result, we may not recover some or all of our investment. In addition, mezzanine loans may have
higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real
estate and increasing the risk of loss of principal.
Real estate-related equity securities in which we may invest are subject to specific risks relating
to the particular issuer of the securities and may be subject to the general risks of investing in
real estate or real estate-related assets.
We may invest in the common and preferred stock of both publicly traded and private
unaffiliated real estate companies, which involves a higher degree of risk than debt securities due
to a variety of factors, including the fact that such investments are subordinate to creditors and
are not secured by the issuers property. Our investments in real estate-related equity securities
will involve special risks relating to the particular issuer of the equity securities, including
the financial condition and business outlook of the issuer. Issuers of real estate-related equity
securities generally invest in real estate or real estate-related assets and are subject to the
inherent risks associated with acquiring real estate-related investments discussed in these risk
factors, including risks relating to rising interest rates.
We expect a portion of our real estate-related investments to be illiquid and we may not be able to
adjust our portfolio in response to changes in economic and other conditions.
We may acquire real estate-related investments in connection with privately negotiated
transactions which are not registered under the relevant securities laws, resulting in a
prohibition against their transfer, sale, pledge or other disposition except in a transaction that
is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As
a result, our ability to vary our portfolio in response to changes in economic and other conditions
may be relatively limited. The mezzanine and bridge loans we may purchase will be particularly
illiquid investments due to their short life, their unsuitability for securitization and the
greater difficulty of recoupment in the event of a borrowers default.
Interest rate and related risks may cause the value of our real estate-related investments to be
reduced.
Interest rate risk is the risk that fixed income securities such as preferred and debt
securities, and to a lesser extent dividend paying common stocks, will decline in value because of
changes in market interest rates. Generally, when market interest rates rise, the market value of
such securities will decline, and vice versa. Our investment in such securities means that the net
asset value and market price of the common stock may tend to decline if market interest rates rise.
During periods of rising interest rates, the average life of certain types of securities may
be extended because of slower than expected principal payments. This may lock in a below-market
interest rate, increase the securitys duration and reduce the value of the security. This is known
as extension risk. During periods of declining interest rates, an issuer may be able to exercise an
option to prepay principal earlier than scheduled, which is generally known as call or prepayment
risk. If this occurs, we may be forced to reinvest in lower yielding securities. This is known as
reinvestment risk. Preferred and debt securities frequently have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation
if the issuer can refinance
the debt at a lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. These risks may reduce the value of our real estate-related investments.
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If we liquidate prior to the maturity of our real estate-related investments, we may be
forced to sell those investments on unfavorable terms or at a loss.
Our board of directors may choose to effect a liquidity event in which we liquidate our
assets, including our real estate-related investments. If we liquidate those investments prior to
their maturity, we may be forced to sell those investments on unfavorable terms or at a loss. For
instance, if we are required to liquidate mortgage loans at a time when prevailing interest rates
are higher than the interest rates of such mortgage loans, we would likely sell such loans at a
discount to their stated principal values.
Risks Related to Joint Ventures
The terms of joint venture agreements or other joint ownership arrangements into which we have and
may enter could impair our operating flexibility and our results of operations.
In connection with the purchase of real estate, we may enter into joint ventures with third
parties, including affiliates of our advisor. We may also purchase or develop properties in
co-ownership arrangements with the sellers of the properties, developers or other persons. These
structures involve participation in the investment by other parties whose interests and rights may
not be the same as ours. Our joint venture partners may have rights to take some actions over which
we have no control and may take actions contrary to our interests. Joint ownership of an investment
in real estate may involve risks not associated with direct ownership of real estate, including the
following:
| a venture partner may at any time have economic or other business interests or goals which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in a joint venture or the timing of the termination and liquidation of the venture; | ||
| a venture partner might become bankrupt and such proceedings could have an adverse impact on the operation of the partnership or joint venture; | ||
| actions taken by a venture partner might have the result of subjecting the property to liabilities in excess of those contemplated; and | ||
| a venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT. |
Under certain joint venture arrangements, neither venture partner may have the power to
control the venture, and an impasse could occur, which might adversely affect the joint venture and
decrease potential returns to our stockholders. If we have a right of first refusal or buy/sell
right to buy out a venture partner, we may be unable to finance such a buy-out or we may be forced
to exercise those rights at a time when it would not otherwise be in our best interest to do so. If
our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing
capacity or other capital resources to allow us to purchase an interest of a venture partner
subject to the buy/sell right, in which case we may be forced to sell our interest when we would
otherwise prefer to retain our interest. In addition, we may not be able to sell our interest in a
joint venture on a timely basis or on acceptable terms if we desire to exit the venture for any
reason, particularly if our interest is subject to a right of first refusal of our venture partner.
We may structure our joint venture relationships in a manner which may limit the amount we
participate in the cash flows or appreciation of an investment.
We may enter into joint venture agreements, the economic terms of which may provide for the
distribution of income to us otherwise than in direct proportion to our ownership interest in the
joint venture. For example, while we and a co-venturer may invest an equal amount of capital in an
investment, the investment may be structured such
that we have a right to priority distributions of cash flows up to a certain target return
while the co-venturer may receive a disproportionately greater share of cash flows than we are to
receive once such target return has been achieved. This type of investment structure may result in
the co-venturer receiving more of the cash flows, including appreciation, of an investment than we
would receive. If we do not accurately judge the appreciation prospects of a particular investment
or structure the venture appropriately, we may incur losses on joint venture investments or have
limited participation in the profits of a joint venture investment, either of which could reduce
our ability to pay cash distributions to our stockholders.
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Federal Income Tax Risks
Failure to qualify as a REIT for federal income tax purposes would subject us to federal income tax
on our taxable income at regular corporate rates, which would substantially reduce our ability to
pay distributions to our stockholders.
We have not yet elected to be taxed as a REIT under the Internal Revenue Code. We intend to
qualify and elect to be taxed as a REIT for federal income tax purposes beginning with our taxable
year ending December 31, 2009, or the first year in which we commence material operations. To
qualify as a REIT, we must meet various requirements set forth in the Internal Revenue Code
concerning, among other things, the ownership of our outstanding common stock, the nature of our
assets, the sources of our income and the amount of our distributions to our stockholders. The REIT
qualification requirements are extremely complex, and interpretations of the federal income tax
laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will
be successful in operating so as to qualify as a REIT. At any time, new laws, interpretations or
court decisions may change the federal tax laws relating to, or the federal income tax consequences
of, qualification as a REIT. It is possible that future economic, market, legal, tax or other
considerations may cause our board of directors to determine that it is not in our best interest to
qualify as a REIT or revoke our REIT election, which it may do without stockholder approval.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax
on our taxable income at corporate rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing
our REIT status would reduce our net earnings available for investment or distribution to our
stockholders because of the additional tax liability. In addition, distributions would no longer
qualify for the distributions paid deduction, and we would no longer be required to pay
distributions. If this occurs, we might be required to borrow funds or liquidate some investments
in order to pay the applicable tax.
As a result of all these factors, our failure to qualify as a REIT could impair our ability to
expand our business and raise capital, and would substantially reduce our ability to pay
distributions to our stockholders.
To qualify as a REIT and to avoid the payment of federal income and excise taxes, we may be forced
to borrow funds, use proceeds from the issuance of securities (including our offering), or sell
assets to pay distributions, which may result in our distributing amounts that may otherwise be
used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each
year to distribute to our stockholders at least 90.0% of our real estate investment trust taxable
income, determined without regard to the deduction for distributions paid and by excluding net
capital gains. We will be subject to federal income tax on our undistributed taxable income and net
capital gain and to a 4.0% nondeductible excise tax on any amount by which distributions we pay
with respect to any calendar year are less than the sum of (1) 85.0% of our ordinary income,
(2) 95.0% of our capital gain net income and (3) 100% of our undistributed income from prior years.
These requirements could cause us to distribute amounts that otherwise would be spent on
acquisitions of properties and it is possible that we might be required to borrow funds, use
proceeds from the issuance of securities (including our offering) or sell assets in order to
distribute enough of our taxable income to qualify or maintain our qualification as a REIT and to
avoid the payment of federal income and excise taxes.
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Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and
sell properties through taxable REIT subsidiaries, each of which would diminish the return to our
stockholders.
In light of our investment strategy, it is possible that one or more sales of our properties
may be prohibited transactions under provisions of the Internal Revenue Code. If we are deemed to
have engaged in a prohibited transaction (i.e., we sell a property held by us primarily for sale
in the ordinary course of our trade or business), all income that we derive from such sale would be
subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to
sell property without risking the imposition of the 100% tax. A principal requirement of the safe
harbor is that the REIT must hold the applicable property for not less than two years prior to its
sale. Given our investment strategy, it is entirely possible, if not likely, that the sale of one
or more of our properties will not fall within the prohibited transaction safe harbor.
If we desire to sell a property pursuant to a transaction that does not fall within the safe
harbor, we may be able to avoid the 100% penalty tax if we acquired the property through a taxable
REIT subsidiary, or TRS, or acquired the property and transferred it to a TRS for a non-tax
business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes). However,
there may be circumstances that prevent us from using a TRS in a transaction that does not qualify
for the safe harbor. Additionally, even if it is possible to effect a property disposition through
a TRS, we may decide to forego the use of a TRS in a transaction that does not meet the safe harbor
based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors
that the disposition will not be subject to the 100% penalty tax. In cases where a property
disposition is not effected through a TRS, the Internal Revenue Service, or the IRS, could
successfully assert that the disposition constitutes a prohibited transaction, in which event all
of the net income from the sale of such property will be payable as a tax and none of the proceeds
from such sale will be distributable by us to our stockholders or available for investment by us.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100%
penalty tax upon disposition, then we may acquire such property through a TRS in order to avoid the
possibility that the sale of such property will be a prohibited transaction and subject to the 100%
penalty tax. If we already own such a property directly or indirectly through an entity other than
a TRS, we may contribute the property to a TRS if there is another, non-tax-related business
purpose for the contribution of such property to the TRS. Following the transfer of the property to
a TRS, the TRS will operate the property and may sell such property and distribute the net proceeds
from such sale to us, and we may distribute the net proceeds distributed to us by the TRS to our
stockholders. Though a sale of the property by a TRS likely would eliminate the danger of the
application of the 100% penalty tax, the TRS itself would be subject to a tax at the federal level,
and potentially at the state and local levels, on the gain realized by it from the sale of the
property as well as on the income earned while the property is operated by the TRS. This tax
obligation would diminish the amount of the proceeds from the sale of such property that would be
distributable to our stockholders. As a result, the amount available for distribution to our
stockholders would be substantially less than if the REIT had not operated and sold such property
through the TRS and such transaction was not successfully characterized as a prohibited
transaction. The maximum federal income tax rate currently is 35.0%. Federal, state and local
corporate income tax rates may be increased in the future, and any such increase would reduce the
amount of the net proceeds available for distribution by us to our stockholders from the sale of
property through a TRS after the effective date of any increase in such tax rates.
If we own too many properties through one or more of our TRSs, then we may lose our status as
a REIT. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income
tax on our taxable income at corporate rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing
our REIT status would reduce our net earnings available for investment or distribution to
stockholders because of the additional tax liability. In addition, distributions to stockholders
would no longer qualify for the distributions paid deduction, and we would no longer be required to
pay distributions. If this occurs, we might be required to borrow funds or liquidate some
investments in order to pay the applicable tax. As a REIT, the value of the securities we hold in
all of our TRSs may not exceed 25.0% of the value of all of our assets at the end of any calendar
quarter. If the IRS were to determine that the value of our interests in all of our TRSs exceeded
25.0% of the value of total assets at the end of any calendar quarter, then we would fail to
qualify as a REIT. If we determine it to be in our best interest to own a substantial number of our
properties through one or more TRSs, then it is possible that the IRS may conclude that the value
of our interests in our TRSs exceeds 25.0% of the value of our total assets at the end of any
calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no
more than 25.0% of our gross income with respect to any year may be from sources other than real
estate. Distributions paid to us from a TRS are considered to be non-real estate income. Therefore,
we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all
other non-real estate income with respect to any one year, are more than 25.0% of our gross
income with respect to such year. We will use all reasonable efforts to structure our activities in
a manner intended to satisfy the requirements for our qualification as a REIT. Our failure to
qualify as a REIT would adversely affect our stockholders return on their investment.
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Our stockholders may have a current tax liability on distributions they elect to reinvest in
shares of our common stock.
If our stockholders participate in the DRIP, they will be deemed to have received, and for
income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the
extent the amount reinvested was not a tax-free return of capital. As a result, unless our
stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their
tax liability on the value of the shares of common stock received.
Legislative or regulatory action with respect to taxes could adversely affect the returns to our
investors.
In recent years, numerous legislative, judicial and administrative changes have been made in
the provisions of the federal income tax laws applicable to investments similar to an investment in
our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot
assure our stockholders that any such changes will not adversely affect the taxation of a
stockholder. Any such changes could have an adverse effect on an investment in our stock or on the
market value or the resale potential of our assets. Our stockholders are urged to consult with
their own tax advisor with respect to the impact of recent legislation on their investment in our
stock and the status of legislative, regulatory or administrative developments and proposals and
their potential effect on an investment in shares of our common stock.
Congress passed major federal tax legislation in 2003, with modifications to that legislation
in 2005. One of the changes effected by that legislation generally reduced the tax rate on
dividends paid by companies to individuals to a maximum of 15.0% prior to 2011. REIT distributions
generally do not qualify for this reduced rate. The tax changes did not, however, reduce the
corporate tax rates. Therefore, the maximum corporate tax rate of 35.0% has not been affected.
However, as a REIT, we generally would not be subject to federal or state corporate income taxes on
that portion of our ordinary income or capital gain that we distribute to our stockholders, and we
thus expect to avoid the double taxation to which other companies are typically subject.
Although REITs continue to receive substantially better tax treatment than entities taxed as
corporations, it is possible that future legislation would result in a REIT having fewer tax
advantages, and it could become more advantageous for a company that invests in real estate to
elect to be taxed for federal income tax purposes as a corporation. As a result, our charter
provides our board of directors with the power, under certain circumstances, to revoke or otherwise
terminate our REIT election and cause us to be taxed as a corporation, without the vote of our
stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only
cause such changes in our tax treatment if it determines in good faith that such changes are in
their best interest.
In certain circumstances, we may be subject to federal and state income taxes as a REIT,
which would reduce our cash available for distribution to our stockholders.
Even if we qualify as a REIT, we may be subject to federal income taxes or state taxes. For
example, net income from a prohibited transaction will be subject to a 100% tax. We may not be
able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide
to retain capital gains we earn from the sale or other disposition of our property and pay income
tax directly on such income. In that event, our stockholders would be treated as if they earned
that income and paid the tax on it directly. However, our stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed payment of such tax
liability. We may also be subject to state and local taxes on our income or property, either
directly or at the level of the companies through which we indirectly own our assets. Any federal
or state taxes we pay will reduce our cash available for distribution to our stockholders.
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Distributions to tax-exempt stockholders may be classified as UBTI.
Neither ordinary nor capital gain distributions with respect to the shares of our common stock
nor gain from the sale of the shares of our common stock should generally constitute unrelated
business taxable income, or UBTI, to a tax-exempt stockholder. However, there are certain
exceptions to this rule. In particular:
| part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if the shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI; | ||
| part of the income and gain recognized by a tax exempt stockholder with respect to the shares of our common stock would constitute UBTI if the stockholder incurs debt in order to acquire the shares of our common stock; and | ||
| part or all of the income or gain recognized with respect to the shares of our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Internal Revenue Code may be treated as UBTI. |
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests
concerning, among other things, the sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the ownership of shares of our common
stock. We may be required to pay distributions to our stockholders at disadvantageous times or when
we do not have funds readily available for distribution, or we may be required to liquidate
otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the
REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Foreign purchasers of shares of our common stock may be subject to FIRPTA tax upon the sale of
their shares of our common stock.
A foreign person disposing of a U.S. real property interest, including shares of stock of a
U.S. corporation whose assets consist principally of U.S. real property interests, is generally
subject to the Foreign Investment in Real Property Tax Act of 1980, as amended, or FIRPTA, on the
gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of
stock in a REIT if the REIT is domestically controlled. A REIT is domestically controlled if
less than 50.0% of the REITs stock, by value, has been owned directly or indirectly by persons who
are not qualifying U.S. persons during a continuous five-year period ending on the date of
disposition or, if shorter, during the entire period of the REITs existence. We cannot assure our
stockholders that we will qualify as a domestically controlled REIT. If we were to fail to so
qualify, gain realized by foreign investors on a sale of shares of our common stock would be
subject to FIRPTA tax, unless the shares of our common stock were traded on an established
securities market and the foreign investor did not at any time during a specified testing period
directly or indirectly own more than 5.0% of the value of our outstanding common stock.
Foreign stockholders may be subject to FIRPTA tax upon the payment of a capital gains
dividend.
A foreign stockholder also may be subject to FIRPTA upon the payment of any capital gain
dividends by us, which dividend is attributable to gain from sales or exchanges of U.S. real
property interests. Additionally, capital gains dividends paid to foreign stockholders, if
attributable to gain from sales or exchanges of U.S. real property interests, would not be exempt
from FIRPTA and would be subject to FIRPTA tax.
Employee Benefit Plan, IRA, and Other Tax-Exempt Investor Risks
We, and our stockholders that are employee benefit plans, IRAs, annuities described in
Sections 403(a) or (b) of the Internal Revenue Code, Archer MSAs, health savings accounts, or
Coverdell education savings accounts (referred to generally as Benefit Plans and IRAs) will be
subject to risks relating specifically to our having such Benefit Plan and IRA stockholders, which
risks are discussed below.
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If our stockholders fail to meet the fiduciary and other standards under ERISA or the Internal
Revenue Code as a result of an investment in shares of our common stock, our stockholders could be
subject to criminal and civil penalties.
There are special considerations that apply to Benefit Plans or IRAs investing in shares of
our common stock. If our stockholders are investing the assets of a Benefit Plan or IRA in us, they
should consider:
| whether their investment is consistent with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, and the Internal Revenue Code, or any other applicable governing authority in the case of a government plan; | ||
| whether their investment is made in accordance with the documents and instruments governing their Benefit Plan or IRA, including their Benefit Plan or IRAs investment policy; | ||
| whether their investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA; | ||
| whether their investment will impair the liquidity of the Benefit Plan or IRA; | ||
| whether their investment will constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code; | ||
| whether their investment will produce UBTI, as defined in Sections 511 through 514 of the Internal Revenue Code, to the Benefit Plan or IRA; and | ||
| their need to value the assets of the Benefit Plan or IRA annually in accordance with ERISA and the Internal Revenue Code. |
In addition to considering their fiduciary responsibilities under ERISA and the prohibited
transaction rules of ERISA and the Internal Revenue Code, a Benefit Plan or IRA purchasing shares
of our common stock should consider the effect of the plan asset regulations of the U.S. Department
of Labor. To avoid our assets from being considered plan assets under those regulations, our
charter prohibits benefit plan investors from owning 25.0% or more of the shares of our common
stock prior to the time that the common stock qualifies as a class of publicly-offered securities,
within the meaning of the ERISA plan asset regulations. However, we cannot assure our stockholders
that those provisions in our charter will be effective in limiting benefit plan investor ownership
to less than the 25.0% limit. For example, the limit could be unintentionally exceeded if a benefit
plan investor misrepresents its status as a benefit plan. Even if our assets are not considered to
be plan assets, a prohibited transaction could occur if we or any of our affiliates is a fiduciary
(within the meaning of ERISA and/or the Internal Revenue Code) with respect to a Benefit Plan or
IRA purchasing shares of our common stock, and, therefore, in the event any such persons are
fiduciaries (within the meaning of ERISA and/or the Internal Revenue Code) of our stockholders
Benefit Plan or IRA, they should not purchase shares of our common stock unless an administrative
or statutory exemption applies to their purchase.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Use of Public Offering Proceeds
Our Registration Statement on Form S-11 (File No. 333-158111, effective August 24, 2009),
covering a public offering of up to 300,000,000 shares of common stock, was declared effective
under the Securities Act of 1933, or the Securities Act. Grubb & Ellis Securities, Inc., an
affiliate of our advisor, is the dealer manager of our offering. We are offering to the public a
minimum of 200,000 shares of our common stock for $10.00 per share, aggregating at least
$2,000,000, or the minimum offering, and a maximum of 300,000,000 shares of our common stock for
$10.00 per share and 30,000,000 shares of our common stock pursuant to our distribution
reinvestment plan, for $9.50 per share, aggregating up to $3,285,000,000, or the maximum offering.
Until we raised the minimum offering, all subscription payments were placed in an account held by
an escrow agent in trust for subscribers
benefit, provided that residents of Tennessee will be admitted after aggregate subscriptions
exceed $10,000,000 and provided further, that residents of Ohio will be admitted after aggregate
subscriptions exceed $20,000,000. If we had not been able to raise at least the minimum offering by
August 24, 2010, we would have been required to promptly return all funds raised, including
interest, to subscribers and we would have terminated our offering. Shares purchased by our executive
officers and directors, by our advisor, by our dealer manager or its affiliates did not count
toward the minimum offering.
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As of September 30, 2009, we had not received subscriptions for the minimum offering and had
not received any proceeds from our offering.
As of September 30, 2009, we had not paid any expenses in connection with the sale of shares
of our common stock in our offering.
During the period covered by this Quarterly Report on Form 10-Q, we did not sell any equity
securities that were not registered or otherwise exempt under the Securities Act, and we did not
repurchase any of our securities.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
On July 30, 2009, our sole stockholder approved, by written consent, the Second Articles of
Amendment and Restatement and the Grubb & Ellis Healthcare REIT II, Inc. 2009 Incentive Plan. The
Second Articles of Amendment and Restatement were filed and effective with State Department of
Assessments and Taxation of Maryland on July 30, 2009. On August 28, 2009, our sole stockholder
approved, by written consent, the Articles of Amendment to the Second Articles of Amendment and
Restatement. The Articles of Amendment to the Second Articles of Amendment and Restatement were
filed and effective with State Department of Assessments and Taxation of Maryland on September 1,
2009. On September 17, 2009, our sole stockholder approved, by written consent, the Second Articles
of Amendment to the Second Articles of Amendment and Restatement. The Second Articles of Amendment
to the Second Articles of Amendment and Restatement were filed and effective with State Department
of Assessments and Taxation of Maryland on September 18, 2009.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included, or incorporated by reference, in this Quarterly Report on Form
10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Grubb & Ellis Healthcare REIT II, Inc. (Registrant) |
|||||
November 4, 2009 | By: | /s/ Jeffrey T. Hanson | |||
Date | Jeffrey T. Hanson | ||||
Chief Executive Officer and Chairman of the Board (principal executive officer) |
|||||
November 4, 2009 | By: | /s/ Shannon K S Johnson | |||
Date | Shannon K S Johnson | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) |
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
3.1 | Second Articles of Amendment and Restatement of Grubb & Ellis Healthcare REIT II, Inc. dated July
30, 2009 (included as Exhibit 3.1 to Pre-Effective Amendment No. 3 to our Registration Statement
on Form S-11 (File No. 333-158111) filed August 5, 2009 and incorporated herein by reference) |
|||
3.2 | Articles of Amendment to the Second Articles of Amendment and Restatement of Grubb & Ellis
Healthcare REIT II, Inc. dated September 1, 2009 (included as Exhibit 3.1 to our Current Report on
Form 8-K filed September 3, 2009 and incorporated herein by reference) |
|||
3.3 | Second Articles of Amendment to the Second Articles of Amendment and Restatement of Grubb & Ellis
Healthcare REIT II, Inc. dated September 18, 2009 (included as Exhibit 3.1 to our Current Report
on Form 8-K filed September 21, 2009 and incorporated herein by reference) |
|||
3.4 | Bylaws of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit 3.2 to our Registration
Statement on Form S-11 (File No. 333-158111) filed March 19, 2009 and incorporated herein by
reference) |
|||
4.1 | Second Amended and Restated Escrow Agreement between
Grubb & Ellis Healthcare REIT II, Inc., Grubb & Ellis
Securities, Inc. and CommerceWest Bank,
N.A., dated October 26, 2009 (included as Exhibit 4.1 to our Current Report on Form 8-K filed October 30, 2009 and
incorporated herein by reference) |
|||
4.2 | Form of Subscription Agreement of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit B to Supplement No. 1 to our
Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-158111) filed October 29, 2009 and incorporated herein by reference)
|
|||
4.3 | Distribution Reinvestment Plan of Grubb & Ellis Healthcare REIT II, Inc. effective as of August 24, 2009 (included as
Exhibit C to our Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-158111) filed August 27, 2009 and incorporated
herein by reference) |
|||
4.4 | Share Repurchase Plan of Grubb & Ellis Healthcare REIT II, Inc. (included as Exhibit D to our
Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-158111) filed August 27, 2009 and
incorporated herein by reference) |
|||
10.1 | * | Advisory Agreement by and among Grubb & Ellis Healthcare REIT II, Inc., Grubb & Ellis Healthcare
REIT II Holdings, LP and Grubb & Ellis Healthcare REIT II Advisor, LLC dated August 24, 2009 |
||
10.2 | Form of Indemnification Agreement between Grubb & Ellis Healthcare REIT II, Inc. and Indemnitee
made effective as of August 24, 2009 (included as Exhibit 10.1 to our Current Report on Form 8-K
filed September 3, 2009 and incorporated herein by reference) |
|||
10.3 | Grubb & Ellis Healthcare REIT II, Inc. 2009 Incentive Plan (included as Exhibit 10.3 to
Pre-Effective Amendment No. 1 to our Registration Statement on Form S-11 (File No. 333-158111)
filed May 8, 2009 and incorporated herein by reference) |
|||
31.1 | * | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | ** | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 |
||
32.2 | ** | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
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