UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission File
Number: 333-158111
GRUBB & ELLIS HEALTHCARE
REIT II, INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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26-4008719
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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1551 N. Tustin Avenue, Suite 300, Santa Ana,
California
(Address of principal executive
offices)
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92705
(Zip Code)
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Registrants telephone number,
including area
code: (714) 667-8252
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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None
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None
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Securities registered pursuant to
Section 12(g) of the Act:
None
(Title of Class)
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
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Yes o No þ
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
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Yes o No þ
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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
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subject to such filing requirements for the past 90 days.
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Yes þ No o
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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
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for such shorter period that the registrant was required to
submit and post such files).
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Yes o No o
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in
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Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
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Yes o No þ
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No shares of common stock were held by non-affiliates as
of June 30, 2009.
As of February 12, 2010, there were
2,608,537 shares of common stock of Grubb & Ellis
Healthcare REIT II, Inc. outstanding.
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Documents Incorporated by Reference: Portions of the
registrants proxy statement for the 2010 annual
stockholders meeting which is expected to be filed no later than
April 30, 2010 are incorporated by reference in
Part III, Items 10, 11, 12, 13 and 14.
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Grubb &
Ellis Healthcare Reit II, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
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PART I
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.
Our
Company
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 real estate investment trust,
or REIT, under the Internal Revenue Code of 1986, as amended, or
the Code, for federal income tax purposes for our taxable year
ending December 31, 2010, 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 in our primary offering 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. The United States, or U.S., Securities and Exchange
Commission, or the SEC, declared our registration statement
effective as of August 24, 2009. As of December 31,
2009, we had received and accepted subscriptions in our offering
for 1,497,268 shares of our common stock, or $14,918,000,
excluding subscriptions from residents of Ohio (who were not
admitted as stockholders until January 25, 2010, when we
had received and accepted subscriptions aggregating at least
$20,000,000) and shares of our common stock issued pursuant to
the DRIP.
We conduct substantially all of our operations through
Grubb & Ellis Healthcare REIT II Holdings, LP, or our
operating partnership. We are externally advised by
Grubb & Ellis Healthcare REIT II Advisor, LLC, or 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 and approval of
our board of directors. Our advisor also provides marketing,
sales and client services on our behalf. Our advisor engages
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 February 25, 2010, we had not purchased any
properties, however, we have entered into agreements to purchase
the Center for Neurosurgery and Spine; Highlands Ranch Medical
Pavilion; Parkway Medical Center; and Lacombe Medical Office
Building. For a further discussion of these proposed property
acquisitions, see Note 10, Subsequent Events
Proposed Property Acquisitions, to the Consolidated Financial
Statements contained in this Annual Report on
Form 10-K.
Developments
during 2009 and 2010
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On March 19, 2009, we filed our Registration Statement on
Form S-11
(File No.
333-158111)
covering a public offering of up to 300,000,000 shares of
common stock in our primary offering and up to
30,000,000 shares of common stock in the DRIP for a maximum
offering of up to $3,285,000,000, which was declared effective
by the SEC on August 24, 2009.
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On June 22, 2009, we entered into a dealer manager
agreement, or the Dealer Manager Agreement, with
Grubb & Ellis Securities, Inc., or Grubb &
Ellis Securities, or our dealer manager, to serve as the dealer
manager in connection with our offering.
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On August 24, 2009, we entered into the Advisory Agreement
with 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.
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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 were 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 in connection
with our offering, or our prospectus, (provided, that
subscriptions from residents of Tennessee and Ohio were to
continue to be held in escrow until we had received and accepted
subscriptions aggregating at least $10,000,000 and $20,000,000,
respectively). The conditions of our minimum offering in
Tennessee and Ohio were satisfied on December 9, 2009 and
January 25, 2010, respectively, and we began accepting
subscriptions from Tennessee and Ohio investors on such
respective dates.
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On December 11, 2009, our board of directors authorized a
daily distribution to our stockholders of record as of the close
of business on each day of the period commencing on
January 1, 2010 and ending on February 28, 2010. Our
sponsor has advised us that it intends to fund these
distributions until the earlier of the date we acquire our first
property and February 28, 2010. Our sponsor will not
receive any additional shares of our common stock or other
consideration for funding these distributions, and we will not
repay the funds provided by our sponsor for these distributions.
Our sponsor is not obligated to contribute monies to fund any
subsequent distributions. The distributions are calculated based
on 365 days in the calendar year and are equal to
$0.0017808 per share of common stock, which is equal to an
annualized distribution rate of 6.5%, assuming a purchase price
of $10.00 per share.
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The distributions declared for each record date in January 2010
were paid in February 2010 and the distributions declared for
each record date in February 2010 will be paid in March 2010.
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As of February 12, 2010, we had received and accepted
subscriptions in our offering for 2,567,757 shares of our
common stock, or $25,592,000, excluding shares of our common
stock issued pursuant to the DRIP.
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Our
Structure
The following is a summary of our organizational structure as of
February 25, 2010:
Our principal executive offices are located at
1551 N. Tustin Avenue, Suite 300, Santa Ana,
California 92705 and the telephone number is
(714) 667-8252.
Our sponsor maintains a web site at
www.gbe-reits.com/healthcare2, at which there is
additional information about us and our affiliates. The contents
of that site are not incorporated by reference in, or otherwise
a part of, this filing. We make our periodic and current
reports, as well as our Registration Statement on
Form S-11
(File
No. 333-158111),
amendments to our registration statement and supplements to our
prospectus, available at www.gbe-reits.com/healthcare2 as
soon as reasonably practicable after such materials are
electronically filed with the SEC. They are also available for
printing by any stockholder upon request.
Investment
Objectives
Our investment objectives are:
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to preserve, protect and return our stockholders capital
contributions;
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to pay regular cash distributions; and
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to realize growth in the value of our investments upon our
ultimate sale of such investments.
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We may not attain these objectives. Our board of directors may
change our investment objectives if it determines it is
advisable and in the best interest of our stockholders.
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During the term of the Advisory Agreement, decisions relating to
the purchase or sale of investments will be made by our advisor,
subject to the oversight and approval by our board of directors.
Investment
Strategy
We intend to use substantially all of the net proceeds from our
offering to invest in a diversified portfolio of real estate
properties, focusing primarily on medical office buildings and
healthcare-related facilities. We also may originate or acquire
real estate-related investments such as mortgage, mezzanine,
bridge and other loans, common and preferred stock of, or other
interests in, public or private unaffiliated real estate
companies, commercial mortgage-backed securities, and certain
other securities, including collateralized debt obligations and
foreign securities. We generally seek investments that produce
current income. In order to maintain our exemption from
regulation as an investment company under the Investment Company
Act of 1940, as amended, or the Investment Company Act, we may
be required to limit our investments in certain types of real
estate-related investments.
We seek to maximize long-term stockholder value by generating
sustainable growth in cash flows and portfolio value. In order
to achieve these objectives, we may invest using a number of
investment structures which may include direct acquisitions,
joint ventures, leveraged investments, issuing securities for
property and direct and indirect investments in real estate.
In addition, when and as determined appropriate by our advisor,
our portfolio may also include properties in various stages of
development other than those producing current income. These
stages include, without limitation, unimproved land both with
and without entitlements and permits, property to be redeveloped
and repositioned, newly constructed properties and properties in
lease-up or
other stabilization, all of which have limited or no relevant
operating histories and no current income. Our advisor will make
this determination based upon a variety of factors, including
the available risk adjusted returns for such properties when
compared with other available properties, the appropriate
diversification of the portfolio, and our objectives of
realizing both current income and capital appreciation upon the
ultimate sale of properties.
For each of our investments, regardless of property type, we
seek to invest in properties with the following attributes:
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Quality. We seek to acquire properties that
are suitable for their intended use with a quality of
construction that is capable of sustaining the propertys
investment potential for the long-term, assuming funding of
budgeted maintenance, repairs and capital improvements.
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Location. We seek to acquire properties that
are located in established or otherwise appropriate markets for
comparable properties, with access and visibility suitable to
meet the needs of its occupants.
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Market; Supply and Demand. We focus on local
or regional markets that have potential for stable and growing
property level cash flows over the long-term. These
determinations will be based in part on an evaluation of local
economic, demographic and regulatory factors affecting the
property. For instance, we favor markets that indicate a growing
population and employment base or markets that exhibit potential
limitations on additions to supply, such as barriers to new
construction. Barriers to new construction include lack of
available land and stringent zoning restrictions. In addition,
we generally will seek to limit our investments in areas that
have limited potential for growth.
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Predictable Capital Needs. We seek to acquire
properties where the future expected capital needs can be
reasonably projected in a manner that would enable us to meet
our objectives of growth in cash flows and preservation of
capital and stability.
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Cash Flows. We seek to acquire properties
where the current and projected cash flows, including the
potential for appreciation in value, would enable us to meet our
overall investment objectives. We evaluate cash flows as well as
expected growth and the potential for appreciation.
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We will not invest more than 10.0% of the offering proceeds
available for investment in unimproved or non-income producing
properties or in other investments relating to unimproved or
non-income producing
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property. A property will be considered unimproved or non-income
producing property for purposes of this limitation if it:
(1) is not acquired for the purpose of producing rental or
other operating income, or (2) has no development or
construction in process at the date of acquisition or planned in
good faith to commence within one year of the date of
acquisition.
We will not invest more than 10.0% of the offering proceeds
available for investment in commercial mortgage-backed
securities. In addition, we will not invest more than 10.0% of
the offering proceeds available for investment in equity
securities of public or private real estate companies.
We are not limited as to the geographic area where we may
acquire properties. We are not specifically limited in the
number or size of properties we may acquire or on the percentage
of our assets that we may invest in a single property or
investment. The number and mix of properties and real
estate-related investments we will acquire will depend upon real
estate and market conditions and other circumstances existing at
the time we are acquiring our properties and making our
investments, and the amount of proceeds we raise in our offering
and potential future offerings.
Real
Estate Investments
We intend to invest in a diversified portfolio of real estate
investments, focusing primarily on medical office buildings and
healthcare-related facilities. We generally seek investments
that produce current income. Our investments may include:
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medical office buildings;
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assisted living facilities;
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skilled nursing facilities;
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hospitals;
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long-term acute care facilities;
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surgery centers;
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memory care facilities;
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specialty medical and diagnostic service facilities;
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laboratories and research facilities;
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pharmaceutical and medical supply manufacturing
facilities; and
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offices leased to tenants in healthcare-related industries.
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We generally seek to acquire real estate of the types described
above that will best enable us to meet our investment
objectives, taking into account the diversification of our
portfolio at the time, relevant real estate and financial
factors, the location, the income-producing capacity, and the
prospects for long-range appreciation of a particular property
and other considerations. As a result, we may acquire properties
other than the types described above. In addition, we may
acquire properties that vary from the parameters described above
for a particular property type.
The consideration for each real estate investment must be
authorized by a majority of our directors or a duly authorized
committee of our board of directors, ordinarily based on the
fair market value of the investment. If the majority of our
independent directors or a duly authorized committee of our
board of directors so determines, or if the investment is to be
acquired from an affiliate, the fair market value determination
must be supported by an appraisal obtained from a qualified,
independent appraiser selected by a majority of our independent
directors.
Our real estate investments generally take the form of holding
fee title or long-term leasehold interests. Our investments may
be made either directly through our operating partnership or
indirectly through
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investments in joint ventures, limited liability companies,
general partnerships or other co-ownership arrangements with the
developers of the properties, affiliates of our advisor or other
persons.
In addition, we may purchase real estate investments and lease
them back to the sellers of such properties. Our advisor will
use its best efforts to structure any such sale-leaseback
transaction such that the lease will be characterized as a
true lease and so that we will be treated as the
owner of the property for federal income tax purposes. However,
we cannot assure our stockholders that the Internal Revenue
Service, or the IRS, will not challenge such characterization.
In the event that any such sale-leaseback transaction is
re-characterized as a financing transaction for federal income
tax purposes, deductions for depreciation and cost recovery
relating to such real estate investment would be disallowed or
significantly reduced.
Our obligation to close a transaction involving the purchase of
real estate is generally conditioned upon the delivery and
verification of certain documents from the seller or developer,
including, where appropriate:
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plans and specifications;
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environmental reports (generally a minimum of a Phase I
investigation);
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building condition reports;
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surveys;
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evidence of marketable title subject to such liens and
encumbrances as are acceptable to our advisor;
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audited financial statements covering recent operations of real
properties having operating histories or audited financial
statements or summarized financial information of the lessee or
guarantor, unless such statements are not required to be filed
with the SEC and delivered to stockholders;
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title insurance policies;
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liability insurance policies; and
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tenant leases and operating agreements.
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In determining whether to purchase a particular real estate
investment, we may, in circumstances in which our advisor deems
it appropriate, obtain an option on such property, including
land suitable for development. The amount paid for an option is
normally surrendered if the real estate is not purchased, and is
normally credited against the purchase price if the real estate
is purchased. We also may enter into arrangements with the
seller or developer of a real estate investment whereby the
seller or developer agrees that if, during a stated period, the
real estate investment does not generate specified cash flows,
the seller or developer will pay us cash in an amount necessary
to reach the specified cash flows level, subject in some cases
to negotiated dollar limitations.
We will not purchase or lease real estate in which our sponsor,
our advisor, our directors or any of their affiliates have an
interest without a determination by a majority of our
disinterested directors and a majority of our disinterested
independent directors that such transaction is fair and
reasonable to us and at a price to us no greater than the cost
of the real estate investment to the affiliated seller or
lessor, unless there is substantial justification for the excess
amount and the excess amount is reasonable. In no event will we
acquire any such real estate investment at an amount in excess
of its current appraised value as determined by an independent
expert selected by our disinterested independent directors.
We intend to obtain adequate insurance coverage for all real
estate investments in which we invest. However, there are types
of losses, generally catastrophic in nature, for which we do not
intend to obtain insurance unless we are required to do so by
mortgage lenders. See Item 1A. Risk Factors, Risks Related
to Investments in Real Estate Uninsured losses
relating to real estate and lender requirements to obtain
insurance may reduce our stockholders returns.
We intend to acquire leased properties with long-term leases and
we do not intend to operate any healthcare-related facilities
directly. As a REIT, we would be prohibited from operating
healthcare-related facilities directly, however from time to
time we may lease a healthcare-related facility that we acquire
to a
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wholly owned taxable REIT subsidiary, or TRS. In such an event,
our TRS will engage a third party in the business of operating
healthcare-related facilities to manage the property.
Joint
Ventures
We may enter into joint ventures, general partnerships and other
arrangements with one or more institutions or individuals,
including real estate developers, operators, owners, investors
and others, some of whom may be affiliates of our advisor, for
the purpose of acquiring real estate. Such joint ventures may be
leveraged with debt financing or unleveraged. We may enter into
joint ventures to further diversify our investments or to access
investments which meet our investment criteria that would
otherwise be unavailable to us. In determining whether to invest
in a particular joint venture, our advisor will evaluate the
real estate that such joint venture owns or is being formed to
own under the same criteria used in the selection of our other
properties. However, we will not participate in tenant in common
syndications or transactions.
Joint ventures with unaffiliated third parties may be structured
such that the investment made by us and the co-venturer are on
substantially different terms and conditions. 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.
We may only enter into joint ventures with other real estate
investment programs sponsored or managed by our advisor or its
affiliates, or Grubb & Ellis Group programs, or any of
our directors for the acquisition of properties if:
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a majority of our directors, including a majority of our
independent directors not otherwise interested in such
transaction, approves the transaction as being fair and
reasonable to us; and
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the investment by us and such affiliate are on substantially the
same terms and conditions.
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We may invest in general partnerships or joint ventures with
other Grubb & Ellis Group programs or affiliates of
our advisor to enable us to increase our equity participation in
such venture as additional proceeds of our offering are
received, so that ultimately we own a larger equity percentage
of the property. Our entering into joint ventures with our
advisor or any of its affiliates will result in certain
conflicts of interest. See Item 1A. Risk Factors, Risks
Related to Conflicts of Interest Joint ventures with
affiliates may not be resolved quickly or on terms advantageous
to us.
Real
Estate-Related Investments
In addition to our acquisition of medical office buildings and
healthcare-related facilities, we also may invest in real
estate-related investments, including loans (mortgage,
mezzanine, bridge and other loans) and securities investments
(common and preferred stock of or other interests in public or
private unaffiliated real estate companies, commercial
mortgage-backed securities, and certain other securities,
including collateralized debt obligations and foreign
securities).
Investing
In and Originating Loans
We may originate loans from mortgage brokers or personal
solicitations of suitable borrowers, or may purchase existing
loans that were originated by other lenders. We may purchase
existing loans from affiliates, and we may make or invest in
loans in which the borrower is an affiliate. Our advisor will
evaluate all potential loan investments to determine if the
security for the loan and the
loan-to-value
ratio meets our investment criteria and objectives. Most loans
that we will consider for investment would provide for monthly
payments of interest and some may also provide for principal
amortization, although many loans of the nature that we will
consider provide for payments of interest only and a payment of
principal in full at the end of the loan term. We will not
originate loans with negative amortization provisions.
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Securities
Investments
We may invest in the following types of securities:
(1) equity securities such as common stocks, preferred
stocks and convertible preferred securities of public or private
unaffiliated real estate companies (including other REITs, real
estate operating companies and other real estate companies);
(2) debt securities such as commercial mortgage-backed
securities and debt securities issued by other unaffiliated real
estate companies; and (3) certain other types of securities
that may help us reach our diversification and other investment
objectives. These other securities may include, but are not
limited to, various types of collateralized debt obligations and
certain
non-U.S. dollar
denominated securities.
We have substantial discretion with respect to the selection of
specific securities investments. Our charter provides that we
may not invest in equity securities unless a majority of our
directors, including a majority of our independent directors,
not otherwise interested in the transaction approve such
investment as being fair, competitive and commercially
reasonable. Consistent with such requirements, in determining
the types of securities investments to make, our advisor will
adhere to a board-approved asset allocation framework consisting
primarily of components such as: (1) target mix of
securities across a range of risk/reward characteristics;
(2) exposure limits to individual securities; and
(3) exposure limits to securities subclasses (such as
common equities, debt securities and foreign securities). Within
this framework, our advisor will evaluate specific criteria for
each prospective securities investment including:
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positioning the overall portfolio to achieve an optimal mix of
real estate and real estate-related investments;
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diversification benefits relative to the rest of the securities
assets within our portfolio;
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fundamental securities analysis;
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quality and sustainability of underlying property cash flows;
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broad assessment of macroeconomic data and regional property
level supply and demand dynamics;
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potential for delivering high current income and attractive
risk-adjusted total returns; and
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additional factors considered important to meeting our
investment objectives.
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We will not invest more than 10.0% of the offering proceeds
available for investment in equity securities of public or
private real estate companies. The specific number and mix of
securities in which we invest will depend upon real estate
market conditions, other circumstances existing at the time we
are investing in our securities and the amount of proceeds we
raise in our offering. We will not invest in securities of other
issuers for the purpose of exercising control and the first or
second mortgages in which we intend to invest will likely not be
insured by the Federal Housing Administration or guaranteed by
the Veterans Administration or otherwise guaranteed or insured.
Real estate-related equity securities are generally unsecured
and also may be subordinated to other obligations of the issuer.
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.
Development
Strategy
We may engage our advisor or an affiliate of our advisor to
provide development-related services for all or some of the
properties that we acquire for development or refurbishment. In
those cases, we will pay our advisor or its affiliate a
development fee that is usual and customary for comparable
services rendered for similar projects in the geographic market
where the services are provided if a majority of our independent
directors determines that such development fees are fair and
reasonable and on terms and conditions not less favorable than
those available from unaffiliated third parties. However, we
will not pay a development fee to our advisor or its affiliate
if our advisor or any of its affiliates elects to receive an
acquisition fee based on the cost of such development. In the
event that our advisor assists with planning and coordinating
the construction of any tenant improvements or capital
improvements, our advisor may be paid a construction management
fee of up to 5.0% of the cost of such improvements.
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Disposition
Strategy
We intend to hold each property or real estate-related
investment we acquire for an extended period. However,
circumstances might arise which could result in a shortened
holding period for certain investments. In general, the holding
period for real estate-related investments other than real
property is expected to be shorter than the holding period for
real property assets. A property or real estate-related
investment may be sold before the end of the expected holding
period if:
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diversification benefits exist associated with disposing of the
investment and rebalancing our investment portfolio;
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an opportunity arises to pursue a more attractive investment;
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in the judgment of our advisor, the value of the investment
might decline;
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with respect to properties, a major tenant involuntarily
liquidates or is in default under its lease;
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the investment was acquired as part of a portfolio acquisition
and does not meet our general acquisition criteria;
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an opportunity exists to enhance overall investment returns by
raising capital through sale of the investment; or
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in the judgment of our advisor, the sale of the investment is in
our best interest.
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The determination of whether a particular property or real
estate-related investment should be sold or otherwise disposed
of will be made after consideration of relevant factors,
including prevailing economic conditions, with a view toward
maximizing our investment objectives. We cannot assure our
stockholders that this objective will be realized. The selling
price of a property which is net leased will be determined in
large part by the amount of rent payable under the lease(s) for
such property. If a tenant has a repurchase option at a formula
price, we may be limited in realizing any appreciation. In
connection with our sales of properties, we may lend the
purchaser all or a portion of the purchase price. In these
instances, our taxable income may exceed the cash received in
the sale. The terms of payment will be affected by custom in the
area in which the investment being sold is located and the
then-prevailing economic conditions.
Borrowing
Policies
We intend to use secured and unsecured debt as a means of
providing additional funds for the acquisition of properties and
other real estate-related assets. Our ability to enhance our
investment returns and to increase our diversification by
acquiring assets using additional funds provided through
borrowing could be adversely affected if banks and other lending
institutions reduce the amount of funds available for the types
of loans we seek. When interest rates are high or financing is
otherwise unavailable on a timely basis, we may purchase certain
assets for cash with the intention of obtaining debt financing
at a later time. We may also utilize derivative financial
instruments such as fixed interest rate swaps and caps to add
stability to interest expense and to manage our exposure to
interest rate movements.
We anticipate that after our initial phase of operations when we
may employ greater amounts of leverage, aggregate borrowings,
both secured and unsecured, will not exceed 60.0% of the
combined fair market value of all 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. As of December 31, 2009, we did not have any
outstanding debt.
Our board of directors reviews our aggregate borrowings at least
quarterly to ensure that such borrowings are reasonable in
relation to our net assets. Our borrowing policies provide that
the maximum amount of such borrowings in relation to our net
assets will not exceed 300.0% of our net assets, unless any
excess in such borrowing is approved by a majority of our
directors and is disclosed in our next quarterly report along
with the
11
justification for such excess. For the purposes of this
determination, net assets are our total assets, other than
intangibles, valued at cost before deducting depreciation,
amortization, bad debt and other similar non-cash reserves, less
total liabilities. We compute our leverage at least quarterly on
a consistently-applied basis. Generally, the preceding
calculation is expected to approximate 75.0% of the sum of the
aggregate cost of our real estate and real estate-related assets
before depreciation, amortization, bad debt and other similar
non-cash reserves. As of February 25, 2010 and
December 31, 2009, our leverage did not exceed 300.0% of
the value of our net assets.
By operating on a leveraged basis, we will have more funds
available for our investments. This generally allows us to make
more investments than would otherwise be possible, potentially
resulting in enhanced investment returns and a more diversified
portfolio. However, our use of leverage increases the risk of
default on loan payments and the resulting foreclosure of a
particular asset. In addition, lenders may have recourse to
assets other than those specifically securing the repayment of
the indebtedness.
We will use our best efforts to obtain financing on the most
favorable terms available to us and we will refinance assets
during the term of a loan only in limited circumstances, such as
when a decline in interest rates makes it beneficial to prepay
an existing loan, when an existing loan matures or if an
attractive investment becomes available and the proceeds from
the refinancing can be used to purchase such investment. The
benefits of the refinancing may include an increased cash flow
resulting from reduced debt service requirements, an increase in
distributions from proceeds of the refinancing, and an increase
in diversification of assets owned if all or a portion of the
refinancing proceeds are reinvested.
Our charter restricts us from borrowing money from any of our
directors or from our advisor or its affiliates unless such loan
is approved by a majority of our directors (including a majority
of the independent directors) not otherwise interested in the
transaction, as fair, competitive and commercially reasonable
and no less favorable to us than comparable loans between
unaffiliated parties.
Board
Review of Our Investment Policies
Our board of directors has established written policies on
investments and borrowing. Our board is responsible for
monitoring the administrative procedures, investment operations
and performance of our company and our advisor to ensure such
policies are carried out. Our charter requires that our
independent directors review our investment policies at least
annually to determine that our policies are in the best interest
of our stockholders. Each determination and the basis thereof is
required to be set forth in the minutes of our applicable
meetings of our directors. Implementation of our investment
policies also may vary as new investment techniques are
developed. Our investment policies may not be altered by our
board of directors without the approval of our stockholders.
As required by our charter, our independent directors have
reviewed our policies outlined above and determined that they
are in the best interest of our stockholders because:
(1) they increase the likelihood that we will be able to
acquire a diversified portfolio of income producing properties,
thereby reducing risk in our portfolio; (2) there are
sufficient property acquisition opportunities with the
attributes that we seek; (3) our executive officers,
directors and affiliates of our advisor have expertise with the
type of real estate investments we seek; and (4) our
borrowings will enable us to purchase assets and earn rental
income more quickly, thereby increasing our likelihood of
generating income for our stockholders and preserving
stockholder capital.
Tax
Status
We intend to make an election to be taxed as a REIT, under
Sections 856 through 860 of the Code, and we intend to be
taxed as such beginning with our taxable year ending
December 31, 2010. We intend to qualify 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 our
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
12
federal income tax purposes for four years following the year
during which qualification is lost unless 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 our stockholders.
Distribution
Policy
In order to qualify as a REIT, we are required to distribute
90.0% of our annual taxable income to our stockholders. As of
December 31, 2009, we did not own any properties or other
investments and we had not identified any properties or other
investments to acquire with the proceeds from our offering. We
cannot predict if we will generate sufficient cash flow to pay
cash distributions to our stockholders on an ongoing basis or at
all. The amount of any cash distributions will be determined by
our board of directors and will depend on the amount of
distributable funds, current and projected cash requirements,
tax considerations, any limitations imposed by the terms of
indebtedness we may incur and other factors. If our investments
produce sufficient cash flow, we expect to pay distributions to
our stockholders on a monthly basis. Because our cash available
for distribution in any year may be less than 90.0% of our
taxable income for the year, we may be required to borrow money,
use proceeds from the issuance of securities (in our offering or
subsequent offerings, if any) or sell assets to pay out enough
of our taxable income to satisfy the distribution requirement.
We have not established any limit on the amount of proceeds from
our offering that may be used to fund distributions other than
those limits imposed by our organizational documents and
Maryland law.
See Part II, Item 5. Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities Distributions, for a further
discussion on distribution rates approved by our board of
directors.
Competition
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.
Government
Regulations
Many laws and governmental regulations are applicable to our
future properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur
frequently.
Costs of Compliance with the Americans with Disabilities
Act. Under the Americans with Disabilities Act of
1990, as amended, or the ADA, all public accommodations must
meet federal requirements for access and use by disabled
persons. Although we believe that we will be in substantial
compliance with present requirements of the ADA, we currently do
not own any property and thus, none of our properties have been
audited, nor have investigations of our properties been
conducted to determine compliance. Additional federal, state and
local laws also may require modifications to our properties or
restrict our ability to renovate our
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properties. We cannot predict the cost of compliance with the
ADA or other legislation. We may incur substantial costs to
comply with the ADA or any other legislation.
Costs of Government Environmental Regulation and Private
Litigation. Environmental laws and regulations
hold us liable for the costs of removal or remediation of
certain hazardous or toxic substances which may be on our future
properties. These laws could impose liability without regard to
whether we are responsible for the presence or release of the
hazardous materials. Government investigations and remediation
actions may have substantial costs and the presence of hazardous
substances on a property could result in personal injury or
similar claims by private plaintiffs. Various laws also impose
liability on a person who arranges for the disposal or treatment
of hazardous or toxic substances and such person often must
incur the cost of removal or remediation of hazardous substances
at the disposal or treatment facility. These laws often impose
liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility. As the owner and
operator of our future properties, we may be deemed to have
arranged for the disposal or treatment of hazardous or toxic
substances.
Other Federal, State and Local
Regulations. Our future properties will be
subject to various federal, state and local regulatory
requirements, such as state and local fire and life safety
requirements. If we fail to comply with these various
requirements, we may incur governmental fines or private damage
awards. While we believe that our future properties will be in
material compliance with all of these regulatory requirements,
we do not know whether existing requirements will change or
whether future requirements will require us to make significant
unanticipated expenditures that will adversely affect our
ability to make distributions to our stockholders. We believe,
based in part on engineering reports which are generally
obtained at the time we acquire the properties, that all of our
future properties will comply in all material respects with
current regulations. However, if we were required to make
significant expenditures under applicable regulations, our
financial condition, results of operations, cash flows and
ability to satisfy our debt service obligations and to pay
distributions could be adversely affected.
Geographic
Concentration
As of December 31, 2009, we had neither purchased nor
contracted to purchase any investments nor had our advisor
identified any real estate or real estate-related investments in
which it is probable that we will invest.
Employees
We have no employees and our executive officers are all
employees of our advisor
and/or its
affiliates. Our
day-to-day
management is performed by our advisor and its affiliates. We
cannot determine at this time if or when we might hire any
employees, although we do not anticipate hiring any employees
for the next twelve months. We do not directly compensate our
executive officers for services rendered to us. However, our
executive officers, consultants and the executive officers and
key employees of our advisor are eligible for awards pursuant to
the 2009 Incentive Plan, or our incentive plan. As of
February 25, 2010, no awards had been granted to our
executive officers, consultants or the executive officers or key
employees of our advisor under this plan.
Financial
Information About Industry Segments
Financial Accounting Standards Board, or FASB, Accounting
Standards Codification, or ASC, Topic 280, Segment
Reporting, establishes standards for reporting financial and
descriptive information about an enterprises reportable
segments. As of December 31, 2009, we had neither purchased
nor contracted to purchase any investments. As such, we evaluate
current operations as one segment and do not report segment
information.
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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 proceeds from
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 is 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 is 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.
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
Grubb & Ellis Group programs may not be an accurate
predictor of our future results.
We were formed in January 2009, and our offering was declared
effective by the SEC on August 24, 2009, and therefore 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 REIT with a substantial operating history,
and our stockholders should not rely on the past performance of
other Grubb & Ellis Group programs 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,
15
many of which may be beyond our control. Therefore, to be
successful in this market, we must, among other things:
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identify and acquire investments that further our investment
strategy;
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rely on our dealer manager to build, expand and maintain its
network of licensed securities brokers and other agents in order
to sell shares of our common stock;
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respond to competition both for investment opportunities and
potential investors in us; and
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build and expand our operations structure to support our
business.
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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 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 our management 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 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 assure our stockholders 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 amount we have raised to
date, 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 our advisor in selecting investments for us to
acquire, selecting tenants for our properties and securing
financing arrangements. Except for stockholders who purchased
shares of our common stock in our offering after such time as we
supplemented our prospectus to describe one or more identified
investments, our stockholders generally have no opportunity to
evaluate the terms of transactions or other economic or
financial data concerning our investments. 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.
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,
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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 the DRIP. In addition, our board of
directors may reject share repurchase requests in its sole
discretion and 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.
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.
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
17
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) list the shares of our common stock on a
national securities exchange and the market value of our company
after we list 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 our
stockholders 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.
18
Risks
Related to Our Business
We may
not have sufficient cash available from operations to pay
distributions, and, therefore, we have paid distributions from
the net proceeds of our offering, from borrowings in
anticipation of future cash flows or from other sources, such as
our sponsor. 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. The actual amount and timing of
distributions are 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 vary from time to time. We expect to have
little cash flows from operations available for distribution
until we make substantial investments. Therefore, we have used,
and in the future may use, the net proceeds from our offering,
borrowed funds, or other sources, such as our sponsor, 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.
On December 11, 2009, our board of directors authorized a
daily distribution to our stockholders of record as of the close
of business on each day of the period commencing on
January 1, 2010 and ending on February 28, 2010, as a
result of our sponsor advising us that it intends to fund these
distributions in the event a property has not been acquired
during such period. Our sponsor will not receive any additional
shares of our common stock or other consideration for funding
these distributions, and we will not repay the funds provided by
our sponsor for these distributions. Our sponsor is not
obligated to contribute monies to fund any subsequent
distributions. The distributions are calculated based on
365 days in the calendar year and are equal to $0.0017808
per share of common stock, which is equal to an annualized
distribution rate of 6.5%, assuming a purchase price of $10.00
per share. We can provide no assurance that we will be able to
continue this distribution rate or pay any distribution to our
stockholders beyond the timeframe our sponsor has committed to.
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 all of 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 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
19
portion of such funds for working capital. We cannot assure our
stockholders that sufficient cash will be available to pay
distributions to them monthly, or at all. 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 all 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 all of our 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.
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. Under our charter, we have a limitation on borrowing
that precludes us from borrowing in excess of 300.0% 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
20
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.
The
ongoing market disruptions may adversely affect our operating
results and financial condition.
The global financial markets have been 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 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 ongoing
market disruptions could also affect our operating results and
financial condition as follows:
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Debt and Equity Markets Our results of
operations are sensitive to the volatility of the credit
markets. The real estate debt markets have been 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 ongoing 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.
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Valuations The ongoing 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.
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Government Intervention The pervasive and
fundamental disruptions that the global financial markets have
been 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.
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Increasing
vacancy rates for commercial real estate resulting from ongoing
disruptions in the financial markets and deteriorating economic
conditions could reduce revenue and the resale value of our
properties.
We depend upon tenants for a majority of our revenue from real
property investments. Ongoing 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. 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.
We are
dependent on tenants for our revenue, and lease terminations
could reduce our distributions to our
stockholders.
The successful performance of our future 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 future tenants, or any guarantor of one of our future
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
22
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 future 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.
We may
be unable to secure funds for future tenant or other capital
improvements, which could limit our ability to attract, or
replace or retain 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 our operating partnership in exchange for a property owner
contributing property to the partnership. If we enter into such
transactions, in order to
23
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.
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 prospectus or our periodic filings with 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 our executive officers and
Mr. Hanson and Mr. Prosky currently serve as two of
our directors. Our sponsor does not have any employment
agreements with Mr. Hanson, Mr. Prosky or
Ms. Biller. In the event that 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 material 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 were not 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
24
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 shares 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.
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
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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.
Further, such an inability to manage an internalization
transaction effectively, potential conflicts of interests
arising from an internalization of our management functions,
and/or other
problems experienced with this possible transaction, could lead
to stockholder lawsuits. If such lawsuits are filed against us,
the cost of defending the lawsuits is likely to be expensive
and, even if we ultimately prevail, the process would divert our
attention from operating our business. If we do not prevail in
any such lawsuit that may be filed against us in the future, we
could be liable for significant damages, which would reduce our
cash available for operations or future distributions to our
stockholders.
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. 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.
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:
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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;
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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;
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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;
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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;
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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;
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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;
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constricted access to credit may result in tenant defaults or
non-renewals under leases;
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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
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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.
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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
acquire investments.
We 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.
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.
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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 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
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 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, 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 have
provided and will continue 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.
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
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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 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 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 faces 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 is 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 are entitled include acquisition fees, asset
management fees, property management fees, disposition fees and
other fees as provided for under the Advisory Agreement and
agreement of limited partnership with our operating partnership.
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.
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
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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:
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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;
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private issuances of our securities to other investors,
including institutional investors;
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issuances of our securities pursuant to our incentive
plan; or
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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:
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a merger, tender offer or proxy contest;
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assumption of control by a holder of a large block of our
securities; or
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removal of incumbent management.
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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:
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the election or removal of directors;
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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
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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;
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our dissolution; and
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certain mergers, consolidations and sales or other dispositions
of all or substantially all of our assets.
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All other matters are subject to the discretion of our board of
directors.
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:
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any person who beneficially owns 10.0% or more of the voting
power of the corporations outstanding voting stock; or
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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.
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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:
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80.0% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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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.
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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 of directors. 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 us 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:
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limitations on capital structure;
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restrictions on specified investments;
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prohibitions on transactions with affiliates; and
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compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations that would
significantly change our operations.
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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. 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
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34
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.
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 the
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 has been 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-
35
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.
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 U.S. 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.
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.
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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.
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:
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the development company fails to develop the property;
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all or a specified portion of the pre-leased tenants fail to
take possession under their leases for any reason; or
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we are unable to raise sufficient proceeds from our offering to
pay the purchase price at closing.
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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.
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.
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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.
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 primarily intend to 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.
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A high
concentration of our properties in a particular geographic area
would magnify the effects of downturns in that geographic
area.
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.
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.
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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.
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
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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 U.S. 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.
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.
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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:
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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;
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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;
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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
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the Civil Monetary Penalties Law, which authorizes the
U.S. Department of Health and Human Services to impose
monetary penalties for certain fraudulent acts.
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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.
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:
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changes in the demand for and methods of delivering healthcare
services;
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changes in third party reimbursement policies;
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significant unused capacity in certain areas, which has created
substantial competition for patients among healthcare providers
in those areas;
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increased expense for uninsured patients;
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increased competition among healthcare providers;
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increased liability insurance expense;
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continued pressure by private and governmental payors to reduce
payments to providers of services; and
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increased scrutiny of billing, referral and other practices by
federal and state authorities.
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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.
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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.
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.
44
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.
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
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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.
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.
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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.
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.
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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:
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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;
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a venture partner might become bankrupt and such proceedings
could have an adverse impact on the operation of the partnership
or joint venture;
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actions taken by a venture partner might have the result of
subjecting the property to liabilities in excess of those
contemplated; and
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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.
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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 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, 2010, or the first year in which we commence
material operations. To qualify as a REIT, we must meet various
requirements set forth in the 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.
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 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 Code
sets forth a safe harbor for REITs that wish to sell property
without risking the imposition of the 100% tax. A principal
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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 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 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
50
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.
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 and state 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 our stockholders 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.
51
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:
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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;
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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
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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.
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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.
52
Employee
Benefit Plan, IRA, and Other Tax-Exempt Investor Risks
We, and our stockholders that are employee benefit plans,
individual retirement accounts, or 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.
If our
stockholders fail to meet the fiduciary and other standards
under ERISA or the 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:
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whether their investment is consistent with the applicable
provisions of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, and the Code, or any other
applicable governing authority in the case of a government plan;
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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;
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whether their investment satisfies the prudence and
diversification requirements of Sections 404(a)(1)(B) and
404(a)(1)(C) of ERISA;
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whether their investment will impair the liquidity of the
Benefit Plan or IRA;
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whether their investment will constitute a prohibited
transaction under Section 406 of ERISA or Section 4975
of the Code;
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whether their investment will produce UBTI, as defined in
Sections 511 through 514 of the Code, to the Benefit Plan
or IRA; and
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their need to value the assets of the Benefit Plan or IRA
annually in accordance with ERISA and the Code.
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In addition to considering their fiduciary responsibilities
under ERISA and the prohibited transaction rules of ERISA and
the 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
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
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.
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Item 1B.
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Unresolved
Staff Comments.
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Not applicable.
As of December 31 2009, we had not entered into any leases for
our principal executive offices located at
1551 N. Tustin Avenue, Suite 300, Santa Ana,
California 92705. We do not have an address separate from
53
our advisor, Grubb & Ellis Equity Advisors, or our
sponsor. Since we pay our advisor fees for its services, we do
not pay rent for the use of its space.
As of December 31, 2009, we had neither purchased nor
contracted to purchase any investments nor had our advisor
identified any real estate or real estate-related investments in
which it was probable that we would invest.
Indebtedness
As of December 31, 2009, we did not have any outstanding
debt.
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Item 3.
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Legal
Proceedings.
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 2009.
54
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Market
Information
There is no established public trading market for shares of our
common stock.
In order for members of the Financial Industry Regulatory
Authority, or FINRA, and their associated persons to participate
in the offering and sale of shares of our common stock, we are
required to disclose in each annual report distributed to
stockholders a per share estimated value of the shares, the
method by which it was developed, and the date of the data used
to develop the estimated value. In addition, we will prepare
annual statements of estimated share values to assist
fiduciaries of retirement plans subject to the annual reporting
requirements of ERISA in the preparation of their reports
relating to an investment in shares of our common stock. For
these purposes, our advisors estimated value of the shares
is $10.00 per share as of December 31, 2009. The basis for
this valuation is the fact that the current public offering
price for shares of our common stock is $10.00 per share
(ignoring purchase price discounts for certain categories of
purchasers). However, there is no public trading market for the
shares of our common stock at this time, and there can be no
assurance that stockholders could receive $10.00 per share if
such a market did exist and they sold their shares of our common
stock or that they will be able to receive such amount for their
shares of our common stock in the future. Until 18 months
after the later of the completion of our offering or any
subsequent offering of shares of our common stock, we intend to
continue to use the offering price of shares of our common stock
in our most recent offering as the estimated per share value
reported in our Annual Reports on
Form 10-K
distributed to stockholders. Beginning 18 months after the
last offering of shares of our common stock, the value of the
properties and our other assets will be determined in a manner
deemed appropriate by our board of directors, and we will
disclose the resulting estimated per share value in our Annual
Reports on
Form 10-K
distributed to stockholders.
Stockholders
As of February 12, 2010, we had approximately 779
stockholders of record.
Distributions
On December 11, 2009, our board of directors authorized a
daily distribution to our stockholders of record as of the close
of business on each day of the period commencing on
January 1, 2010 and ending on February 28, 2010. Our
sponsor has advised us that it intends to fund these
distributions until the earlier of the date we acquire our first
property and February 28, 2010. Our sponsor will not
receive any additional shares of our common stock or other
consideration for funding these distributions, and we will not
repay the funds provided by our sponsor for these distributions.
Our sponsor is not obligated to contribute monies to fund any
subsequent distributions.
The distributions are calculated based on 365 days in the
calendar year and are equal to $0.0017808 per share of 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 January 2010
were paid in February 2010 and the distributions declared for
each record date in February 2010 will be paid in March 2010.
The amount of the distributions to our stockholders is
determined quarterly by our board of directors and is 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
55
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.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, our funds from operations, or
FFO, was $(281,000). For the period from January 7, 2009
(Date of Inception) through December 31, 2009, we did not
pay any distributions.
See our disclosure regarding FFO in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Funds from Operations.
Securities
Authorized for Issuance under Equity Compensation
Plans
We adopted our incentive plan, pursuant to which our board of
directors or a committee of our independent directors may make
grants of options, restricted shares of common stock, stock
purchase rights, SARs or other awards to our independent
directors, employees and consultants. The maximum number of
shares of our common stock that may be issued pursuant to our
incentive plan is 2,000,000.
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Number of Securities
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Weighted
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Number of
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to be Issued upon
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Average
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Securities
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Exercise of
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Exercise Price of
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Remaining
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Outstanding Options,
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Outstanding Options,
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Available for Future
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Plan Category
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Warrants and Rights
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Warrants and Rights
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Issuance
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Equity compensation plans approved by security holders(1)
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1,985,000
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Equity compensation plans not approved by security holders
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Total
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1,985,000
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(1) |
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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. Such shares are not shown in
the chart above as they are deemed outstanding shares of our
common stock; however, such grants reduce the number of
securities remaining available for future issuance. |
Use of
Public Offering Proceeds
Our Registration Statement on
Form S-11
(File
No. 333-158111,
effective August 24, 2009), registering a public offering
of up to 300,000,000 shares of common stock, was declared
effective under the Securities Act. Grubb & Ellis
Securities 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, and a maximum of 300,000,000 shares of our
common stock for $10.00 per share in our primary offering and
30,000,000 shares of our common stock pursuant to the DRIP,
for $9.50 per share, for a maximum offering of up to
$3,285,000,000.
As of December 31, 2009, we had received and accepted
subscriptions in our offering for 1,497,268, shares of our
common stock, or $14,918,000, excluding subscriptions from
residents of Ohio (who were not admitted as stockholders until
January 25, 2010, when we had received and accepted
subscriptions aggregating at least $20,000,000) and shares of
our common stock issued pursuant to the DRIP.
As of December 31, 2009, we had incurred selling
commissions of $998,000 and dealer manager fees of $441,000 in
connection with our offering. We had also incurred other
offering expenses of $150,000 as of such date. Such fees and
reimbursements are charged to stockholders equity as such
amounts are reimbursed from the gross proceeds of our offering.
The cost of raising funds in our offering as a percentage of
funds
56
raised will not exceed 11.0%. As of December 31, 2009, net
offering proceeds were $13,329,000, including proceeds from the
DRIP and after deducting offering expenses.
As of December 31, 2009, $282,000 remained payable to our
dealer manager, our advisor or its affiliates for offering
related costs.
Unregistered
Sales of Equity Securities
On October 21, 2009, we issued an aggregate of
15,000 shares of restricted common stock to our independent
directors pursuant to our incentive plan in a private
transaction exempt from registration pursuant to
Section 4(2) of the Securities Act. Each of these
restricted common stock awards vested 20.0% on the grant date
and 20.0% will vest on each of the first four anniversaries of
the date of grant.
Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
No share repurchases were made during the three months ended
December 31, 2009. Our 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.
All repurchases are subject to a one-year holding period, except
for repurchases made in connection with a stockholders
death or qualifying disability. Repurchases are limited to
(1) those that could be funded from the cumulative proceeds
we receive from the sale of shares of our common stock pursuant
to the DRIP and (2) 5.0% of the weighted average number of
shares of our common stock outstanding during the prior calendar
year.
The prices per share at which we will repurchase shares of our
common stock will range, depending on the length of time the
stockholder held such shares, from 92.5% to 100%, of the price
paid per share to acquire such shares from us. However, if
shares of our common stock are to be repurchased in connection
with a stockholders death or qualifying disability, the
repurchase price will be no less than 100% of the price paid to
acquire the shares of our common stock from us.
If funds are not available to repurchase all shares of our
common stock for which repurchase requests were received by the
end of the calendar quarter, shares of our common stock will be
purchased on a pro rata basis and any unfulfilled requests will
be held until the next calendar quarter, unless withdrawn;
provided, however, we may give priority to the repurchase of a
deceased stockholders shares of our common stock or shares
of a stockholder with a qualifying disability.
57
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Item 6.
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Selected
Financial Data.
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The following should be read with Part I, Item 1A.
Risk Factors and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and
our accompanying consolidated financial statements and the notes
thereto. Our historical results are not necessarily indicative
of results for any future period.
The following tables present summarized consolidated financial
information, including balance sheet data, statement of
operations data, and statement of cash flows data in a format
consistent with our consolidated financial statements under
Part IV, Item 15. Exhibits, Financial Statement
Schedules of this Annual Report on
Form 10-K.
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Selected Financial Data
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December 31, 2009
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BALANCE SHEET DATA:
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Total assets
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$
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13,809,000
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Stockholders equity
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$
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13,283,000
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Period from
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January 7, 2009
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(Date of Inception)
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through
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December 31, 2009
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STATEMENT OF OPERATIONS DATA:
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General and administrative expenses
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$
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286,000
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Loss from continuing operations
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$
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(282,000
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)
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Net loss attributable to controlling interest
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$
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(281,000
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)
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Net loss per common share basic and diluted(1):
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Net loss from continuing operations
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$
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(1.51
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Net loss attributable to controlling interest
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$
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(1.51
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)
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STATEMENT OF CASH FLOWS DATA:
|
|
|
|
|
Cash flows (used) in operating activities
|
|
$
|
(40,000
|
)
|
Cash flows provided by (used in) investing activities
|
|
$
|
|
|
Cash flows provided by financing activities
|
|
$
|
13,813,000
|
|
OTHER DATA:
|
|
|
|
|
Distributions declared
|
|
$
|
|
|
Distributions declared per share
|
|
$
|
|
|
Funds from operations(2)
|
|
$
|
(281,000
|
)
|
Net operating income (loss)(3)
|
|
$
|
|
|
|
|
|
(1) |
|
Net loss per common share is based upon the weighted average
number of shares of our common stock outstanding. Distributions
by us of our current and accumulated earnings and profits for
federal income tax purposes are taxable to stockholders as
ordinary income. Distributions in excess of these earnings and
profits generally are treated as a non-taxable reduction of the
stockholders basis in the shares of our common stock to
the extent thereof (a return of capital for tax purposes) and,
thereafter, as taxable gain. These distributions in excess of
earnings and profits will have the effect of deferring taxation
of the distributions until the sale of the stockholders
common stock. |
|
(2) |
|
For additional information on FFO, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Funds from Operations,
which includes a reconciliation of our GAAP net loss to FFO for
the period from January 7, 2009 (Date of Inception) through
December 31, 2009. |
|
(3) |
|
For additional information on net operating income, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Net
Operating Income (Loss), which includes a reconciliation of our
GAAP net loss to net operating income (loss) for the period from
January 7, 2009 (Date of Inception) through
December 31, 2009. |
58
|
|
Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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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 consolidated financial statements and notes
appearing elsewhere in this Annual Report on
Form 10-K.
Such consolidated financial statements and information have been
prepared to reflect our financial position as of
December 31, 2009, together with our results of operations
for the period from January 7, 2009 (Date of Inception)
through December 31, 2009 and cash flows for the period
from January 7, 2009 (Date of Inception) through
December 31, 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. 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, 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 under the Internal
Revenue Code of 1986, as amended, or the Code, for federal
income tax purposes for our taxable year ending
December 31, 2010, 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 in our primary offering 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
59
offering. The SEC declared our registration statement effective
as of August 24, 2009. As of December 31, 2009, we had
received and accepted subscriptions in our offering for
1,497,268, shares of our common stock, or $14,918,000, excluding
subscriptions from residents of Ohio (who were not admitted as
stockholders until January 25, 2010, when we had received
and accepted subscriptions aggregating at least $20,000,000) and
shares of our common stock issued pursuant to the DRIP.
We conduct substantially all of our operations through
Grubb & Ellis Healthcare REIT II Holdings, LP, or our
operating partnership. We are externally advised by
Grubb & Ellis Healthcare REIT II Advisor, LLC, or 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 and approval of
our board of directors. Our advisor also provides marketing,
sales and client services on our behalf. Our advisor engages
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 December 31, 2009, we had neither purchased nor
contracted to purchase any investments nor has our advisor
identified any real estate or real estate-related investments in
which it was reasonably probable that we would invest.
Investment
Strategy
We intend to use substantially all of the net proceeds from our
offering to invest in a diversified portfolio of real estate
properties, focusing primarily on medical office buildings and
healthcare-related facilities. We also may originate or acquire
real estate-related investments such as mortgage, mezzanine,
bridge and other loans, common and preferred stock of, or other
interests in, public or private unaffiliated real estate
companies, commercial mortgage-backed securities, and certain
other securities, including collateralized debt obligations and
foreign securities. We generally seek investments that produce
current income. In order to maintain our exemption from
regulation as investment company under the Investment Company
Act of 1940, as amended, or the Investment Company Act, we may
be required to limit our investments in certain types of real
estate-related investments.
We seek to maximize long-term stockholder value by generating
sustainable growth in cash flows and portfolio value. In order
to achieve these objectives, we may invest using a number of
investment structures which may include direct acquisitions,
joint ventures, leveraged investments, issuing securities for
property and direct and indirect investments in real estate.
In addition, when and as determined appropriate by our advisor,
our portfolio may also include properties in various stages of
development other than those producing current income. These
stages would include, without limitation, unimproved land both
with and without entitlements and permits, property to be
redeveloped and repositioned, newly constructed properties and
properties in
lease-up or
other stabilization, all of which will have limited or no
relevant operating histories and no current income. Our advisor
makes this determination based upon a variety of factors,
including the available risk adjusted returns for such
properties when compared with other available properties, the
appropriate diversification of the portfolio, and our objectives
of realizing both current income and capital appreciation upon
the ultimate sale of properties.
For each of our investments, regardless of property type, we
seek to invest in properties with the following attributes:
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Quality. We seek to acquire properties that
are suitable for their intended use with a quality of
construction that is capable of sustaining the propertys
investment potential for the long-term, assuming funding of
budgeted maintenance, repairs and capital improvements.
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Location. We seek to acquire properties that
are located in established or otherwise appropriate markets for
comparable properties, with access and visibility suitable to
meet the needs of its occupants.
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60
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Market; Supply and Demand. We focus on local
or regional markets that have potential for stable and growing
property level cash flows over the long-term. These
determinations are based in part on an evaluation of local
economic, demographic and regulatory factors affecting the
property. For instance, we favor markets that indicate a growing
population and employment base or markets that exhibit potential
limitations on additions to supply, such as barriers to new
construction. Barriers to new construction include lack of
available land and stringent zoning restrictions. In addition,
we generally will seek to limit our investments in areas that
have limited potential for growth.
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|
Predictable Capital Needs. We seek to acquire
properties where the future expected capital needs can be
reasonably projected in a manner that would enable us to meet
our objectives of growth in cash flows and preservation of
capital and stability.
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|
|
|
Cash Flows. We seek to acquire properties
where the current and projected cash flows, including the
potential for appreciation in value, would enable us to meet our
overall investment objectives. We evaluate cash flows as well as
expected growth and the potential for appreciation.
|
We will not invest more than 10.0% of the offering proceeds
available for investment in unimproved or non-income producing
properties or in other investments relating to unimproved or
non-income producing property. A property will be considered
unimproved or non-income producing property for purposes of this
limitation if it: (1) is not acquired for the purpose of
producing rental or other operating income, or (2) has no
development or construction in process at the date of
acquisition or planned in good faith to commence within one year
of the date of acquisition.
We will not invest more than 10.0% of the offering proceeds
available for investment in commercial mortgage-backed
securities. In addition, we will not invest more than 10.0% of
the offering proceeds available for investment in equity
securities of public or private real estate companies.
We are not limited as to the geographic area where we may
acquire properties. We are not specifically limited in the
number or size of properties we may acquire or on the percentage
of our assets that we may invest in a single property or
investment. The number and mix of properties and real
estate-related investments we will acquire will depend upon real
estate and market conditions and other circumstances existing at
the time we are acquiring our properties and making our
investments, and the amount of proceeds we raise in our offering
and potential future offerings.
Critical
Accounting Policies
We believe that our critical accounting policies, once we
commence our 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 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 will recognize revenue in accordance with Financial
Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 605, Revenue Recognition, or
ASC Topic 605. ASC Topic 605 requires that all four of the
following basic criteria be met before revenue is realized or
realizable and
61
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 ASC, 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 ASC Subtopic
605-45,
Revenue Recognition Principal Agent
Consideration, or ASC Subtopic
605-45. ASC
Subtopic
605-45
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.
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 a
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 will be
reflected in operations.
As part of the leasing process, we may provide the lessee with
an allowance for the construction of leasehold improvements.
These leasehold improvements will be capitalized and recorded as
tenant improvements, and depreciated over the shorter of the
useful life of the improvements or the lease term. If the
allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event we are not considered
the owner of the improvements, the allowance will be considered
to be a lease inducement and will be recognized over the lease
term as a reduction of rental revenue. Factors considered during
this evaluation include, among other things, who holds legal
title to the improvements as well as other controlling rights
provided by the lease agreement and provisions for
substantiation of such costs (e.g. unilateral control of the
tenant space during the build-out process). Determination of the
appropriate accounting for the payment of a tenant allowance
will be made on a
lease-by-lease
basis, considering the facts and circumstances of the individual
tenant lease. Recognition of lease revenue commences when the
lessee is given possession of the leased space upon completion
of tenant improvements when we are the owner of the leasehold
improvements. However, when the leasehold improvements are owned
by the tenant, the lease inception date is the date the tenant
obtains possession of the leased space for purposes of
constructing its leasehold improvements.
Impairment
We will carry our properties 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
62
not be recoverable. Indicators we consider important and that we
believe could trigger an impairment review include, among
others, the following:
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significant negative industry or economic trends;
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a significant underperformance relative to historical or
projected future operating results; and
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a significant change in the extent or manner in which the asset
is used or significant physical change in the asset.
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In the event that the carrying amount of a property exceeds the
sum of the undiscounted cash flows 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 ASC 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 ASC 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:
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management, having the authority to approve the action, commits
to a plan to sell the asset;
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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;
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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;
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the asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and
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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.
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Purchase
Price Allocation
In accordance with ASC 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 comparable sales, cost data and discounted cash flow
models similar to those used by independent appraisers.
Allocations are made at the fair value for furniture, fixtures
and equipment on the premises. 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
63
debt assumed. 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.
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 consolidated balance sheets 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 consolidated balance sheets
and will be amortized to rental income over the remaining
non-cancelable lease term plus any below market 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 consolidated balance sheets 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 consolidated balance sheets and will be
amortized to depreciation and amortization expense over the
average remaining non-cancelable lease term of the acquired
leases plus the market renewal 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
consolidated balance sheets 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.
Qualification
as a REIT
We intend to make an election to be taxed as a REIT under
Section 856 through 860 of the Code and, we intend to be
taxed as such beginning with our taxable year ending
December 31, 2010, 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 REIT 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. Because of our intention
to elect REIT status in 2010, we will not benefit from the loss
incurred for the year ended December 31, 2009.
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 the Consolidated Financial Statements that are a part of this
Annual Report on
Form 10-K.
64
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 and those risks listed in Part I, Item 1A.
Risk Factors, of this Annual Report on
Form 10-K,
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.
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 substantially more than the amount we have
raised to date, 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. 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.
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 period from January 7, 2009 (Date of Inception)
through December 31, 2009, we had a net loss attributable
to controlling interest of approximately $281,000, or $1.51 per
share, due to general and administrative expenses primarily
related to directors and officers liability
insurance of $64,000, transfer agent services of $59,000, board
of directors fees of $55,000, professional and legal fees of
$50,000, restricted stock compensation of $35,000 and
acquisition related expenses of $18,000. 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.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we had interest income of $4,000
related to interest earned on funds held in cash accounts.
65
Our organizational and offering expenses, other than selling
commissions and the dealer manager fee, are being paid by our
advisor or its affiliates on our behalf. 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. These expenses
will only become our liability to the extent these other
organizational and offering expenses do not exceed 1.0% of the
gross proceeds of our offering. As of December 31, 2009,
our advisor and its affiliates had incurred expenses on our
behalf of $1,956,000 in excess of 1.0% of the gross proceeds of
our offering, and therefore, these expenses are not recorded in
our accompanying consolidated financial statements as of
December 31, 2009. To the extent we raise additional funds
from our offering, these amounts may become our liability.
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. For a further discussion of other organizational and
offering expenses, see Note 4, Related Party
Transactions Offering Stage, to the Consolidated
Financial Statements that are a part of this Annual Report on
Form 10-K.
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 primarily from our offering and
from any indebtedness that we may incur.
We expect to 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, borrowings, and the net proceeds of our offering.
However, there may be a delay between the sale of shares of our
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.
Our advisor will evaluate potential additional investments and
will engage in negotiations with real estate sellers,
developers, brokers, investment managers, lenders and others on
our behalf. Until we invest the proceeds of our offering in
properties and real estate-related securities, 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 properties and real estate-related securities. The
number of properties we may acquire and other investments we
will make will depend upon the number of shares sold in our
offering and the resulting amount of net proceeds available for
investment.
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
66
anticipated sources of the necessary capital, which may include
a line of credit or other loans 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.
Cash
Flows
Cash flows used in operating activities for the period from
January 7, 2009 (Date of Inception) through
December 31, 2009, were $40,000. For the period from
January 7, 2009 (Date of Inception) through
December 31, 2009, cash flows used in operating activities
related to the payment of general and administrative expenses.
We anticipate cash flows from operating activities to increase
as we purchase properties and have a full year of operations.
We did not have any cash flows from investing activities for the
period from January 7, 2009 (Date of Inception) through
December 31, 2009.
Cash flows provided by financing activities for the period from
January 7, 2009 (Date of Inception) through
December 31, 2009, were $13,813,000. Such cash flows
related primarily to funds raised from investors in our offering
in the amount of $15,118,000, partially offset by the payment of
offering costs of $1,307,000. We anticipate cash flows from
financing activities to increase in the future as we raise
additional funds from investors and incur debt to purchase
properties.
Distributions
We had not paid any distributions as of December 31, 2009.
The amount of the distributions to our stockholders will be
determined quarterly by our board of directors and is 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 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.
For a further discussion of our distributions, see Item 5.
Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Distributions.
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 300.0% 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
67
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 February 25, 2010 and December 31,
2009, our leverage did not exceed 300.0% of the value of our net
assets.
As of December 31, 2009, we had neither purchased nor
contracted to purchase any investments and had not incurred any
debt.
REIT
Requirements
In order to qualify as a REIT for federal income tax purposes,
we are required to make distributions to our stockholders of at
least 90.0% of our REIT taxable income. In the event that there
is a shortfall in net cash available due to factors including,
without limitation, the timing of such distributions or the
timing of the collections of receivables, we may seek to obtain
capital to pay distributions by means of secured debt financing
through one or more third parties. We may also pay distributions
from cash from capital transactions including, without
limitation, the sale of one or more of our properties or from
the proceeds of our offering.
Commitments
and Contingencies
For a discussion of our commitments and contingencies, see
Note 3, Commitments and Contingencies, to the Consolidated
Financial Statements that are a part of this Annual Report on
Form 10-K
.
Debt
Service Requirements
As of December 31, 2009, we did not have any outstanding
debt.
Contractual
Obligations
As of December 31, 2009, we did not have any contractual
obligations.
Off-Balance
Sheet Arrangements
As of December 31, 2009, we had no off-balance sheet
transactions.
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 we believe
to be an appropriate supplemental measure to reflect the
operating performance of a REIT. FFO is not equivalent to our
net income or loss as determined under GAAP.
68
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 had not acquired any real estate properties or real
estate-related investments as of December 31, 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, we believe, may 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.
The following is a reconciliation of net loss to FFO for the
period from January 7, 2009 (Date of Inception) through
December 31, 2009.
|
|
|
|
|
|
|
Period from
|
|
|
|
January 7, 2009
|
|
|
|
(Date of Inception)
|
|
|
|
through
|
|
|
|
December 31, 2009
|
|
|
Net loss
|
|
$
|
(282,000
|
)
|
Add:
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
1,000
|
|
Depreciation and amortization consolidated properties
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
(281,000
|
)
|
|
|
|
|
|
FFO per common share basic and diluted
|
|
$
|
(1.51
|
)
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
186,330
|
|
|
|
|
|
|
Net
Operating Income (Loss)
Although we had not acquired any real estate properties or real
estate-related investments as of December 31, 2009, we are
disclosing net operating income (loss), and intend to disclose
net operating income in future filings, because we believe that
net operating income (loss) provides an accurate measure of the
operating performance of our operating assets because net
operating income (loss) excludes certain items that are not
associated with management of the properties. Net operating
income (loss) 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 (loss) 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.
69
To facilitate understanding of this financial measure, the
following is a reconciliation of net loss to net operating
income (loss) for the period from January 7, 2009 (Date of
Inception) through December 31, 2009.
|
|
|
|
|
|
|
Period from
|
|
|
|
January 7, 2009
|
|
|
|
(Date of Inception)
|
|
|
|
through
|
|
|
|
December 31, 2009
|
|
|
Net loss
|
|
$
|
(282,000
|
)
|
Add:
|
|
|
|
|
General and administrative
|
|
|
286,000
|
|
Depreciation and amortization
|
|
|
|
|
Interest expense
|
|
|
|
|
Less:
|
|
|
|
|
Interest and dividend income
|
|
|
(4,000
|
)
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
|
|
|
|
|
|
|
Subsequent
Events
For a discussion of subsequent events, see Note 10,
Subsequent Events, to the Consolidated Financial Statements that
are a part of this Annual Report on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. 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 December 31, 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 8.
|
Financial
Statements and Supplementary Data.
|
See the index at Part IV, Item 15. Exhibits, Financial
Statement Schedules.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A(T).
|
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 pursuant to 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 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
70
allow timely decisions regarding required disclosure. In
designing and evaluating the 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 December 31, 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 December 31,
2009, were effective for the purposes stated above.
(b) Managements Report on Internal Control over
Financial Reporting. This annual report does not
include a report of managements assessment regarding
internal control over financial reporting due to a transition
period established by rules of the SEC for newly public
companies.
(c) Changes in internal control over financial
reporting. This annual 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.
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2010 annual meeting of stockholders.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2010 annual meeting of stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2010 annual meeting of stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2010 annual meeting of stockholders.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2010 annual meeting of stockholders.
71
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1) Financial Statements:
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
(a)(2) Financial Statement Schedule:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
(a)(3) Exhibits:
The exhibits listed on the Exhibit Index (following the
signatures section of this report) are included, or incorporated
by reference, in this annual report.
(b) Exhibits:
See Item 15(a)(3) above.
(c) Financial Statement Schedule:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
72
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Grubb & Ellis Healthcare REIT II, Inc.
We have audited the accompanying consolidated balance sheet of
Grubb & Ellis Healthcare REIT II, Inc., a Maryland
Corporation (the Company), as of December 31,
2009, and the related consolidated statements of operations,
equity and cash flows for the period from January 7, 2009
(Date of Inception) through December 31, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Grubb & Ellis
Healthcare REIT II, Inc. at December 31, 2009, and the
consolidated results of its operations and its cash flows for
the period from January 7, 2009 (Date of Inception) through
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst &
Young LLP
Irvine, California
February 25, 2010
73
|
|
|
|
|
ASSETS
|
Cash
|
|
$
|
13,773,000
|
|
Prepaid expenses
|
|
|
36,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,809,000
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
178,000
|
|
Accounts payable due to affiliates
|
|
|
347,000
|
|
|
|
|
|
|
Total liabilities
|
|
|
525,000
|
|
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; 1,532,268 shares issued and outstanding as of
December 31, 2009
|
|
|
15,000
|
|
Additional paid-in capital
|
|
|
13,549,000
|
|
Accumulated deficit
|
|
|
(281,000
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
13,283,000
|
|
Noncontrolling interest (Note 5)
|
|
|
1,000
|
|
|
|
|
|
|
Total equity
|
|
|
13,284,000
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
13,809,000
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
74
|
|
|
|
|
Expenses:
|
|
|
|
|
General and administrative
|
|
$
|
286,000
|
|
|
|
|
|
|
Loss from operations
|
|
|
(286,000
|
)
|
Other income:
|
|
|
|
|
Interest income
|
|
|
4,000
|
|
|
|
|
|
|
Net loss
|
|
|
(282,000
|
)
|
Less: Net loss attributable to noncontrolling interest
|
|
|
1,000
|
|
|
|
|
|
|
Net loss attributable to controlling interest
|
|
$
|
(281,000
|
)
|
|
|
|
|
|
Net loss per common share attributable to controlling
interest basic and diluted
|
|
$
|
(1.51
|
)
|
|
|
|
|
|
Weighted average number of common shares
outstanding basic and diluted
|
|
|
186,330
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
Preferred
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
BALANCE January 7, 2009 (Date of Inception)
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of common stock
|
|
|
1,517,268
|
|
|
|
15,000
|
|
|
|
15,103,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,118,000
|
|
Issuance of vested and nonvested restricted common stock
|
|
|
15,000
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,589,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,589,000
|
)
|
Amortization of nonvested common stock compensation
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Noncontrolling interest contribution to operating partnership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(281,000
|
)
|
|
|
(1,000
|
)
|
|
|
(282,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
|
1,532,268
|
|
|
$
|
15,000
|
|
|
$
|
13,549,000
|
|
|
$
|
|
|
|
$
|
(281,000
|
)
|
|
$
|
1,000
|
|
|
$
|
13,284,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
76
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net loss
|
|
$
|
(282,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
Stock based compensation
|
|
|
35,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Prepaid expenses
|
|
|
(36,000
|
)
|
Accounts payable and accrued liabilities
|
|
|
178,000
|
|
Accounts payable due to affiliates
|
|
|
65,000
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(40,000
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
15,118,000
|
|
Noncontrolling interest contribution to operating partnership
|
|
|
2,000
|
|
Payment of offering costs
|
|
|
(1,307,000
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,813,000
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
13,773,000
|
|
CASH Beginning of period
|
|
|
|
|
|
|
|
|
|
CASH End of period
|
|
$
|
13,773,000
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
Financing Activities:
|
|
|
|
|
Accrued offering costs
|
|
$
|
282,000
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
77
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
For the Period from January 7, 2009 (Date of
Inception) through December 31, 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,
under the Internal Revenue Code of 1986, as amended, or the
Code, for federal income tax purposes for our taxable year
ending December 31, 2010, 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 in our primary offering 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. The United States Securities and Exchange Commission
declared our registration statement effective as of
August 24, 2009. As of December 31, 2009, we had
received and accepted subscriptions in our offering for
1,497,268, shares of our common stock, or $14,918,000, excluding
subscriptions from residents of Ohio (who were not admitted as
stockholders until January 25, 2010, when we had received
and accepted subscriptions aggregating at least $20,000,000) and
shares of our common stock issued pursuant to the DRIP.
We conduct substantially all of our operations through
Grubb & Ellis Healthcare REIT II Holdings, LP, or our
operating partnership. We are externally advised by
Grubb & Ellis Healthcare REIT II Advisor, LLC, or 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 and approval of
our board of directors. Our advisor also provides marketing,
sales and client services on our behalf. Our advisor engages
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 December 31, 2009, we had neither purchased nor
contracted to purchase any investments nor had our advisor
identified any real estate or real estate-related investments in
which it is probable that we will invest.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The summary of significant accounting policies presented below
is designed to assist in understanding our consolidated
financial statements. Such 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 consolidated financial
statements.
78
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basis
of Presentation
Our accompanying consolidated financial statements include our
accounts and those of our operating partnership. 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 December 31,
2009 own a 99.99% general partnership interest therein. Our
advisor is a limited partner and as of December 31, 2009
owns a 0.01% noncontrolling limited partnership interest in the
operating partnership.
Our operating partnership currently has no real estate
operations. 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 consolidated
financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation.
In preparing our accompanying consolidated financial statements,
management has evaluated subsequent events through the financial
statement issuance date. We believe that the disclosures
contained herein are adequate to prevent the information
presented from being misleading.
Use of
Estimates
The preparation of our 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.
Stock
Compensation
We follow Financial Accounting Standards Board, or FASB,
Accounting Standards Codification, or ASC, Topic 718,
Compensation Stock Compensation, to account
for our stock compensation pursuant to the 2009 Incentive Plan,
or our incentive plan. See Note 5, Equity 2009
Incentive Plan for a further discussion of grants under our
incentive plan.
Income
Taxes
We intend to make an election to be taxed as a REIT, under
Sections 856 through 860 of the Code, and we intend to be
taxed as such beginning with our taxable year ending
December 31, 2010, 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 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. Because of our intention to elect
REIT status in 2010, we will not benefit from the loss incurred
for the year ended December 31, 2009.
We follow ASC Topic 740, Income Taxes, to recognize,
measure, present and disclose in our consolidated financial
statements uncertain tax positions that we have taken or expect
to take on a tax return. As of
79
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2009, we did not have any liabilities for
uncertain tax positions that we believe should be recognized in
our consolidated financial statements.
Segment
Disclosure
ASC Topic 280, Segment Reporting, establishes standards
for reporting financial and descriptive information about an
enterprises reportable segments. As of December 31,
2009, we had 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 (now contained in
ASC Topic 860, Transfers and Servicing).
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 ASC
Topic 860, Transfers 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 ASC 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 adopted SFAS No. 166
on January 1, 2010. The adoption of SFAS No. 166
did not 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 (now contained in ASC Topic 810,
Consolidation), 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 adopted SFAS No. 167
on January 1, 2010. The adoption of SFAS No. 167
did not have a material impact on our consolidated financial
statements.
|
|
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 organizational and offering expenses, other than selling
commissions and the dealer manager fee, are being paid by our
advisor or its affiliates on our behalf. 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. These expenses
will only become our liability to the extent these other
organizational and offering expenses do not
80
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exceed 1.0% of the gross proceeds of our offering. As of
December 31, 2009, our advisor and its affiliates had
incurred expenses on our behalf of $1,956,000 in excess of 1.0%
of the gross proceeds of our offering, and therefore, these
expenses are not recorded in our accompanying consolidated
financial statements as of December 31, 2009. To the extent
we raise additional funds from our offering, these amounts may
become our liability.
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. See Note 4, Related Party Transactions
Offering Stage, for a further discussion of other
organizational and offering expenses.
|
|
4.
|
Related
Party Transactions
|
Fees
and Expenses Paid to Affiliates
All of our executive officers and our non-independent directors
are also executive officers and employees
and/or
holders of a direct or indirect interest in our advisor, our
sponsor, Grubb & Ellis Equity Advisors or other
affiliated entities. We entered into the Advisory Agreement with
our advisor and a dealer manager agreement with
Grubb & Ellis Securities, Inc., or Grubb &
Ellis Securities, or 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. In the aggregate, for the
period from January 7, 2009 (Date of Inception) through
December 31, 2009, we incurred $1,704,000 to our advisor or
its affiliates as detailed below.
Offering
Stage
Selling
Commissions
Our dealer manager receives 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.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we incurred $998,000 in selling
commissions to our dealer manager. Such commissions are 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 receives 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 may re-allow
all or a portion of these fees to participating broker-dealers.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we incurred $441,000 in dealer
manager fees to our dealer manager or its affiliates. Such fees
and reimbursements are charged to stockholders equity as
such amounts are reimbursed to our dealer manager or its
affiliates from the gross proceeds of our offering.
Other
Organizational and Offering Expenses
Our 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. For the period from January 7, 2009 (Date of
Inception) through December 31, 2009, we incurred $150,000
in offering expenses to our advisor or Grubb & Ellis
Equity Advisors. Other organizational expenses are expensed as
incurred, and offering expenses are
81
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 period from January 7, 2009 (Date of Inception)
through December 31, 2009, we did not incur any 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 period from January 7, 2009 (Date of Inception)
through December 31, 2009, we did not incur any 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 and other fees 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. As of December 31,
2009, such fees and expenses did not exceed 6.0% of the purchase
price or total development costs.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we did not incur any acquisition
expenses to our advisor and its affiliates.
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.
82
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the period from January 7, 2009 (Date of Inception)
through December 31, 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 consolidated statement 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 our 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 period from January 7, 2009 (Date of Inception)
through December 31, 2009, we did not incur a property
management fee or an oversight fee to our advisor or 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 period
from January 7, 2009 (Date of Inception) through
December 31, 2009, we did not incur any payroll for
on-site
personnel and engineering to our advisor or 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 period from January 7, 2009 (Date of Inception)
through December 31, 2009, we did not incur any lease fees
to our advisor or 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 period from January 7, 2009 (Date of
Inception) through December 31, 2009, we did not incur such
construction management fee to our advisor or its affiliates.
Operating
Expenses
We 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.
83
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, Grubb & Ellis Equity
Advisors incurred operating expenses on our behalf of $56,000,
which is included in general and administrative in our
accompanying consolidated statement of operations.
Related
Party Services Agreement
We entered into a services agreement, effective
September 21, 2009, with Grubb & Ellis Equity
Advisors, Transfer Agent, LLC, formerly known as
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.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we incurred $59,000 for investor
services expenses that our transfer agent provided to us, which
is included in general and administrative in our accompanying
consolidated statement of operations.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, Grubb & Ellis Equity
Advisors incurred $7,000 in subscription agreement processing
expenses that our transfer agent provided to us. As an other
organizational and offering expense, these subscription
agreement processing expenses will only become our liability to
the extent cumulative other organizational and offering expenses
do not exceed 1.0% of the gross proceeds of our offering.
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
period from January 7, 2009 (Date of Inception) through
December 31, 2009, we did not incur any additional services
to our advisor or 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 period from
January 7, 2009 (Date of Inception) through
December 31, 2009, we did not incur any disposition fees to
our advisor or its affiliates.
84
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (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 period from January 7, 2009 (Date of
Inception) through December 31, 2009, we did not incur any
such distributions to our advisor.
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 period from January 7, 2009
(Date of Inception) through December 31, 2009, we did not
incur any such distributions to our advisor.
Accounts
Payable Due to Affiliates
The following amounts were outstanding to affiliates as of
December 31, 2009:
|
|
|
|
|
|
|
Entity
|
|
Fee
|
|
December 31,
2009
|
|
|
Grubb & Ellis Equity Advisors
|
|
Operating Expenses
|
|
$
|
65,000
|
|
Grubb & Ellis Equity Advisors
|
|
Offering Costs
|
|
|
150,000
|
|
Grubb & Ellis Securities
|
|
Selling Commissions and Dealer Manager Fees
|
|
|
132,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347,000
|
|
|
|
|
|
|
|
|
Preferred
Stock
Our charter authorizes us to issue 200,000,000 shares of
our $0.01 par value preferred stock. As of
December 31, 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 an initial capital contribution to our operating
partnership.
85
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 21, 2009, we granted 15,000 shares of
restricted common stock to our independent directors. Through
December 31, 2009, we issued 1,497,268 shares of our
common stock in connection with our offering and no shares of
our common stock pursuant to the DRIP. As of December 31,
2009, we had 1,532,268 shares of our common stock
outstanding.
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 December 31, 2009, we owned a 99.99% general
partnership interest in our operating partnership and our
advisor owned a 0.01% limited partnership interest in our
operating partnership. As such, 0.01% of the earnings of our
operating partnership are allocated to noncontrolling interest.
Distributions
On December 11, 2009, our board of directors authorized a
daily distribution to our stockholders of record as of the close
of business on each day of the period commencing on
January 1, 2010 and ending on February 28, 2010. Our
sponsor has advised us that it intends to fund these
distributions until the earlier of the date we acquire our first
property and February 28, 2010. Our sponsor will not
receive any additional shares of our common stock or other
consideration for funding these distributions, and we will not
repay the funds provided by our sponsor for these distributions.
Our sponsor is not obligated to contribute monies to fund any
subsequent distributions. The distributions are calculated based
on 365 days in the calendar year and are equal to
$0.0017808 per share of common stock, which is equal to an
annualized distribution rate of 6.5%, assuming a purchase price
of $10.00 per share.
The distributions declared for each record date in January 2010
were paid in February 2010 and the distributions declared for
each record date in February 2010 will be paid in March 2010.
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
December 31, 2009.
Share
Repurchase Plan
Our board of directors has approved a share repurchase plan. Our
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. All repurchases are
subject to a one-year holding period, except for repurchases
made in connection with a stockholders death or qualifying
disability. Repurchases are limited to (1) those that could
be funded from the cumulative proceeds we receive from the sale
of shares of our common stock pursuant to the DRIP and
(2) 5.0% of the weighted average number of shares of our
common stock outstanding during the prior calendar year.
The prices per share at which we will repurchase shares of our
common stock will range, depending on the length of time the
stockholder held such shares, from 92.5% to 100%, of the price
paid per share to acquire such shares from us. However, if
shares of our common stock are to be repurchased in connection
with a stockholders death or qualifying disability, the
repurchase price will be no less than 100% of the price paid to
acquire the shares of our common stock from us.
86
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No share repurchases were made for the period from
January 7, 2009 (Date of Inception) through
December 31, 2009.
2009
Incentive Plan
We adopted our incentive plan, pursuant to which our board of
directors or a committee of our independent directors may make
grants of options, restricted shares of common stock, stock
purchase rights, SARs or other awards to our independent
directors, employees and consultants. The maximum number of
shares of our common stock that may be issued pursuant to our
incentive plan is 2,000,000.
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.
The fair value of each share of restricted common stock was
estimated at the date of grant at $10.00 per share, the per
share price of shares in our offering, and with respect to the
initial 20.0% of shares that vested on the grant date, expensed
as compensation immediately, and with respect to the remaining
shares, amortized on a straight-line basis over the vesting
period. Shares of restricted common stock may not be sold,
transferred, exchanged, assigned, pledged, hypothecated or
otherwise encumbered. Such restrictions expire upon vesting.
Shares of restricted common stock have full voting rights and
rights to dividends. For the period from January 7, 2009
(Date of Inception) through December 31, 2009, we
recognized compensation expense of $35,000, related to the
restricted common stock grants ultimately expected to vest,
which has been reduced for estimated forfeitures. ASC Topic 718
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. For the period from
January 7, 2009 (Date of Inception) through
December 31, 2009, we did not assume any forfeitures. Stock
compensation expense is included in general and administrative
in our accompanying consolidated statement of operations.
As of December 31, 2009, there was $115,000 of total
unrecognized compensation expense, net of estimated forfeitures,
related to nonvested shares of restricted common stock. As of
December 31, 2009, this expense is expected to be
recognized over a remaining weighted average period of
3.81 years.
As of December 31, 2009, the fair value of the nonvested
shares of restricted common stock was $120,000. A summary of the
status of the nonvested shares of restricted common stock as of
December 31, 2009, and the changes for the period from
January 7, 2009 (Date of Inception) through
December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Common
|
|
|
Date Fair
|
|
|
|
Stock
|
|
|
Value
|
|
|
Balance January 7, 2009 (Date of Inception)
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
15,000
|
|
|
|
10.00
|
|
Vested
|
|
|
(3,000
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
12,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Expected to vest December 31, 2009
|
|
|
12,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
87
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Concentration
of Credit Risk
|
Financial instruments that potentially subject us to a
concentration of credit risk are primarily cash. As of
December 31, 2009, we had cash in excess of Federal Deposit
Insurance Corporation insured limits. We believe this risk is
not significant.
We report earnings (loss) per share pursuant to ASC 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 December 31, 2009, we
did not have any securities that give rise to potentially
dilutive shares of our common stock.
|
|
8.
|
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.
For the period from January 7, 2009 (Date of Inception)
through December 31, 2009, we have not recorded any charges
to earnings related to the subordinated distribution upon
termination.
|
|
9.
|
Selected
Quarterly Financial Data (unaudited)
|
Set forth below is the unaudited selected quarterly financial
data. We believe that all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the
amounts stated below to present fairly, and in accordance with
GAAP, the unaudited selected quarterly financial data when read
in conjunction with our consolidated financial statements.
88
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 7, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Date of Inception)
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
December 31, 2009
|
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
March 31, 2009
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Expenses
|
|
|
(224,000
|
)
|
|
|
(62,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(224,000
|
)
|
|
|
(62,000
|
)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(220,000
|
)
|
|
|
(62,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interest
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to controlling interest
|
|
$
|
(219,000
|
)
|
|
$
|
(62,000
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to controlling
interest basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(3.10
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic and diluted
|
|
|
675,136
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
13,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Status
of our Offering
On January 25, 2010, we satisfied the $20,000,000 minimum
offering amount required by the State of Ohio in connection with
our offering and began accepting subscriptions from Ohio
investors.
As of February 12, 2010, we had received and accepted
subscriptions in our offering for 2,567,757 shares of our
common stock, or $25,592,000, excluding shares of our common
stock issued pursuant to the DRIP.
Proposed
Property Acquisitions
On January 7, 2010, we entered into a purchase and sale
agreement to purchase the Center for Neurosurgery and Spine
located in Sartell, Minnesota, for a purchase price of
$6,500,000, plus closing costs. We intend to purchase the
property by taking title subject to a mortgage, which as of
February 5, 2010, has an unpaid principal balance of
approximately $3,374,000 and the remaining balance from funds
raised through our offering. We anticipate paying an acquisition
fee of $179,000, or 2.75%, of the purchase price to our advisor.
The seller has agreed to pay an affiliated broker of our sponsor
a customary fee as a commission for its real estate brokerage
services.
On January 26, 2010, we entered into a purchase and sale
agreement to purchase Highlands Ranch Medical Pavilion located
in Highlands Ranch, Colorado, for a purchase price of
$8,400,000, plus closing costs. We intend to finance the
purchase of the property through a loan assumption evidenced by
a note, which as of February 22, 2010, has an unpaid
principal balance of approximately $4,459,000 and the remaining
balance from funds raised through our offering. We anticipate
paying an acquisition fee of $231,000, or 2.75%, of the purchase
price to our advisor.
89
GRUBB &
ELLIS HEALTHCARE REIT II, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 28, 2010, we entered into a purchase and sale
agreement to purchase Parkway Medical Center located in
Beachwood, Ohio, for a purchase price of $10,975,000, plus
closing costs. We intend to finance the purchase of the property
from funds raised through our offering. We anticipate paying an
acquisition fee of $302,000, or 2.75%, of the purchase price to
our advisor. The seller has agreed to pay a Grubb &
Ellis broker a customary fee as a commission for its real estate
brokerage services.
On February 8, 2010, we entered into a purchase and sale
agreement to purchase Lacombe Medical Office Building located in
Lacombe, Louisiana, for a purchase price of $6,970,000, plus
closing costs. We intend to finance the purchase of the property
from funds raised through our offering. We anticipate paying an
acquisition fee of $192,000, or 2.75%, of the purchase price to
our advisor. The seller has agreed to pay a Grubb &
Ellis broker a customary fee as a commission for its real estate
brokerage services.
We anticipate that the closings will occur during the first and
second quarters of 2010; however, closing is subject to certain
agreed upon conditions and there can be no assurance that we
will be able to complete the acquisition of the Center for
Neurosurgery and Spine, Highlands Ranch Medical Pavilion,
Parkway Medical Center and Lacombe Medical Office Building.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
Grubb & Ellis
Healthcare REIT II, Inc.
(Registrant)
|
|
|
|
|
|
|
|
By
|
|
/s/ Jeffrey
T. Hanson
Jeffrey
T. Hanson
|
|
Chief Executive Officer and Chairman of the Board (principal
executive officer)
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Shannon
K S Johnson
Shannon
K S Johnson
|
|
Chief Financial Officer (principal financial officer and
principal accounting officer)
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Jeffrey
T. Hanson
Jeffrey
T. Hanson
|
|
Chief Executive Officer and Chairman of the Board (principal
executive officer)
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Shannon
K S Johnson
Shannon
K S Johnson
|
|
Chief Financial Officer (principal financial officer and
principal accounting officer)
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Danny
Prosky
Danny
Prosky
|
|
Director
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Patrick
R. Leardo
Patrick
R. Leardo
|
|
Director
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Gerald
W. Robinson
Gerald
W. Robinson
|
|
Director
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
|
|
|
|
|
By
|
|
/s/ Gary
E. Stark
Gary
E. Stark
|
|
Director
|
|
|
|
|
|
Date
|
|
February 25, 2010
|
|
|
91
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 Annual Report on
Form 10-K
for the fiscal year ended December 31, 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
|
|
Agreement of Limited Partnership of Grubb & Ellis
Healthcare REIT II Holdings, LP (included as Exhibit 10.2
to our Registration Statement on Form S-11 (File
No. 333-158111)
filed March 19, 2009 and incorporated herein by reference)
|
|
10
|
.2
|
|
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 (included as
Exhibit 10.1 to our
Form 10-Q
filed November 4, 2009 and incorporated herein by reference)
|
|
10
|
.3
|
|
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
|
.4
|
|
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)
|
|
10
|
.5
|
|
Form of Restricted Stock Award Agreement of Grubb &
Ellis Healthcare REIT II, Inc. (included as Exhibit 10.1 to
our Current Report on Form 8-K filed October 26, 2009
and incorporated herein by reference)
|
|
21
|
.1*
|
|
Subsidiaries of Grubb & Ellis Healthcare REIT II, Inc.
|
|
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
|
92
|
|
|
|
|
|
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. |
93