Attached files
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EX-32.1 - Summit Healthcare REIT, Inc | v179108_ex32-1.htm |
EX-21.1 - Summit Healthcare REIT, Inc | v179108_ex21-1.htm |
EX-31.2 - Summit Healthcare REIT, Inc | v179108_ex31-2.htm |
EX-31.1 - Summit Healthcare REIT, Inc | v179108_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2009
or
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period
from to
Commission
file number: 000-52566
CORNERSTONE
CORE PROPERTIES REIT, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
73-1721791
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1920 Main Street,
Suite 400,
Irvine, California 92614
(Address
of Principal Executive Offices)
949-852-1007
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class:
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
Title
of Each Class:
|
Common
Stock, $0.001 par value per share
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer”, “and large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): Yes o No x
As of
June 30, 2009 (the last business day of the registrant’s second fiscal
quarter), there were 22,482,541 shares of common stock held by non-affiliates of
the registrant having an aggregate market value of $166,918,796.
As of
March 26, 2010, there were approximately 22,733,499 shares of common stock of
Cornerstone Core Properties REIT, Inc. outstanding. The Registrant
incorporates by reference portions of its Definitive Proxy Statement for the
2010 Annual Meeting of Stockholders, which is expected to be filed no later than
April 30, 2010, into Part III of this Form 10-K to the extent
stated herein.
CORNERSTONE
CORE PROPERTIES REIT, INC.
(A
Maryland Corporation)
TABLE
OF CONTENTS
PART I
|
||
Item
1
|
Business
|
3
|
Item
1A
|
Risk Factors
|
8
|
Item
1B
|
Unresolved Staff
Comments
|
22
|
Item
2
|
Properties
|
23
|
Item
3
|
Legal Proceedings
|
24
|
Item
4
|
Reserved
|
24
|
PART II
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||
Item
5
|
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
25
|
Item
6
|
Selected Financial
Data
|
29
|
Item
7
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
30
|
Item
7A
|
Quantitative and Qualitative Disclosures About
Market Risk
|
37
|
Item
8
|
Financial Statements and Supplementary
Data
|
37
|
Item
9
|
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
|
38
|
Item
9A(T)
|
Controls and
Procedures
|
38
|
Item
9B
|
Other Information
|
38
|
PART III
|
||
Item
10
|
Directors, Executive Officers and Corporate
Governance
|
39
|
Item
11
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Executive
Compensation
|
39
|
Item
12
|
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
|
39
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Item
13
|
Certain Relationships and Related Transactions,
and Director Independence
|
39
|
Item
14
|
Principal Accounting Fees and
Services
|
39
|
PART IV
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||
Item
15
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Exhibits and Financial Statement
Schedules
|
40
|
2
PART I
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain
statements in this report, other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives
and expected operating results, and the assumptions upon which those statements
are based, are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally are identified by the words “believes,”
“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and
similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements. A detailed discussion of these and other risks and uncertainties
that could cause actual results and events to differ materially from such
forward-looking statements is included in the section entitled “Risk Factors” in
Item 1A of this report. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. Accordingly, there can be no assurance that our
expectations will be realized.
As used
in this report, “we,” “us” and “our” refer to Cornerstone Core Properties
REIT, Inc. and its consolidated subsidiaries except where the context
otherwise requires.
ITEM 1. BUSINESS
Our
Company
Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on
October 22, 2004 for the purpose of engaging in the business of investing
in and owning commercial real estate. We have qualified, and intend
to continue to qualify, as a real estate investment trust (REIT) for federal tax
purposes.
We are
structured as an umbrella partnership REIT, referred to as an “UPREIT,” under
which substantially all of our current and future business is, and will be,
conducted through a majority owned subsidiary, Cornerstone Operating
Partnership, L.P., a Delaware limited partnership, formed on November 30,
2004. We are the sole general partner of the operating partnership
and have control over its affairs.
Our
external advisor is Cornerstone Realty Advisors, LLC, a Delaware limited
liability company. One of our directors is also a director of our advisor and
all of our officers are also officers of our advisor. Our advisor has
contractual and fiduciary responsibilities to us and our
stockholders. Under the terms of the advisory agreement, our advisor
will use commercially reasonable efforts to present to us investment
opportunities and to provide a continuing and suitable investment program
consistent with the investment policies and objectives adopted by our board of
directors. Our advisor is responsible for managing our affairs on a
day-to-day basis and for identifying and making property acquisitions on our
behalf. Currently, there are no employees of Cornerstone Core
Properties REIT, Inc. and its subsidiaries. All management and
administrative personnel responsible for conducting our business are currently
employed by affiliates of our advisor.
From our
formation through the end of the year ended December 31, 2005, our
activities consisted solely of organizational activities including preparing for
and launching our initial public offering. On January 6, 2006,
we commenced our initial public offering and retained Pacific Cornerstone
Capital, Inc. (“PCC”), an affiliate of our advisor, to serve as the dealer
manager for the offering. PCC is responsible for marketing our shares being
offered pursuant to the offering. PCC and Terry G. Roussel, the majority owner
of our dealer manager and one of our officers and directors, have been the
subject of a non-public inquiry by Financial Industry Regulatory Authority
(“FINRA”) focused on private placements conducted by our dealer manager during
the period from January 1, 2004 through May 30, 2009. We are not the
issuer of any of the securities offered in the private placements that are the
subject of FINRA’s investigation. One such issuer is, however, the
managing member of our advisor. Without admitting or denying the
findings, our dealer manager and Terry G. Roussel have settled the FINRA
inquiry, which alleges that they violated NASD rules relating to communications
with the public (Rule 2210); supervision (Rule 3010) and standards of commercial
honor and principles of trade (Rule 2110). FINRA’s allegations, in
sum, focus on claimed material misstatements and omissions with respect to
certain performance targets. Our dealer manager has consented to a
censure and fine of $700,000. Mr. Roussel has consented to a fine of
$50,000, suspension from association with a FINRA member in all capacities for
20 business days, and suspension from association with a FINRA member firm in a
principal capacity for an additional three months. Terry G. Roussel
served as our dealer manager’s president and chief compliance officer until
October 1, 2009, when he resigned as president. In January, Terry G. Roussel
transferred his chief compliance officer responsibilities to a qualified
registered principal. He presently serves as one of our dealer manager’s two
directors. Our dealer manager has provided additional disclosures,
satisfactory to FINRA, to investors in the private offerings.
On
November 25, 2008, we filed a registration statement on Form S-11 with the SEC
to register a follow-on public offering. We subsequently amended the
registration statement on February 17, 2009. Pursuant to
the registration statement, as amended, we registered up to 56,250,000
shares of common stock in a primary offering for $8.00 per share, with discounts
available to certain categories of purchasers. We also registered approximately
21,250,000 shares pursuant to our dividend reinvestment plan at a purchase price
equal to $7.60 per share. We stopped making offers under our initial
public offering on June 1, 2009 and commenced our follow-on offering on June 10,
2009.
3
As of
December 31, 2009, approximately 20.8 million shares of our common stock had
been sold in our initial and follow-on public offering for aggregate gross
proceeds of approximately $165.9 million. This excludes shares issued
under our distribution reinvestment plan.
Investment
Objectives
Our
investment objectives are to:
|
·
|
preserve
stockholder capital by owning and operating real estate on an all-cash
basis with no permanent financing;
|
|
·
|
purchase
investment grade properties with the potential for capital appreciation to
our stockholders;
|
|
·
|
purchase
income-producing properties which will allow us to pay cash distributions
to our stockholders at least quarterly, if not more frequently;
and
|
|
·
|
provide
liquidity to our stockholders within the shortest reasonable time
necessary to accomplish the above
objectives.
|
On or
before September 21, 2012, our board of directors will take action to
provide enhanced liquidity for our stockholders. The directors will
consider various plans to enhance liquidity, including, but not limited
to:
|
·
|
modifying
our stock repurchase program to increase the number of shares that we can
redeem under the program during any given period, and to expand the
sources of funding that we can use to redeem shares under the
program;
|
|
·
|
seeking
stockholder approval to begin an orderly liquidation of our assets and
distribute the available proceeds of such sales to our
stockholders;
|
|
·
|
listing
our stock for trading on a national securities exchange;
or
|
|
·
|
seeking
stockholder approval of another liquidity event such as a sale of our
assets or a merger with another
entity.
|
The
implementation of one or more of these plans will be at the discretion of our
board of directors based upon its consideration of the best interests of our
stockholders, however, we currently believe that a modification to our share
redemption program as described above is the liquidity option most likely to be
implemented on or before September 21, 2012.
Investment
Strategy
Large
institutional investors have proven how to build a successful real estate
portfolio. They generally start with a foundation of “core” holdings.
“Core” holdings are existing, high quality properties owned “all-cash” free and
clear of debt. We believe that “core” holdings are necessary to help
investors build the base of their investment portfolio. That is why our primary
investment focus is to acquire investment real estate “all cash” with no
permanent financing.
All cash
real estate investments add a layer of safety to conservative real estate
investment which we believe would be difficult to match by any other
strategy. By owning and operating properties on an “all-cash” basis,
risk of foreclosure of mortgage debt is substantially
eliminated. Following acquisition of “core” real property
investments, many large institutional investors then make “core plus,” “valued
added” and “opportunistic” real property investments each of which has
increasing levels of debt, risk and yield.
Acquisition
Policies
Primary
Investment Focus
We focus
on acquiring investment grade real estate including multi-tenant industrial
properties that are:
|
·
|
owned
and operated on an all-cash basis with no permanent
financing;
|
|
·
|
high-quality,
existing, and currently producing
income;
|
|
·
|
leased
to a diversified tenant base; and
|
4
|
·
|
leased
with overall shorter term operating type leases, allowing for annual
rental increases and greater potential for capital
growth.
|
We seek
potential property acquisitions meeting the above criteria that are located in
major metropolitan markets throughout the United States. Among the most
important criteria we expect to use in evaluating the markets in which we
purchase properties are:
|
·
|
high
population;
|
|
·
|
historically
high levels of tenant demand and lower historic investment volatility for
type of property being acquired;
|
|
·
|
high
historical and projected employment
growth;
|
|
·
|
stable
household income and general economic
stability;
|
|
·
|
a
scarcity of land for new competitive properties;
and
|
|
·
|
sound
real estate fundamentals, such as high occupancy rates and strong rent
rate potential.
|
The
markets in which we invest may not meet all of these criteria and the relative
importance that we assign to any one or more of these criteria may differ from
market to market or change as general economic and real estate market conditions
evolve. We may also consider additional important criteria in the
future.
Multi-tenant
industrial properties generally offer a combination of both warehouse and office
space adaptable to a broad range of tenants and uses and typically cater to
local and regional businesses. Multi-tenant industrial properties
comprise one of the major segments of the commercial real estate market and
tenants in these properties come from a broad spectrum of industries including
light manufacturing, assembly, distribution, import/export, general contractors,
telecommunications, general office/ warehouse, wholesale, service, high-tech and
other fields. These properties diversify revenue by generating rental
income from multiple businesses in a variety of industries instead of relying on
one or two large tenants.
Other
Potential Investments
While we
intend to invest in multi-tenant industrial properties, we have the ability to
invest in any type of real estate investment that we believe to be in the best
interests of our stockholders, including other real estate funds or REITs,
mortgage funds, mortgage loans and sale lease-backs. Furthermore,
there are no restrictions on the number or size of properties we may purchase or
on the amount or proportion of net proceeds of our initial public offering that
we may invest in a single property. Although we can invest in any
type of real estate investment, our charter restricts certain types of
investments. We do not intend to underwrite securities of other
issuers or to engage in the purchase and sale of any types of investments other
than real estate investments.
Investment
Policies and Decisions
Our
advisor makes recommendations to our board of directors, which approves or
rejects all proposed property acquisitions. Our independent directors
will review our investment policies at least annually to determine whether these
policies continue to be in the best interests of our stockholders.
We
purchase properties based on the decision of our board of directors after an
examination and evaluation by our advisor of many factors including but not
limited to the functionality of the property, the historical financial
performance of the property, current market conditions for leasing space at the
property, proposed purchase price, terms and conditions, potential cash flows
and potential profitability of the property. The number of properties
that we will purchase will depend on the amount of funds we raise in our
offerings and upon the price we pay for the properties we
purchase. To identify properties that best fit our investment
criteria, our advisor will study regional demographics and market conditions and
work through local commercial real estate brokers.
Leases
and Tenant Improvements
The
properties we acquire generally have operating type leases. Operating
type leases generally have either gross or modified gross payment
terms. Under gross leases, the landlord pays all operating expenses
of the property. Under modified gross leases, the tenant reimburses
the landlord for certain operating expenses. A “net” lease provides
that the tenant pays or reimburses the owner for all or substantially all
property operating expenses. As landlord, we will generally have
responsibility for certain capital repairs or replacement of specific structural
components of a property such as the roof, heating and air conditioning systems,
the interior floor or slab of the building as well as parking
areas.
When a
tenant at one of our properties vacates its space, it is likely that we will be
required to expend funds for tenant improvements and refurbishments to the
vacated space in order to attract new tenants. If we do not have
adequate cash on hand to fund tenant improvements and refurbishments, we may use
interim debt financing in order to fulfill our obligations under lease
agreements with new tenants.
5
Joint
Ventures and Other Arrangements
We may
acquire some of our properties in joint ventures, some of which may be entered
into with affiliates of our advisor. We may also enter into general
partnerships, co-tenancies and other participations with real estate developers,
owners and others for the purpose of owning and leasing real
properties. Among other reasons, we may want to acquire properties
through a joint venture with third parties or affiliates in order to diversify
our portfolio of properties in terms of geographic region, property type and
tenant industry group. Joint ventures may also allow us to acquire an
interest in a property without requiring that we fund the entire purchase
price. In addition, certain properties may be available to us only
through joint ventures. In determining whether to recommend a
particular joint venture, the advisor will evaluate the real property
for which such joint venture owns or is being formed to own under the same
criteria described elsewhere in this annual report. These entities
may employ debt financing. (See “Borrowing Policies” below.)
Borrowing
Policies
We intend
to be an all-cash REIT that will own and operate our properties with no
permanent indebtedness. Generally, we will pay the entire purchase
price of each property in cash or with equity securities, or a combination of
each. Being an all-cash REIT mitigates the risks associated with
mortgage debt, including the risk of default on the mortgage payments and a
resulting foreclosure of a particular property.
During
our offering period, we have and intend to continue to use temporary financing
to facilitate acquisitions of properties in anticipation of receipt of offering
proceeds. We will endeavor to repay such debt financing promptly upon receipt of
proceeds in our offering. To the extent sufficient proceeds from our
offerings are unavailable to repay such debt financing within a reasonable time
as determined by our board of directors, we may sell properties or raise equity
capital to repay the debt so that we will own our properties all-cash, with no
permanent acquisition financing.
We may
incur indebtedness for working capital requirements, tenant improvements,
capital improvements, leasing commissions and to make distributions including
but not limited to those necessary in order to maintain our qualification as a
REIT for federal income tax purposes. We will endeavor to borrow
funds on an unsecured basis but we may secure indebtedness with some or all of
our portfolio of properties if a majority of our independent directors determine
that it is in the best interests of us and our stockholders.
We may
also acquire properties encumbered with existing financing which cannot be
immediately repaid. To the extent we cannot repay the financing that
encumbers these properties within a reasonable time as determined by a majority
of our independent directors, we intend to sell properties or raise equity
capital to pay debt in order to maintain our all-cash status or reserve an
amount of cash sufficient to repay the loan to mitigate the risks of
foreclosure.
We may
invest in joint venture entities that borrow funds or issue senior equity
securities to acquire properties, in which case our equity interest in the joint
venture would be junior to the rights of the lender or preferred stockholders.
In some cases, our advisor may control the joint venture.
If we
list our stock on a national stock exchange, we may thereafter change our
strategy and begin to use permanent debt in our investment
strategy. Our charter limits our borrowings to the equivalent of 75%
of our cost, before deducting depreciation or other non-cash reserves, of all
our assets unless any excess borrowing is approved by a majority of our
independent directors and is disclosed to our stockholders in our next quarterly
report with an explanation from our independent directors of the justification
for the excess borrowing. While there is no limitation on the amount
we may borrow for the purchase of any single property, we intend to repay such
debt within a reasonable time or raise additional equity capital or sell
properties in order to maintain our all-cash status.
Competition
We
compete with a considerable number of other real estate companies seeking to
acquire and lease industrial space, most of which may have greater marketing and
financial resources than we do. Principal factors of competition in
our business are the quality of properties (including the design and condition
of improvements), leasing terms (including rent and other charges and allowances
for tenant improvements), attractiveness and convenience of location, the
quality and breadth of tenant services provided and reputation as an owner and
operator of quality office properties in the relevant market. Our
ability to compete also depends on, among other factors, trends in the national
and local economies, financial condition and operating results of current and
prospective tenants, availability and cost of capital, construction and
renovation costs, taxes, governmental regulations, legislation and population
trends.
We may
hold interests in properties located in the same geographic locations as other
entities managed by our advisor or our advisor’s affiliates. Our
properties may face competition in these geographic regions from such other
properties owned, operated or managed by other entities managed by our
advisor or our advisor’s affiliates. Our advisor or its affiliates
have interests that may vary from those we may have in such geographic
markets.
6
Government
Regulations
Our
company and the properties we own are subject to federal, state and local laws
and regulations relating to environmental protection and human health and
safety. Federal laws such as the National Environmental Policy Act, the
Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act,
the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency
Planning and Community Right to Know Act and the Hazard Communication Act govern
such matters as wastewater discharges, air emissions, the operation and removal
of underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation
of contamination associated with disposals. Some of these laws and regulations
impose joint and several liability on tenants, owners or operators for the costs
to investigate or remediate contaminated properties, regardless of fault or
whether the acts causing the contamination were legal. Compliance
with these laws and any new or more stringent laws or regulations may require us
to incur material expenditures. Future laws, ordinances or
regulations may impose material environmental liability. In addition,
there are various federal, state and local fire, health, life-safety and similar
regulations with which we may be required to comply, and which may subject us to
liability in the form of fines or damages for noncompliance.
Our
properties may be affected by our tenants’ operations, the existing condition of
land when we buy it, operations in the vicinity of our properties, such as the
presence of underground storage tanks, or activities of unrelated third
parties. The presence of hazardous substances, or the failure to
properly remediate these substances, may make it difficult or impossible to sell
or rent such property.
Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous real property owner or operator may be liable for the cost
to remove or remediate hazardous or toxic substances on, under or in such
property. These costs could be substantial. Such laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic
substances. Environmental laws also may impose restrictions on the
manner in which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures or prevent us from entering
into leases with prospective tenants that may be impacted by such
laws. Environmental laws provide for sanctions for noncompliance and
may be enforced by governmental agencies or, in certain circumstances, by
private parties. Certain environmental laws and common law principles
could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials into the
air. Third parties may seek recovery from real property owners or
operators for personal injury or property damage associated with exposure to
released hazardous substances. The cost of defending against claims
of liability, of complying with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could
be substantial.
We obtain
satisfactory Phase I environmental assessments on each property we
purchase. A Phase I assessment is an inspection and review of
the property, its existing and prior uses, aerial maps and records of government
agencies for the purpose of determining the likelihood of environmental
contamination. A Phase I assessment includes only non-invasive
testing. It is possible that all environmental liabilities were not
identified in the Phase I assessments we obtained or that a prior owner,
operator or current occupant has created an environmental condition which we do
not know about. There can be no assurance that future law, ordinances
or regulations will not impose material environmental liability on us or that
the current environmental condition of our properties will not be affected by
our tenants, or by the condition of land or operations in the vicinity of our
properties such as the presence of underground storage tanks or groundwater
contamination.
Acquisition
Activity
At
December 31, 2009, we owned twelve properties. All of these
properties are consolidated into our accompanying consolidated financials
statements and included in the properties summary as provided under “Item 2
Properties” referenced below.
We have
acquired our properties to date with a combination of the proceeds from our
ongoing public offerings and debt incurred upon the acquisition of certain
properties.
Employees
We have
no employees and our executive officers are all employees of our advisor’s
affiliates. Substantially all of our work is performed by employees
of our advisor’s affiliates. We are dependent on our advisor and PCC
for certain services that are essential to us, including the sale of shares in
our ongoing public follow-on offering; the identification, evaluation,
negotiation, purchase and disposition of properties; the management of the daily
operations of our real estate portfolio; and other general and administrative
responsibilities. In the event that these companies are unable to provide the
respective services, we will be required to obtain such services from other
sources.
7
Available
Information
Information
about us is available on our website (http://www.crefunds.com). We
make available, free of charge, on our Internet website, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with the
SEC. These materials are also available at no cost in print to any
person who requests it by contacting our Investor Services Department at 1920
Main Street, Suite 400, Irvine, California 92614; telephone (877)
805-3333. Our filings with the SEC are available to the public over
the Internet at the SEC’s website at http://www.sec.gov. You may read
and copy any filed document at the SEC’s public reference room in
Washington, D.C. at 100 F Street, N.E., Room 1580,
Washington D.C. Please call the SEC at (800) SEC-0330 for
further information about the public reference rooms.
ITEM
1A. RISK FACTORS
The risks
and uncertainties described below can adversely affect our business, operating
results, prospects and financial condition. These risks and
uncertainties could cause our actual results to differ materially from those
presented in our forward-looking statements.
General
Recent
disruptions in the financial markets and continuing poor economic conditions
could adversely affect the values of our investments and our ongoing results of
operations.
Disruptions
in the capital markets during the past two years have constrained equity and
debt capital available for investment in commercial real estate, resulting in
fewer buyers seeking to acquire commercial properties and consequent reductions
in property values. Furthermore, the current state of the economy and the
implications of future potential weakening may negatively impact commercial real
estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our portfolio. The current downturn may impact our
tenants’ ability to pay base rent, percentage rent or other charges due to
us.
Liquidity
in the global credit market has been significantly contracted by market
disruptions, making it costly to finance acquisitions, obtain new lines of
credit or refinance existing debt, when debt financing is available at
all.
The
occurrence of these events could have the following negative effects on
us:
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the
values of our investments in commercial properties could decrease below
the amounts we paid for the
investments;
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revenues
from our properties could decrease due to lower occupancy rates, reduced
rental rates and potential increases in uncollectible
receivables;
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our
capital expenditures may increase due to re-leasing costs and commissions;
and
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we
may not be able to refinance our existing indebtedness or to obtain
additional debt financing on attractive
terms.
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These
factors could impair our ability to make distributions to stockholders and
decrease the value of investments in us.
Financial
markets are still recovering from a period of disruption and recession, and we
are unable to predict if and when the economy will stabilize or
improve.
The
financial markets are still recovering from a recession, which created volatile
market conditions, resulted in a decrease in availability of business credit and
led to the insolvency, closure or acquisition of a number of financial
institutions. While the markets showed signs of stabilizing in the end of 2009,
it remains unclear when the economy will fully recover to pre-recession levels.
Continued economic weakness in the U.S. economy generally or a new recession
would likely adversely affect our financial condition and that of our tenants
and could impact the ability of our tenants to pay rent to us.
Our
limited operating history makes it difficult for you to evaluate
us. In addition, as a company in its early stages of operations we
have incurred losses in the past and may continue to incur losses.
We have a
limited operating history. As a consequence, our past performance and the past
performance of other real estate investment programs sponsored by affiliates of
our advisor may not be indicative of the performance we will achieve. We were
formed on October 22, 2004 in order to invest primarily in investment real
estate. We have acquired twelve properties as of the date of this report and
generated limited income, cash flow, funds from operations or funds from which
to make distributions to our shareholders. In addition, as a company
in its early stages of operations, we have incurred losses since our inception
and we may continue to incur losses.
8
Because
there is no public trading market for our stock it will be difficult for
stockholders to sell their stock. If stockholders are able to sell their stock,
they will likely sell it at a substantial discount.
There is
no current public market for our stock and there is no assurance that a public
market will ever develop for our stock. Our charter contains restrictions on the
ownership and transfer of our stock, and these restrictions may inhibit our
stockholders’ ability to sell their stock. Our charter prevents any one person
from owning more than 9.8% in number of shares or value, whichever is more
restrictive, of the outstanding shares of any class or series of our stock
unless exempted by our board of directors. Our charter also limits our
stockholders’ ability to transfer their stock to prospective stockholders unless
(i) they meet suitability standards regarding income or net worth, and
(ii) the transfer complies with minimum purchase requirements. We have
adopted a stock repurchase program, but it is limited in terms of the number of
shares of stock which may be redeemed annually. Our board of directors may also
limit, suspend or terminate our stock repurchase program at any time. We have no
obligations to purchase our stockholders’ stock if redemption would violate
restrictions on cash distributions under Maryland law.
It may be
difficult for our stockholders to sell their stock promptly or at all. If our
stockholders are able to sell shares of stock, they may only be able to sell
them at a substantial discount from the price they paid. This may be the result,
in part, of the fact that the amount of funds available for investment is
expected to be reduced by sales commissions, dealer manager fees, organization
and offering expenses, and acquisition fees and expenses. If our offering
expenses are higher than we anticipate, we will have a smaller amount available
for investment. Unless our aggregate investments increase in value to compensate
for these up-front fees and expenses, it is unlikely that our stockholders will
be able to sell their stock, whether pursuant to our stock repurchase program or
otherwise, without incurring a substantial loss. We cannot assure our
stockholders that their stock will ever appreciate in value to equal the price
they paid for their stock. It is also likely that their stock would not be
accepted as the primary collateral for a loan. Stockholders should
consider their stock as an illiquid investment, and they must be prepared to
hold their stock for an indefinite period of time.
Competition
with third parties for properties and other investments may result in our paying
higher prices for properties which could reduce our profitability and the return
on your investment.
We
compete with many other entities engaged in real estate investment activities,
including individuals, corporations, banks, insurance companies, other REITs,
real estate limited partnerships, and other entities engaged in real estate
investment activities, many of which have greater resources than we do. Some of
these investors may enjoy significant competitive advantages that result from,
among other things, a lower cost of capital and enhanced operating efficiencies.
In addition, the number of entities and the amount of funds competing for
suitable investments may increase. Any such increase would result in increased
demand for these assets and increased prices. If competitive pressures cause us
to pay higher prices for properties, our ultimate profitability may be reduced
and the value of our properties may not appreciate or may decrease significantly
below the amount paid for such properties. At the time we elect to dispose of
one or more of our properties, we will be in competition with sellers of similar
properties to locate suitable purchasers, which may result in us receiving lower
proceeds from the disposal or result in us not being able to dispose of the
property due to the lack of an acceptable return. This may cause our
stockholders to experience a lower return on their investment.
If
we are unable to find or experience delays in finding suitable investments, we
may need to reduce or suspend distributions to our stockholders.
Our
ability to achieve our investment objectives and to make distributions depends
upon the performance of our advisor in the acquisition and operation of our
investments, and upon the performance of property managers and leasing agents in
the management of our properties and the identification of prospective tenants.
We may be delayed in making investments in properties due to delays in the sale
of our stock, delays in negotiating or obtaining the necessary purchase
documentation for properties, delays in locating suitable investments or other
factors. We cannot be sure that our advisor will be successful in obtaining
suitable investments on financially attractive terms or that our investment
objectives will be achieved. We may also make other real estate investments such
as investments in publicly traded REITs, mortgage funds and other entities which
make real estate investments. Until we make real estate investments, we will
hold the proceeds from our public offerings in an interest-bearing account or
invest the proceeds in short-term, investment-grade securities. We expect the
rates of return on these short-term investments to be substantially less than
the returns we make on real estate investments. If we are unable to invest the
proceeds from our offerings in properties or other real estate investments for
an extended period of time, distributions to our stockholders may be suspended
and may be lower and the value of their investment could be
reduced.
If
we do not raise substantial funds in our public offerings, we will be limited in
the number and type of investments we may make, and the value of investments in
us will fluctuate with the performance of the specific properties we
acquire.
Our
offerings are made on a “best efforts” basis and no individual, firm or
corporation has agreed to purchase any of our stock. The amount of
proceeds we raise in our public offerings may be substantially less than the
amount we would need to achieve a broadly diversified property
portfolio. If we raise substantially less than the maximum offering
amount, we will make fewer investments resulting in less diversification in
terms of the number of investments owned and the geographic regions in which our
investments are located. In that case, the likelihood that any single
property’s performance would materially reduce our overall profitability will
increase. We are not limited in the number or size of our investments
or the percentage of net proceeds we may dedicate to a single
investment. In addition, any inability to raise substantial funds
would increase our fixed operating expenses as a percentage of gross income, and
our net income and the distributions we make to stockholders would be
reduced.
9
We
may not generate sufficient cash for distributions. The cash distributions our
stockholders receive may be less frequent or lower in amount than
expected.
If the
rental revenues from the properties we own do not exceed our operational
expenses, we may reduce or cease cash distributions until such time as we sell a
property. We currently expect to make distributions to our stockholders monthly,
but may make distributions quarterly or not at all. All expenses we incur in our
operations, including payment of interest to temporarily finance properties
acquisitions, are deducted from cash funds generated by operations prior to
computing the amount of cash available to be paid as distributions to our
stockholders. Our directors will determine the amount and timing of
distributions. Our directors will consider all relevant factors, including the
amount of cash available for distribution, capital expenditure and reserve
requirements and general operational requirements. We cannot determine with
certainty how long it may take to generate sufficient available cash flow to
fully support distributions to our stockholders. We may borrow funds, return
capital or sell assets to make distributions. With limited prior operations, we
cannot predict the amount of distributions our stockholders may receive. We may
be unable to maintain cash distributions or increase distributions over
time.
We
have, and may in the future, pay distributions from sources other than cash
provided from operations.
Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a substantial
portion of our distributions from the proceeds of our offerings or from
borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced. The distributions paid
for the four quarters ended December 31, 2009 were approximately $10.5
million. Of this amount approximately $6.0 million was reinvested
through our dividend reinvestment plan and approximately $4.5 million was paid
in cash to stockholders. For the four quarters ended December 31, 2009 cash flow
from operations and FFO were approximately $2.9 million and a loss of $4.5
million, respectively. Accordingly, for the four quarters ended
December 31, 2009, total distributions exceeded cash flow from operations and
FFO for the same period. During the four quarters ended December 31, 2009, total
distributions paid in cash exceeded cash flow from operations and FFO for the
same period. We used offering proceeds to pay cash distributions in excess of
cash flow from operations during the fourth quarters ended December 31,
2009.
If
we borrow money to meet the REIT minimum distribution requirement or for other
working capital needs, our expenses will increase, our net income will be
reduced by the amount of interest we pay on the money we borrow and we will be
obligated to repay the money we borrow from future earnings or by selling
assets, which will decrease future distributions to stockholders.
If we
fail for any reason to distribute at least 90% of our REIT taxable income, then
we would not qualify for the favorable tax treatment accorded to
REITs. It is possible that 90% of our income would exceed the cash we
have available for distributions due to, among other things, differences in
timing between the actual receipt of income and actual payment of deductible
expenses and the inclusion/deduction of such income/expenses when determining
our taxable income, nondeductible capital expenditures, the creation of
reserves, the use of cash to purchase stock under our stock repurchase program,
and required debt amortization payments. We may decide to borrow
funds in order to meet the REIT minimum distribution requirements even if our
management believes that the then prevailing market conditions generally are not
favorable for such borrowings or that such borrowings would not be advisable in
the absence of such tax considerations. Distributions made in excess of our net
income will generally constitute a return of capital to
stockholders.
The
inability of our advisor to retain or obtain key personnel, property managers
and leasing agents could delay or hinder implementation of our investment
strategies, which could impair our ability to make distributions.
Our
success depends to a significant degree upon the contributions of Terry G.
Roussel, the President and Chief Executive Officer of our
advisor. Neither we nor our advisor have an employment agreement with
Mr. Roussel or with any of our other executive officers. If
Mr. Roussel was to cease his affiliation with our advisor, our advisor may
be unable to find a suitable replacement, and our operating results could
suffer. We believe that our future success depends, in large part,
upon our advisor’s, property managers’ and leasing agents’ ability to hire and
retain highly skilled managerial, operational and marketing
personnel. Competition for highly skilled personnel is intense, and
our advisor and any property managers we retain may be unsuccessful in
attracting and retaining such skilled personnel. If we lose or are
unable to obtain the services of highly skilled personnel, property managers or
leasing agents, our ability to implement our investment strategies could be
delayed or hindered and the value of our stockholders’ investments in us may
decline.
Risks
Related to Conflicts of Interest
Our
advisor will face conflicts of interest relating to the purchase and leasing of
properties, and such conflicts may not be resolved in our favor, which could
limit our investment opportunities and impair our ability to make distributions
and could reduce the value of our stockholders’ investment in us.
We rely
on our advisor to identify suitable investment opportunities. We may
be buying properties at the same time as other entities that are affiliated with
or sponsored by our advisor. Other programs sponsored by our advisor
or its affiliates also rely on our advisor for investment
opportunities. Many investment opportunities would be suitable for us
as well as other programs. Our advisor could direct attractive
investment opportunities or tenants to other entities. Such events
could result in our investing in properties that provide less attractive
returns, thus reducing the level of distributions that we may be able to pay to
our stockholders and the value of their investments in us.
10
If
we acquire properties from affiliates of our advisor, the price may be higher
than we would pay if the transaction was the result of arm’s-length
negotiations.
The
prices we pay to affiliates of our advisor for our properties will be equal to
the prices paid by them, plus the costs incurred by them relating to the
acquisition and financing of the properties or if the price to us is in excess
of such cost, substantial justification for such excess will exist and such
excess will be reasonable and consistent with current market conditions as
determined by a majority of our independent directors. Substantial
justification for a higher price could result from improvements to a property by
the affiliate of our advisor or increases in market value of the property during
the period of time the property is owned by the affiliates of our advisor as
evidenced by an appraisal of the property. These prices will not be
the subject of arm’s-length negotiations, which could mean that the acquisitions
may be on terms less favorable to us than those negotiated in an arm’s-length
transaction. Even though we will use an independent third party
appraiser to determine fair market value when acquiring properties from our
advisor and its affiliates, we may pay more for particular properties than we
would have in an arm’s-length transaction, which would reduce our cash available
for investment in other properties or distribution to our
stockholders.
We
may purchase properties from persons with whom our advisor or its affiliates
have prior business relationships and our advisor’s interest in preserving its
relationship with these persons could result in us paying a higher price for the
properties than we would otherwise pay.
We may
have the opportunity to purchase properties from third parties including
affiliates of our independent directors who have prior business relationships
with our advisor or its affiliates. If we purchase properties from
such third parties, our advisor may experience a conflict between our interests
and its interest in preserving any ongoing business relationship with these
sellers.
Our
advisor will face conflicts of interest relating to joint ventures that we may
form with affiliates of our advisor, which conflicts could result in a
disproportionate benefit to the other venture partners at our
expense.
We may
enter into joint venture agreements with third parties (including entities that
are affiliated with our advisor or our independent directors) for the
acquisition or improvement of properties. Our advisor may have
conflicts of interest in determining which program should enter into any
particular joint venture agreement. The co-venturer may have economic
or business interests or goals that are or may become inconsistent with our
business interests or goals. In addition, our advisor may face a
conflict in structuring the terms of the relationship between our interests and
the interest of the affiliated co-venturer and in managing the joint
venture. Since our advisor and its affiliates will control both the
affiliated co-venturer and, to a certain extent, us, agreements and transactions
between the co-venturers with respect to any such joint venture will not have
the benefit of arm’s-length negotiation of the type normally conducted between
unrelated co-venturers. Co-venturers may thus benefit to our and our
stockholders’ detriment.
Our
advisor and its affiliates receive commissions, fees and other compensation
based upon the sale of our stock, our property acquisitions, the property we own
and the sale of our properties and therefore our advisor and its affiliates may
make recommendations to us that we buy, hold or sell property in order to
increase their compensation. Our advisor will have considerable
discretion with respect to the terms and timing of our acquisition, disposition
and leasing transactions.
Our
advisor and its affiliates receive commissions, fees and other compensation
based upon the sale of our stock and based on our
investments. Therefore, our advisor may recommend that we purchase
properties that generate fees for our advisor, but are not necessarily the most
suitable investment for our portfolio. In some instances our advisor
and its affiliates may benefit by us retaining ownership of our assets, while
our stockholders may be better served by sale or disposition. In other instances
they may benefit by us selling the properties which may entitle our advisor to
disposition fees and possible success-based sales fees. In addition,
our advisor’s ability to receive asset management fees and reimbursements
depends on our continued investment in properties and in other assets that
generate fees to them. Therefore, the interest of our advisor and its
affiliates in receiving fees may conflict with our interests.
Our
advisor and its affiliates, including our officers, one of whom is also a
director, will face conflicts of interest caused by compensation arrangements
with us and other Cornerstone-sponsored programs, which could result in actions
that are not in the long-term best interests of our stockholders.
Our
advisor and its affiliates will receive substantial fees from us that are
partially tied to the performance of our investments. These fees
could influence our advisor’s advice to us, as well as the judgment of the
affiliates of our advisor who serve as our officers or
directors. Among other matters, the compensation arrangements could
affect their judgment with respect to:
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property
acquisitions from other advisor-sponsored programs, which might entitle
our advisor to disposition fees and possible success-based sale fees in
connection with its services for the
seller;
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11
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whether
and when we seek to list our common stock on a national securities
exchange or the Nasdaq National Market, which listing could entitle our
advisor to a success-based listing fee but could also adversely affect its
sales efforts for other programs if the price at which our stock trades is
lower than the price at which we offered stock to the
public; and
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whether
and when we seek to sell the company or its assets, which sale could
entitle our advisor to success-based fees but could also adversely affect
its sales efforts for other programs if the sales price for the company or
its assets resulted in proceeds less than the amount needed to preserve
our stockholders’ capital.
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Considerations
relating to their compensation from other programs could result in decisions
that are not in the best interests of our stockholders, which could hurt our
ability to make distributions to our stockholders or result in a decline in the
value of their investments in us.
If
the competing demands for the time of our advisor, its affiliates and our
officers result in them spending insufficient time on our business, we may miss
investment opportunities or have less efficient operations which could reduce
our profitability and result in lower distributions to
stockholders.
We do not
have any employees. We rely on the employees of our advisor and its
affiliates for the day-to-day operation of our business. We estimate
that over the life of the company, our advisor and its affiliates will dedicate,
on average, less than half of their time to our operations. The
amount of time that our advisor and its affiliates spend on our business will
vary from time to time and is expected to be more while we are raising money and
acquiring properties. Our advisor and its affiliates, including our
officers, have interests in other programs and engage in other business
activities. As a result, they will have conflicts of interest in
allocating their time between us and other programs and activities in which they
are involved. Because these persons have competing interests on their
time and resources, they may have conflicts of interest in allocating their time
between our business and these other activities. During times of
intense activity in other programs and ventures, they may devote less time and
fewer resources to our business than are necessary or appropriate to manage our
business. We expect that as our real estate activities expand, our
advisor will attempt to hire additional employees who would devote substantially
all of their time to our business. There is no assurance that our
advisor will devote adequate time to our business. If our advisor suffers or is
distracted by adverse financial or operational problems in connection with its
operations unrelated to us, it may allocate less time and resources to our
operations. If any of these things occur, the returns on our
investments, our ability to make distributions to stockholders and the value of
their investments in us may suffer.
Our
officers, one of whom is also a director, face conflicts of interest related to
the positions they hold with our advisor and its affiliates which could hinder
our ability to successfully implement our business strategy and to generate
returns to our stockholders.
Our
officers, one of whom is also a director, are also officers of our advisor, our
dealer manager and other affiliated entities. As a result, they owe
fiduciary duties to these various entities and their stockholders and members,
which fiduciary duties may from time to time conflict with the fiduciary duties
that they owe to us and our stockholders. Their loyalties to these
other entities could result in actions or inactions that are detrimental to our
business, which could harm the implementation of our business strategy and our
investment, property management and leasing opportunities. If we do
not successfully implement our business strategy, we may be unable to generate
cash needed to make distributions to our stockholders and to maintain or
increase the value of our assets.
Our
board’s possible loyalties to existing advisor-sponsored programs (and possibly
to future advisor-sponsored programs) could result in our board approving
transactions that are not in our best interest and that reduce our net income
and lower our distributions to stockholders.
One of
our directors is also a director of our advisor which is an affiliate of the
managing member of another affiliate-sponsored program. The loyalties
of this director to the other affiliate-sponsored program may influence the
judgment of our board when considering issues for us that may affect the other
affiliate-sponsored program, such as the following:
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We
could enter into transactions with the other program, such as property
sales or acquisitions, joint ventures or financing
arrangements. Decisions of our board regarding the terms of
those transactions may be influenced by our board’s loyalties to the other
program.
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A
decision of our board regarding the timing of a debt or equity offering
could be influenced by concerns that the offering would compete with an
offering of the other program.
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A
decision of our board regarding the timing of property sales could be
influenced by concerns that the sales would compete with those of the
other program.
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We
could also face similar conflicts and some additional conflicts if our
advisor or its affiliates sponsor additional REITs, assuming some of our
directors are also directors of the additional
REITs.
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12
Our
independent directors must evaluate the performance of our advisor with respect
to whether our advisor is presenting to us our fair share of investment
opportunities. If our advisor is not presenting a sufficient number
of investment opportunities to us because it is presenting many opportunities to
other advisor-sponsored entities or if our advisor is giving preferential
treatment to other advisor-sponsored entities in this regard, our independent
directors may need to enforce our rights under the terms of the advisory
agreement or seek a new advisor.
We
are dependent upon our advisor and its affiliates to conduct our operations and
to fund our organization and offering activities. Any adverse changes
in the financial health of our advisor or its affiliates or our relationship
with them could hinder our operating performance and the return on your
investment. If our advisor became unable to fund our organization and
offering expenses, we may sell fewer shares in this offering, we may be unable
to acquire a diversified portfolio of properties, our operating expenses may be
a larger percentage of our revenue and our net income may be lower.
We are
dependent on Cornerstone Realty Advisors to manage our operations and our
portfolio of real estate assets. Our advisor has limited operating
history and it will depend upon the fees and other compensation that it will
receive from us in connection with the purchase, management and sale of our
properties to conduct its operations. To date, the fees we pay to our
advisor have been inadequate to cover its operating expenses. To
cover its operational shortfalls, our advisor has relied on cash raised in
private offerings of its sole member as well as private offerings of an
affiliate that has made loans to our advisor’s sole member. Of these
private offerings, the only one that is ongoing is the private offering of the
affiliate that has made loans to our advisor’s sole member. A recent
FINRA inquiry, which relates to such private offerings, could adversely affect
the success of such private offerings or future private capital-raising
efforts. If our advisor is unable to secure additional capital, it
may become unable to meet its obligations and we might be required to find
alternative service providers, which could result in a significant disruption of
our business and may adversely affect the value of our stockholders’ investments
in us. Furthermore, to the extent that our advisor is unable to raise
adequate funds to support our organization and offering activities, our ability
to raise money in our follow-on offering could be adversely
affected. If we sell fewer shares in our follow-on offering, we may
be unable to acquire a diversified portfolio of properties, our operating
expenses may be a larger percentage of our revenue and our net income may be
lower.
We
are dependent on our affiliated dealer manager to raise funds in our follow-on
public offering. Events that prevent our dealer manager from serving in
that capacity would jeopardize the success of our offering and could reduce the
value of our stockholders’ investments in us.
The
success of our ongoing follow-on public offering depends to a large degree on
the capital-raising efforts of our affiliated dealer manager. If we were
unable to raise significant capital in our offering, our general and
administrative costs would be likely to continue to represent a larger portion
of our revenues than would otherwise be the case, which would likely adversely
affect the value of our stockholders’ investments in us. In addition,
lower offering proceeds would limit the diversification of our portfolio, which
would cause the value of investments in us to be more dependent on the
performance of any one of our properties. Therefore, the value of our
stockholders’ investments in us could depend on the success of our
offering.
We
believe that it could be difficult to secure the services of another dealer
manager for a public offering of our shares should our affiliated dealer manager
be unable to serve in that capacity. Therefore, any event that hinders the
ability of our dealer manager to conduct offerings on our behalf would
jeopardize the success of our offering and, as described above, could adversely
affect the value of investments in us. A number of outcomes could impair our
dealer manager’s ability to successfully serve in that capacity.
Our
dealer manager has limited capital. In order to conduct its operations, our
dealer manager depends on transaction-based compensation that it earns in
connection with offerings in which it participates. If our dealer manager does
not earn sufficient revenues from the offerings that it manages, it may not have
sufficient resources to retain the personnel necessary to market and sell large
amounts of shares on our behalf. In addition, our dealer manager has also relied
on our affiliates in order to fund its operations, and our affiliates have
relied on private offerings in order to make such equity investments in our
dealer manager. Should our affiliates become unable or unwilling to
make further equity investments in our dealer manager, our dealer manager’s
operations and its ability to conduct a successful public offering for us could
suffer.
Our
dealer manager operates in a highly regulated area and must comply with a
complex scheme of federal and state securities laws and regulations as well as
the rules imposed by FINRA. In some cases, there may not be clear authority
regarding the interpretation of regulations applicable to our dealer manager. In
such an environment, the risk of sanctions by regulatory authorities is
heightened. Although these risks are also shared by other dealer managers of
public offerings, the risks may be greater for our dealer manager because of the
limited financial resources of our dealer manager and its affiliates. Limited
financial resources may make it more difficult for our dealer manager to endure
regulatory sanctions and to continue to serve effectively as the dealer manager
of our offering.
Risks
Related to Our Corporate Structure
A
limit on the percentage of our securities a person may own may discourage a
takeover or business combination, which could prevent our stockholders from
realizing a premium price for their stock.
13
In order
for us to qualify as a REIT, no more than 50% of our outstanding stock may be
beneficially owned, directly or indirectly, by five or fewer individuals
(including certain types of entities) at any time during the last half of each
taxable year. To assure that we do not fail to qualify as a REIT
under this test, our charter restricts direct or indirect ownership by one
person or entity to no more than 9.8% in number of shares or value, whichever is
more restrictive, of the outstanding shares of any class or series of our stock
unless exempted by our board of directors. This restriction may have
the effect of delaying, deferring or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender offer or sale
of all or substantially all of our assets) that might provide a premium price to
our stockholders.
Our
charter permits our board of directors to issue stock with terms that may
subordinate the rights of our common stockholders or discourage a third party
from acquiring us in a manner that could result in a premium price to our
stockholders.
Our board
of directors may increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that we have authority to
issue and classify or reclassify any unissued common stock or preferred stock
and establish the preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption of any such stock. Our board of directors
could authorize the issuance of preferred stock with terms and conditions that
could have priority as to distributions and amounts payable upon liquidation
over the rights of the holders of our common stock. Such preferred
stock could also have the effect of delaying, deferring or preventing a change
in control of us, including an extraordinary transaction (such as a merger,
tender offer or sale of all or substantially all of our assets) that might
provide a premium price to holders of our common stock.
The
payment of the subordinated performance fee due upon termination, and the
purchase of interests in our operating partnership held by our advisor and its
affiliates as required in our advisory agreement, may discourage a takeover
attempt that could have resulted in a premium price to our
stockholders.
In the
event of a merger in which we are not the surviving entity, and pursuant to
which our advisory agreement is terminated, our advisor and its affiliates may
require that we pay the subordinated performance fee due upon termination, and
that we purchase all or a portion of the operating partnership units they hold
at any time thereafter for cash, or our stock, as determined by the
seller. The subordinated performance fee due upon termination ranges
from a low of 5% if the sum of the appraised value of our assets minus our
liabilities on the date the advisory agreement is terminated plus total
distributions (other than stock distributions) paid prior to termination of the
advisory agreement exceeds the amount of invested capital plus annualized
returns of 6%, to a high of 15% if the sum of the appraised value of our assets
minus our liabilities plus all prior distributions (other than stock
distributions) exceeds the amount of invested capital plus annualized returns of
10% or more. This deterrence may limit the opportunity for
stockholders to receive a premium for their stock that might otherwise exist if
an investor attempted to acquire us through a merger.
Our
stockholders will have limited control over changes in our policies and
operations, which increases the uncertainty and risks of an investment in
us.
Our board
of directors determines our major policies, including our policies regarding
financing, growth, debt capitalization, REIT qualification and distributions.
Our board of directors may amend or revise these and other policies without a
vote of the stockholders. Under Maryland General Corporation Law and our
charter, our stockholders have a right to vote only on limited matters. Our
board’s broad discretion in setting policies and our stockholders’ inability to
exert control over those policies increases the uncertainty and risks of an
investment on us.
A
stockholder’s interest in us may be diluted if we issue additional
stock.
Our
stockholders do not have preemptive rights to any stock we issue in the future.
Therefore, in the event that we (1) sell stock in the future, including stock
issued pursuant to our distribution reinvestment plan, (2) sell securities that
are convertible into stock, (3) issue stock in a private offering, (4) issue
stock upon the exercise of the options granted to our independent directors,
employees of our advisor or others, or (5) issue stock to sellers of properties
acquired by us in connection with an exchange of limited partnership interests
in our operating partnership, investors purchasing stock in our offerings will
experience dilution of their percentage ownership in us. Depending on the terms
of such transactions, most notably the price per share, which may be less than
the price paid per share in our offerings, and the value of our properties,
investors in our offerings might also experience a dilution in the book value
per share of their stock.
A
stockholder’s interest in us may be diluted if we acquire properties for units
in our operating partnership.
Holders
of units of our operating partnership will receive distributions per unit in the
same amount as the distributions we pay per share to our stockholders and will
generally have the right to exchange their units of our operating partnership
for cash or shares of our stock (at our option). In the event we issue units in
our operating partnership in exchange for properties, investors purchasing stock
in our offerings will experience potential dilution in their percentage
ownership interest in us. Depending on the terms of such transactions, most
notably the price per unit, which may be less than the price paid per share in
our offerings, the value of our properties and the value of the properties we
acquire through the issuance of units of limited partnership interests in our
operating partnership, investors in our offerings might also experience a
dilution in the book value per share of their stock.
14
Although
we are not currently afforded the protection of the Maryland General Corporation
Law relating to business combinations our board of directors could opt into
these provisions of Maryland law in the future, which may discourage others from
trying to acquire control of us and may prevent our stockholders from receiving
a premium price for their stock in connection with a business
combination.
Under
Maryland law, “business combinations” between a Maryland corporation and certain
interested stockholders or affiliates of interested stockholders are prohibited
for five years after the most recent date on which the interested stockholder
becomes an interested stockholder. These business combinations include a merger,
consolidation, share exchange, or, in circumstances specified in the statute, an
asset transfer or issuance or reclassification of equity
securities. Also under Maryland law, control shares of a Maryland
corporation acquired in a control share acquisition have no voting rights except
to the extent approved by a vote of two-thirds of the votes entitled to be cast
on the matter. Shares owned by the acquirer, by officers or by
directors who are employees of the corporation are not entitled to vote on the
matter. Should our board opt into these provisions of Maryland law, it may
discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle
8 of the Maryland General Corporation Law could provide similar anti-takeover
protection.
Our
stockholder’s and our rights to recover claims against our independent directors
are limited, which could reduce our stockholders’ and our recovery against our
independent directors if they negligently cause us to incur losses.
Our
charter provides that no independent director shall be liable to us or our
stockholders for monetary damages and that we will generally indemnify them for
losses unless they are grossly negligent or engage in willful
misconduct. As a result, our stockholders and we may have more
limited rights against our independent directors than might otherwise exist
under common law, which could reduce our stockholders' and our recovery from
these persons if they act in a negligent manner. In addition, we may be
obligated to fund the defense costs incurred by our independent directors (as
well as by our other directors, officers, employees and agents) in some cases,
which would decrease the cash otherwise available for distributions to our
stockholders.
Stockholders
may not be able to sell their stock under our stock repurchase
program.
Our board
of directors could choose to amend the terms of our stock repurchase program
without stockholder approval. Our board is also free to terminate the program at
any time upon 30 days written notice to our stockholders. In
addition, the stock repurchase program includes numerous restrictions that would
limit our stockholders ability to sell stock.
The
offering price was not established on an independent basis and stockholders may
be paying more for our stock than its value or the amount our stockholders would
receive upon liquidation.
The
offering price of our shares of stock bears no relationship to our book or asset
value or to any other established criteria for valuing stock. The
board of directors considered the following factors in determining the offering
price for our common stock:
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the
offering prices of comparable non-traded REITs;
and
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the
recommendation of the dealer
manager.
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However,
the offering price is likely to be higher than the price at which our
stockholders could resell their shares because (1) our public offering involves
the payment of underwriting compensation and other directed selling efforts,
which payments and efforts are likely to produce a higher sales price than could
otherwise be obtained, and (2) there is no public market for our shares.
Moreover, the offering price is likely to be higher than the amount our
stockholders would receive per share if we were to liquidate at this time
because of the up-front fees that we pay in connection with the issuance of our
shares as well as the recent reduction in the demand for real estate as a result
of the recent credit market disruptions and economic slowdown.
Because
the dealer manager is one of our affiliates, investors in our stock will not
have the benefit of an independent review of us or our prospectus customarily
undertaken in underwritten offerings.
The
dealer manager of our offerings, Pacific Cornerstone Capital, Inc., is an
affiliate of our advisor and will not make an independent review of us or our
offerings. Accordingly, investors in our stock do not have the
benefit of an independent review of the terms of our
offerings. Further, the due diligence investigation of us by the
dealer manager cannot be considered to be an independent review and, therefore,
may not be as meaningful as a review conducted by an unaffiliated broker-dealer
or investment banker.
15
Payment
of fees to our Advisor and its affiliates will reduce cash available for
investment and distribution.
Our
advisor and its affiliates will perform services for us in connection with the
offer and sale of our stock, the selection and acquisition of our properties,
and possibly the management and leasing of our properties. They will
be paid significant fees for these services, which will reduce the amount of
cash available for investment in properties and distribution to
stockholders. The fees to be paid to our advisor and its affiliates
were not determined on an arm’s-length basis. We cannot be sure that
a third-party unaffiliated with our advisor would not be willing to provide such
services to us at a lower price.
We may
also pay significant fees during our listing/liquidation
stage. Although most of the fees payable during our
listing/liquidation stage are contingent on our investors first enjoying
agreed-upon investment returns, affiliates of our advisor could also receive
significant payments even without our reaching the investment-return thresholds
should we seek to become self-managed. Due to the apparent preference
of the public markets for self-managed companies, a decision to list our shares
on a national securities exchange might well be preceded by a decision to become
self-managed. And given our advisor’s familiarity with our assets and
operations, we might prefer to become self-managed by acquiring entities
affiliated with our advisor. Such an internalization transaction
could result in significant payments to affiliates of our advisor irrespective
of whether our stockholders enjoyed the returns on which we have conditioned
other performance-based compensation.
These
fees increase the risk that the amount available for payment of distributions to
our stockholders upon a liquidation of our portfolio would be less than the
purchase price of the shares of stock in the offering. Substantial
up-front fees also increase the risk that our stockholders will not be able to
resell their shares of stock at a profit, even if our stock is listed on a
national securities exchange.
If
we are unable to obtain funding for future capital needs, cash distributions to
our stockholders could be reduced and the value of our investments could
decline.
If we
need additional capital in the future to improve or maintain our properties or
for any other reason, we will have to obtain financing from other sources, such
as cash flow from operations, borrowings, property sales or future equity
offerings. These sources of funding may not be available on
attractive terms or at all. If we cannot procure additional funding
for capital improvements, our investments may generate lower cash flows or
decline in value, or both.
Our
advisor does not have as strong an economic incentive to avoid losses as do
sponsors who have made significant equity investments in the companies they
sponsor.
Terry G.
Roussel, our chief executive officer and an affiliate of our advisor, has
invested $1,000 in 125 shares of our stock. As of the date of this report, our
advisor and its affiliates have only invested $200,000 in Cornerstone Operating
Partnership, L.P. Without significant exposure for our advisor, our investors
may be at a greater risk of loss because our advisor and its affiliates do not
have as much to lose from a decrease in the value of our stock as do those
sponsors who make more significant equity investments in the companies they
sponsor.
General
Risks Related to Investments in Real Estate and Real Estate Related
Investments
Economic
and regulatory changes that impact the real estate market may reduce our net
income and the value of our properties.
We are
subject to risks related to the ownership and operation of real estate,
including but not limited to:
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worsening
general or local economic conditions and financial markets could cause
lower demand, tenant defaults, and reduced occupancy and rental rates,
some or all of which would cause an overall decrease in revenue from
rents;
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increases
in competing properties in an area which could require increased
concessions to tenants and reduced rental
rates;
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increases
in interest rates or unavailability of permanent mortgage funds which may
render the sale of a property difficult or unattractive;
and
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changes
in laws and governmental regulations, including those governing real
estate usage, zoning and taxes.
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Some or
all of the foregoing factors may affect our properties, which would reduce our
net income, and our ability to make distributions to our
stockholders.
Lease
terminations could reduce our revenues from rents and our distributions to our
stockholders and cause the value of our stockholders’ investment in us to
decline.
The
success of our investments depends upon the occupancy levels, rental income and
operating expenses of our properties and our company. In the event of
a tenant default or bankruptcy, we may experience delays in enforcing our rights
as landlord and may incur costs in protecting our investment and re-leasing our
property. We may be unable to re-lease the property for the rent
previously received. We may be unable to sell a property with low
occupancy without incurring a loss. These events and others could
cause us to reduce the amount of distributions we make to stockholders and the
value of our stockholders’ investment in us to decline.
16
Rising
expenses at both the property and the company level could reduce our net income
and our cash available for distribution to stockholders.
Our
properties are subject to operating risks common to real estate in general, any
or all of which may reduce our net income. If any property is not
substantially occupied or if rents are being paid in an amount that is
insufficient to cover operating expenses, we could be required to expend funds
with respect to that property for operating expenses. The properties
are subject to increases in tax rates, utility costs, operating expenses,
insurance costs, repairs and maintenance and administrative
expenses. If we are unable to lease properties on a basis requiring
the tenants to pay such expenses, we would be required to pay some or all of
those costs which would reduce our income and cash available for distribution to
stockholders.
Costs
incurred in complying with governmental laws and regulations may reduce our net
income and the cash available for distributions.
Our
company and the properties we own are subject to federal, state and local laws
and regulations relating to environmental protection and human health and
safety. Federal laws such as the National Environmental Policy Act,
the Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act,
the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency
Planning and Community Right to Know Act and the Hazard Communication Act govern
such matters as wastewater discharges, air emissions, the operation and removal
of underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation
of contamination associated with disposals. The properties we own and
those we expect to acquire are subject to the Americans with
Disabilities Act of 1990 which generally requires that certain types of
buildings and services be made accessible and available to people with
disabilities. These laws may require us to make modifications to our
properties. Some of these laws and regulations impose joint and
several liability on tenants, owners or operators for the costs to investigate
or remediate contaminated properties, regardless of fault or whether the acts
causing the contamination were legal. Compliance with these laws and
any new or more stringent laws or regulations may require us to incur material
expenditures. Future laws, ordinances or regulations may impose
material environmental liability. In addition, there are various
federal, state and local fire, health, life-safety and similar regulations with
which we may be required to comply, and which may subject us to liability in the
form of fines or damages for noncompliance. Our properties may be
affected by our tenants’ operations, the existing condition of land when we buy
it, operations in the vicinity of our properties, such as the presence of
underground storage tanks, or activities of unrelated third
parties. The presence of hazardous substances, or the failure to
properly remediate these substances, may make it difficult or impossible to sell
or rent such property. Any material expenditures, fines, or damages
we must pay will reduce our ability to make distributions and may reduce the
value of our stockholders’ investment in us.
Discovery
of environmentally hazardous conditions may reduce our cash available for
distribution to our stockholders.
Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous real property owner or operator may be liable for the cost
to remove or remediate hazardous or toxic substances on, under or in such
property. These costs could be substantial. Such laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic
substances. Environmental laws also may impose restrictions on the
manner in which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures or prevent us from entering
into leases with prospective tenants that may be impacted by such
laws. Environmental laws provide for sanctions for noncompliance and
may be enforced by governmental agencies or, in certain circumstances, by
private parties. Certain environmental laws and common law principles
could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials into the
air. Third parties may seek recovery from real property owners or
operators for personal injury or property damage associated with exposure to
released hazardous substances. The cost of defending against claims
of liability, of complying with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could
be substantial and reduce our ability to make distributions and the value of our
stockholders’ investments in us.
Any
uninsured losses or high insurance premiums will reduce our net income and the
amount of our cash distributions to stockholders.
Our
advisor will attempt to obtain adequate insurance to cover significant areas of
risk to us as a company and to our properties. However, there are
types of losses at the property level, generally catastrophic in nature, such as
losses due to wars, acts of terrorism, earthquakes, floods, hurricanes,
pollution or environmental matters, which are uninsurable or not economically
insurable, or may be insured subject to limitations, such as large deductibles
or co-payments. We may not have adequate coverage for such
losses. If any of our properties incurs a casualty loss that is not
fully insured, the value of our assets will be reduced by any such uninsured
loss. In addition, other than any working capital reserve or other
reserves we may establish, we have no source of funding to repair or reconstruct
any uninsured damaged property. Also, to the extent we must pay
unexpectedly large amounts for insurance, we could suffer reduced earnings that
would result in lower distributions to stockholders.
17
We
may have difficulty selling real estate investments, and our ability to
distribute all or a portion of the net proceeds from such sale to our
stockholders may be limited.
Equity
real estate investments are relatively illiquid. Therefore, we will
have a limited ability to vary our portfolio in response to changes in economic
or other conditions. In addition, the liquidity of real estate
investments has been further reduced by the recent turmoil in the capital
markets, which has constrained equity and debt capital available for investment
in commercial real estate, resulting in fewer buyers seeking to acquire
commercial properties and consequent reductions in property values. As a
result of these factors, we will also have a limited ability to sell assets in
order to fund working capital and similar capital needs. When we sell
any of our properties, we may not realize a gain on such sale. We may
not elect to distribute any proceeds from the sale of properties to our
stockholders; for example, we may use such proceeds to:
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purchase
additional properties;
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repay
debt, if any;
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buy
out interests of any co-venturers or other partners in any joint venture
in which we are a party;
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create
working capital reserves; or
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make
repairs, maintenance, tenant improvements or other capital improvements or
expenditures to our remaining
properties.
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Our
ability to sell our properties may also be limited by our need to avoid a 100%
penalty tax that is imposed on gain recognized by a REIT from the sale of
property characterized as dealer property. In order to ensure that we
avoid such characterization, we may be required to hold our properties for a
minimum period of time, generally two years, and comply with certain other
requirements in the Internal Revenue Code.
Real
estate market conditions at the time we decide to dispose of a property may be
unfavorable which could reduce the price we receive for a property and lower the
return on our stockholders’ investment in us..
We intend
to hold the properties in which we invest until we determine that selling or
otherwise disposing of properties would help us to achieve our investment
objectives. General economic conditions, availability of financing,
interest rates and other factors, including supply and demand, all of which are
beyond our control, affect the real estate market. We may be unable
to sell a property for the price, on the terms, or within the time frame we
want. Accordingly, the gain or loss on our stockholders’ investment
in us could be affected by fluctuating market conditions.
.
As
part of otherwise attractive portfolios of properties, substantially all of
which we can own on an all-cash basis, we may acquire some properties with
existing lock-out provisions which may inhibit us from selling a property, or
may require us to maintain specified debt levels for a period of years on some
properties.
Loan
provisions could materially restrict us from selling or otherwise disposing of
or refinancing properties. These provisions would affect our ability
to turn our investments into cash and thus affect cash available for
distributions to our stockholders. Loan provisions may prohibit us
from reducing the outstanding indebtedness with respect to properties,
refinancing such indebtedness on a non-recourse basis at maturity, or increasing
the amount of indebtedness with respect to such properties.
Loan
provisions could impair our ability to take actions that would otherwise be in
the best interests of our stockholders and, therefore, may have an adverse
impact on the value of our stock, relative to the value that would result if the
loan provisions did not exist. In particular, loan provisions could
preclude us from participating in major transactions that could result in a
disposition of our assets or a change in control even though that disposition or
change in control might be in the best interests of our
stockholders.
If
we sell properties by providing financing to purchasers of our properties,
distribution of net sales proceeds to our stockholders would be delayed and
defaults by the purchasers could reduce our cash available for distribution to
stockholders.
If we
provide financing to purchasers, we will bear the risk that the purchaser may
default. Purchaser defaults could reduce our cash distributions to
our stockholders. Even in the absence of a purchaser default, the
distribution of the proceeds of sales to our stockholders, or their reinvestment
in other assets, will be delayed until the promissory notes or other property we
may accept upon a sale are actually paid, sold, refinanced or otherwise disposed
of or completion of foreclosure proceedings.
Actions
of our joint venture partners could subject us to liabilities in excess of those
contemplated or prevent us from taking actions that are in the best interests of
our stockholders which could result in lower investment returns to our
stockholders.
18
We are
likely to enter into joint ventures with affiliates and other third parties to
acquire or improve properties. We may also purchase properties in
partnerships, co-tenancies or other co-ownership arrangements. Such
investments may involve risks not otherwise present when acquiring real estate
directly, including, for example:
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joint
venturers may share certain approval rights over major
decisions;
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that
such co-venturer, co-owner or partner may at any time have economic or
business interests or goals which are or which become inconsistent with
our business interests or goals, including inconsistent goals relating to
the sale of properties held in the joint venture or the timing of
termination or liquidation of the joint
venture;
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the
possibility that our co-venturer, co-owner or partner in an investment
might become insolvent or bankrupt;
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the
possibility that we may incur liabilities as a result of an action taken
by our co-venturer, co-owner or
partner;
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that
such co-venturer, co-owner or partner may be in a position to take action
contrary to our instructions or requests or contrary to our policies or
objectives, including our policy with respect to qualifying and
maintaining our qualification as a
REIT;
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disputes
between us and our joint venturers may result in litigation or arbitration
that would increase our expenses and prevent its officers and directors
from focusing their time and effort on our business and result in
subjecting the properties owned by the applicable joint venture to
additional risk; or
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that
under certain joint venture arrangements, neither venture partner may have
the power to control the venture, and an impasse could be reached which
might have a negative influence on the joint
venture.
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These
events might subject us to liabilities in excess of those contemplated and thus
reduce our stockholders' investment returns. If we have a right of
first refusal or buy/sell right to buy out a co-venturer, co-owner or partner,
we may be unable to finance such a buy-out if it becomes exercisable or we may
be required to purchase such interest at a time when it would not otherwise be
in our best interest to do so. If our interest is subject to a buy/sell right,
we may not have sufficient cash, available borrowing capacity or other capital
resources to allow us to elect to purchase an interest of a co-venturer subject
to the buy/sell right, in which case we may be forced to sell our interest as
the result of the exercise of such right when we would otherwise prefer to keep
our interest. Finally, we may not be able to sell our interest in a joint
venture if we desire to exit the venture.
If
we make or invest in mortgage loans, our mortgage loans may be affected by
unfavorable real estate market conditions, including interest rate fluctuations,
which could decrease the value of those loans and the return on our
stockholders’ investments in us.
If we
make or invest in mortgage loans, we will be at risk of defaults by the
borrowers on those mortgage loans as well as interest rate risks. To the
extent we incur delays in liquidating such defaulted mortgage loans; we may not
be able to obtain sufficient proceeds to repay all amounts due to us under the
mortgage loan. Further, we will not know whether the values of the
properties securing the mortgage loans will remain at the levels existing on the
dates of origination of those mortgage loans. If the values of the
underlying properties fall, our risk will increase because of the lower value of
the security associated with such loans. In addition, interest rate
fluctuations could reduce our returns as compared to market interest rates and
reduce the value of the mortgage loans in the event we sell them.
Second
mortgage loan investments involve a greater risk of loss in the event of default
than traditional mortgage loans.
If we
decide to invest in second mortgages, our subordinated priority to the
senior lender or lenders will place our investment at a greater risk of
loss than a traditional mortgage. In the event of default, any recovery of
our second mortgage investment will be subordinate to the senior
lender. Further, it is likely that any investments we make in second
mortgages will be placed with private entities and not insured by a government
sponsored entity, placing additional credit risk on the borrower which may
result in a loss to our portfolio.
Delays
in restructuring or liquidating non-performing mortgage loans could reduce the
return on our stockholders' investment.
If we
invest in mortgage loans, they may become non-performing after origination or
acquisition for a wide variety of reasons. Such non-performing loans may require
a substantial amount of workout negotiations and/or restructuring, which may
entail, among other things, a substantial reduction in the interest rate and a
substantial write-down of the loan. However, even if a restructuring is
successfully accomplished, upon maturity of such loan, replacement “takeout”
financing may not be available. We may find it necessary or desirable to
foreclose on some of the collateral securing one or more of our investments.
Intercreditor provisions may substantially interfere with our ability to do so.
Even if foreclosure is an option, the foreclosure process can be lengthy and
expensive. Borrowers often resist foreclosure actions by asserting numerous
claims, counterclaims and defenses, including, without limitation, lender
liability claims and defenses, in an effort to prolong the foreclosure action.
In some states, foreclosure actions can take up to several years or more to
litigate. At any time during the foreclosure proceedings, the borrower may file
for bankruptcy, which would have the effect of staying the foreclosure action
and further delaying the foreclosure process. Foreclosure litigation tends to
create a negative public image of the collateral property and may result in
disrupting ongoing leasing and management of the property. Foreclosure actions
by senior lenders may substantially affect the amount that we may receive from
an investment.
19
If
a significant portion of our assets are deemed “investment securities,” we may
become subject to the Investment Company Act of 1940 which would restrict our
operations and we could not continue our business.
If we
fail to qualify for an exemption or exception from the Investment Company Act of
1940, we would be required to comply with numerous additional regulatory
requirements and restrictions which could adversely restrict our operations and
force us to discontinue our business. Our investments in real estate represent
the substantial majority of our total asset mix, which would not subject us to
the Investment Company Act. If, however, in the future we originate
or acquire mortgage loans and make investments in joint ventures (not structured
in compliance with the Investment Company Act) and other investment assets that
are deemed by the SEC or the courts to be “investment securities” and these
assets exceed 40% of the value of our total assets, we could be deemed to be an
investment company and subject to these additional regulatory and operational
restrictions.
Even if
otherwise deemed an investment company, we may qualify for an exception or
exemption from the Investment Company Act. For example, under the real
estate/mortgage exception, entities that are primarily engaged in the business
of purchasing and otherwise acquiring mortgages and interests in real estate are
exempt from registration under the Investment Company Act. Under the real estate
exception, the SEC Staff has provided guidance that would require us to maintain
55% of our assets in qualifying real estate interests. In order for an asset to
constitute a qualifying real estate interest or qualifying asset, the interest
must meet various criteria. Fee interests in real estate and whole mortgage
loans are generally considered qualifying assets. If we were required to
register as an investment company but failed to do so, we would be prohibited
from engaging in our business, and criminal and civil actions could be brought
against us. In addition, our contracts would be unenforceable unless a
court required enforcement, and a court could appoint a receiver to take control
of us and liquidate our business.
Risks
Associated with Debt Financing
We
expect to continue to use temporary acquisition financing to acquire properties
and otherwise incur other indebtedness, which will increase our expenses and
could subject us to the risk of losing properties in foreclosure if our cash
flow is insufficient to make loan payments.
We used
temporary acquisition financing to acquire nine of the twelve properties we own
as of December 31, 2009. We may continue to use temporary acquisition financing
to acquire additional properties. This will enable us to acquire
properties before we have raised offering proceeds for the entire purchase
price. We plan to use subsequently raised offering proceeds to pay
off the temporary acquisition financing.
We may
borrow funds for operations, tenant improvements, capital improvements or for
other working capital needs. We may also borrow funds to make
distributions including but not limited to funds to satisfy the REIT tax
qualification requirement that we distribute at least 90% of our annual REIT
taxable income to our stockholders. We may also borrow if we
otherwise deem it necessary or advisable to ensure that we maintain our
qualification as a REIT for federal income tax purposes. To the
extent we borrow funds, we may raise additional equity capital or sell
properties to pay such debt.
If there
is a shortfall between the cash flow from a property and the cash flow needed to
service temporary acquisition financing on that property, then the amount
available for distributions to stockholders may be reduced. In
addition, incurring mortgage debt increases the risk of loss since defaults on
indebtedness secured by a property may result in lenders initiating foreclosure
actions. In that case, we could lose the property securing the loan
that is in default. For tax purposes, a foreclosure of any of our
properties would be treated as a sale of the property for a purchase price equal
to the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on foreclosure, but we
would not receive any cash proceeds. We may give full or partial
guarantees to lenders of mortgage debt to the entities that own our
properties. When we give a guaranty on behalf of an entity that owns
one of our properties, we will be responsible to the lender for satisfaction of
the debt if it is not paid by such entity. If any mortgages contain
cross-collateralization or cross-default provisions, a default on a single
property could affect multiple properties.
Liquidity
in the global credit markets has been significantly contracted by market
disruptions during the past two years, making it costly to obtain new debt
financing, when debt financing is available at all. To the extent that market
conditions prevent us from obtaining temporary acquisition financing on
financially attractive terms, our ability to make suitable investments in
commercial real estate could be delayed or limited. If we are unable to
invest the proceeds from this offering in suitable real estate investments for
an extended period of time, distributions to our stockholders may be suspended
and may be lower and the value of investments in our shares could be
reduced.
20
Lenders
may require us to enter into restrictive covenants relating to our operations,
which could limit our ability to make distributions to our
stockholders.
When
providing financing, a lender may impose restrictions on us that affect our
distribution and operating policies and our ability to incur additional
debt. Loan documents we have entered into contain covenants that
limit our ability to further mortgage the property, discontinue insurance
coverage, or replace our advisor. These or other limitations may
limit our flexibility and prevent us from achieving our operating
plans.
High
levels of debt or increases in interest rates could increase the amount of our
loan payments, reduce the cash available for distribution to stockholders and
subject us to the risk of losing properties in foreclosure if our cash flow is
insufficient to make loan payments.
Our
policies do not limit us from incurring debt. High debt levels would
cause us to incur higher interest charges, would result in higher debt service
payments, and could be accompanied by restrictive covenants. Interest
we pay could reduce cash available for distribution to
stockholders. Additionally, variable rate debt could result in
increases in interest rates which would increase our interest costs, which would
reduce our cash flows and our ability to make distributions to our
stockholders. In addition, if we need to repay existing debt during
periods of rising interest rates, we could be required to liquidate one or more
of our investments in properties at times which may not permit realization of
the maximum return on such investments and could result in a loss.
Federal
Income Tax Risks
If
we fail to qualify as a REIT, we will be subjected to tax on our income and the
amount of distributions we make to our stockholders will be less.
We have
elected to be taxed as a REIT under the Internal Revenue Code. A REIT
generally is not taxed at the corporate level on income it currently distributes
to its stockholders. Qualification as a REIT involves the application
of highly technical and complex rules for which there are only limited
judicial or administrative interpretations. The determination of
various factual matters and circumstances not entirely within our control may
affect our ability to continue to qualify as a REIT. In addition, new
legislation, regulations, administrative interpretations or court decisions
could significantly change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification.
If we
were to fail to qualify as a REIT in any taxable year:
|
·
|
we
would not be allowed to deduct our distributions to our stockholders when
computing our taxable income;
|
|
·
|
we
would be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate
rates;
|
|
·
|
we
would be disqualified from being taxed as a REIT for the four taxable
years following the year during which qualification was lost, unless
entitled to relief under certain statutory
provisions;
|
|
·
|
we
would have less cash to make distributions to our stockholders;
and
|
|
·
|
we
might be required to borrow additional funds or sell some of our assets in
order to pay corporate tax obligations we may incur as a result of our
disqualification.
|
Even
if we maintain our status as a REIT, we may be subject to federal and state
income taxes in certain events, which would reduce our cash available for
distribution to our stockholders.
Net
income from a “prohibited transaction” will be subject to a 100%
tax. We may not be able to pay sufficient distributions to avoid
excise taxes applicable to REITs. We may also decide to retain income
we earn from the sale or other disposition of our property and pay income tax
directly on such income. In that event, our stockholders would be
treated as if they earned that income and paid the tax on it
directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed
payment of such tax liability. We may also be subject to state and
local taxes on our income or property, either directly or at the level of our
operating partnership or at the level of the other companies through which we
indirectly own our assets. Any federal or state taxes we pay will
reduce the cash available to make distributions to our
stockholders.
To
maintain our REIT status, we may be forced to forego otherwise attractive
opportunities, which may delay or hinder our ability to meet our investment
objectives and reduce the overall return to our stockholders.
To
qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning,
among other things, the sources of our income, nature of our assets and the
amounts we distribute to our stockholders. We may be required to make
distributions to stockholders at times when it would be more advantageous to
reinvest cash in our business or when we do not have funds readily available for
distribution. Compliance with the REIT requirements may hinder our ability to
operate solely on the basis of maximizing profits and the value of our
stockholders’ investments in us.
21
If
our operating partnership is classified as a “publicly-traded partnership” under
the Internal Revenue Code, it will be subjected to tax on our income and the
amount of distributions we make to our stockholders will be less.
We
structured our operating partnership so that it would be classified as a
partnership for federal income tax purposes. In this regard, the
Internal Revenue Code generally classifies “publicly traded partnerships” (as
defined in Section 7704 of the Internal Revenue Code) as associations
taxable as corporations (rather than as partnerships), unless substantially all
of their taxable income consists of specified types of passive
income. In order to minimize the risk that the Internal Revenue Code
would classify our operating partnership as a “publicly traded partnership” for
tax purposes, we placed certain restrictions on the transfer and/or redemption
of partnership units in our operating partnership. If the Internal
Revenue Service were to assert successfully that our operating partnership is a
“publicly traded partnership,” and substantially all of our operating
partnership’s gross income did not consist of the specified types of passive
income, the Internal Revenue Code would treat our operating partnership as an
association taxable as a corporation. In such event, the character of
our assets and items of gross income would change and would prevent us from
qualifying and maintaining our status as a REIT. In addition, the
imposition of a corporate tax on our operating partnership would reduce the
amount of cash distributable to us from our operating partnership and therefore
would reduce our amount of cash available to make distributions to
you.
Distributions
payable by REITs do not qualify for the reduced tax rates under recently enacted
tax legislation.
Recently
enacted tax legislation generally reduces the maximum tax rate for dividend
distributions payable by corporations to individuals meeting certain
requirements to 15% through 2010. Distributions payable by REITs, however,
generally continue to be taxed at the normal rate applicable to the individual
recipient, rather than the 15% preferential rate. Although this legislation does
not adversely affect the taxation of REITs or distributions paid by REITs, the
more favorable rates applicable to regular corporate distributions could cause
investors who are individuals to perceive investments in REITs to be relatively
less attractive than investments in the stocks of non-REIT corporations that
make distributions, which could reduce the value of the stock of REITs,
including our stock.
Distributions
to tax-exempt investors may be classified as unrelated business taxable income
and tax-exempt investors would be required to pay tax on the unrelated business
taxable income and to file income tax returns.
Neither
ordinary nor capital gain distributions with respect to our common stock nor
gain from the sale of stock should generally constitute unrelated business
taxable income to a tax-exempt investor. However, there are certain exceptions
to this rule. In particular:
|
·
|
under
certain circumstances, part of the income and gain recognized by certain
qualified employee pension trusts with respect to our stock may be treated
as unrelated business taxable income if our stock is predominately held by
qualified employee pension trusts, such that we are a “pension-held” REIT
(which we do not expect to be the
case);
|
|
·
|
part
of the income and gain recognized by a tax exempt investor with respect to
our stock would constitute unrelated business taxable income if such
investor incurs debt in order to acquire the common stock;
and
|
|
·
|
part
or all of the income or gain recognized with respect to our stock held by
social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans which
are exempt from federal income taxation under Sections 501(c)(7), (9),
(17), or (20) of the Code may be treated as unrelated business taxable
income.
|
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
22
ITEM 2. PROPERTIES
As of
December 31, 2009, our portfolio consists of twelve properties which were
approximately 81.6% leased. The following table provides summary
information regarding our properties.
Property
|
Location
|
Date Purchased
|
Square
Footage
|
Purchase
Price
|
Debt
|
December
31, 2009
% Leased
|
||||||||||||||
2111
South Industrial Park
|
North
Tempe, AZ
|
June 1,
2006
|
26,800
|
$
|
1,975,000
|
$
|
—
|
85.1
|
%
|
|||||||||||
Shoemaker
Industrial Buildings
|
Santa
Fe Springs, CA
|
June 30,
2006
|
18,921
|
2,400,000
|
—
|
75.7
|
%
|
|||||||||||||
15172
Golden West Circle
|
Westminster,
CA
|
December 1,
2006
|
102,200
|
11,200,000
|
2,824,000
|
100.0
|
%
|
|||||||||||||
20100
Western Avenue
|
Torrance,
CA
|
December 1,
2006
|
116,433
|
19,650,000
|
4,701,000
|
51.5
|
%
|
|||||||||||||
Mack Deer Valley
|
Phoenix,
AZ
|
January 21,
2007
|
180,985
|
23,150,000
|
3,868,000
|
100.0
|
%
|
|||||||||||||
Marathon Center
|
Tampa
Bay, FL
|
April 2,
2007
|
52,020
|
4,450,000
|
—
|
67.2
|
%
|
|||||||||||||
Pinnacle Park Business Center
|
Phoenix,
AZ
|
October 2,
2007
|
159,661
|
20,050,000
|
4,553,000
|
100.0
|
%
|
|||||||||||||
Orlando Small Bay
Portfolio
|
||||||||||||||||||||
Carter
|
Winter
Garden, FL
|
November 15,
2007
|
49,125
|
92.4
|
%
|
|||||||||||||||
Goldenrod
|
Orlando,
FL
|
November 15,
2007
|
78,646
|
75.6
|
%
|
|||||||||||||||
Hanging
Moss
|
Orlando,
FL
|
November 15,
2007
|
94,200
|
89.0
|
%
|
|||||||||||||||
Monroe
South
|
Sanford,
FL
|
November 15,
2007
|
172,500
|
64.4
|
%
|
|||||||||||||||
394,471
|
37,128,000
|
15,860,000
|
76.0
|
%
|
||||||||||||||||
Monroe North Commerce Center
|
Sanford,
FL
|
April 17,
2008
|
181,348
|
14,275,000
|
7,078,000
|
72.5
|
%
|
|||||||||||||
1,232,839
|
$
|
134,278,000
|
$
|
38,884,000
|
81.6
|
%
|
Historical
Occupancy
The
following table sets forth annualized occupancy rates for our material
properties for the past five years (or such shorter period for which information
is available):
Annualized Percent Leased (%)
|
||||||||||||||||||||
Property
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
15172
Goldenwest Circle
|
100
|
100
|
100
|
100
|
100
|
|||||||||||||||
20100
Western Avenue
|
63
|
100
|
95
|
100
|
100
|
|||||||||||||||
Mack Deer Valley
|
80
|
80
|
99
|
44
|
(2)
|
—
|
(3)
|
|||||||||||||
Pinnacle Park Business Center
|
100
|
99
|
96
|
53
|
(2)
|
—
|
(3)
|
|||||||||||||
Orlando Small Bay
Portfolio
|
77
|
94
|
97
|
—
|
(1)
|
—
|
(1)
|
|||||||||||||
Monroe North
CommerCenter
|
82
|
100
|
98
|
—
|
(1)
|
—
|
(1)
|
(1)
|
Pre-acquisition
leasing information not available.
|
(2)
|
These
projects completed construction and were put in operation during third
quarter of 2006. Accordingly, these numbers represent the leasing-up
period for these projects.
|
(3)
|
Represents
development and construction
period.
|
Historical
Annualized Average Rents
The
following table sets forth average effective annualized rent per square foot for
our material properties for the past five years (or such shorter period for
which information is available):
23
Average Effective Annualized Rent per Square Foot
(4)
|
||||||||||||||||||||
Property
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
15172
Goldenwest Circle
|
$
|
8.10
|
$
|
7.29
|
$
|
7.56
|
$
|
7.10
|
$
|
6.68
|
||||||||||
20100
Western Avenue
|
$
|
10.16
|
$
|
11.41
|
$
|
11.35
|
$
|
11.26
|
$
|
10.97
|
||||||||||
Mack Deer Valley
|
$
|
8.87
|
$
|
8.73
|
$
|
7.75
|
$
|
3.74
|
(2)
|
$
|
—
|
(3)
|
||||||||
Pinnacle Park Business Center
|
$
|
6.78
|
$
|
7.65
|
$
|
8.24
|
$
|
1.43
|
(2)
|
$
|
—
|
(3)
|
||||||||
Orlando Small Bay
Portfolio
|
$
|
7.71
|
$
|
7.59
|
$
|
7.35
|
$
|
—
|
(1)
|
$
|
—
|
(1)
|
||||||||
Monroe North
CommerCenter
|
$
|
6.83
|
$
|
5.83
|
$
|
5.87
|
$
|
—
|
(1)
|
$
|
—
|
(1)
|
(1)
|
Pre-acquisition
leasing information not available.
|
(2)
|
These
projects completed construction and were put in operation during third
quarter of 2006. Accordingly, these numbers represent the leasing-up
period for these projects.
|
(3)
|
Represents
development and construction period.
|
(4) | Average effective annualized rent per square foot is calculated by dividing annual rental revenues by sum of quarterly occupied square footage. |
Portfolio
Lease Expirations
The
following table sets forth lease expiration information for each of the ten
years following December 31, 2009:
Year Ending
December 31
|
No. of
Leases
Expiring
|
Approx.
Amount of
Expiring
Leases
(Sq. Feet)
|
Base Rent
of Expiring
Leases
(Annual $)
|
Percent of
Total
Leasable
Area
Expiring
(%)
|
Percent of
Total
Annual Base
Rent Expiring
(%)
|
|||||||||||||||
Month
to Month
|
6
|
62,943
|
263,000
|
5.1
|
%
|
3.5
|
%
|
|||||||||||||
2010
|
46
|
178,764
|
1,232,000
|
14.5
|
%
|
16.6
|
%
|
|||||||||||||
2011
|
44
|
263,324
|
2,160,000
|
21.4
|
%
|
29.1
|
%
|
|||||||||||||
2012
|
15
|
185,612
|
1,366,000
|
15.1
|
%
|
18.4
|
%
|
|||||||||||||
2013
|
10
|
233,948
|
1,758,000
|
19.0
|
%
|
23.7
|
%
|
|||||||||||||
2014
|
8
|
59,688
|
536,000
|
4.8
|
%
|
7.2
|
%
|
|||||||||||||
2015
|
1
|
6,200
|
58,000
|
0.5
|
%
|
0.8
|
%
|
|||||||||||||
2016
|
1
|
5,364
|
48,000
|
0.4
|
%
|
0.7
|
%
|
|||||||||||||
2017
|
-
|
-
|
-
|
-
|
%
|
-
|
%
|
|||||||||||||
2018
|
-
|
-
|
-
|
-
|
%
|
-
|
%
|
|||||||||||||
131
|
995,843
|
$
|
7,421,000
|
80.8
|
%
|
100.0
|
%
|
Real
Estate-Related Investment
As of
December 31, 2009, we had invested in one real estate loan receivable,
the Sherburne Commons Mortgage Loan:
Loan Name
Location of Related Property or Collateral
|
Date
Originated
|
Loan Type
|
Payment
Type
|
Book
Value
as
of
December 31, 2009
|
Rate
Type
|
Annual
Interest Rate
|
Maturity Date
|
|||||||||
Sherburne
Commons Mortgage Loan
Nantucket,
Massachusetts
|
12/14/2009
|
1st
Mortgage
|
Interest Only
|
$
|
6,900,000
|
Fixed
|
8.0%
|
1/1/2015
|
ITEM 3. LEGAL
PROCEEDINGS
From time
to time in the ordinary course of business, we may become subject to legal
proceeding, claims, or disputes. As of the date hereof, we are not a
party to any pending legal proceedings.
ITEM 4. RESERVED
24
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market
Information
During
the period covered by this report, there was no established public trading
market for our shares of common stock. In order for FINRA members to
participate in the offering and sale of shares of common stock pursuant to our
ongoing public offering, we are required to disclose in each annual report
distributed to stockholders a per share estimated value of the shares, the
method by which it was developed and the date of the data used to develop the
estimated value. In addition, we prepare annual statements of
estimated share values to assist fiduciaries of retirement plans subject to the
annual reporting requirements of ERISA in the preparation of their reports
relating to an investment in our shares. For these purposes, the
deemed value of a share of our common stock is $8.00 per share as of December
31, 2009. The basis for this valuation is that the current public offering price
of a share of our common stock is $8.00 per share (ignoring purchase price
discounts for certain categories of purchasers). However, this
estimated value is likely to be higher than the price at which you could resell
your shares because (1) our public offering involves the payment of underwriting
compensation and other directed selling efforts, which payments and efforts are
likely to produce a higher sales price than could otherwise be obtained, and (2)
there is no public market for our shares. Moreover, this estimated
value is likely to be higher than the amount you would receive per share if we
were to liquidate at this time because of the up-front fees that we pay in
connection with the issuance of our shares as well as the recent reduction in
the demand for real estate as a result of the recent credit market disruptions
and economic slowdown. We expect to continue to use the most recent
public offering price for a share of our common stock as the estimated per share
value reported in our annual reports on Form 10-K until 18 months have passed
since the last sale of a share of common stock in a public offering, excluding
public offerings conducted on behalf of selling stockholders or offerings
related to a dividend reinvestment plan, employee benefit plan, or the
redemption of interests in our operating partnership. After the
18-month period described above, we expect the estimated share values reported
in our annual reports will be based on estimates of the values of our assets net
of our liabilities. We do not currently anticipate that our advisor
will obtain new or updated appraisals for our properties in connection with such
estimates, and accordingly, these estimated share values should not be viewed as
estimates of the amount of net proceeds that would result from a sale of our
properties at that time. We expect that any estimates of the value of
our properties will be performed by our advisor; however, our board of directors
could direct our advisor to engage one or more third-party valuation firms in
connection with such estimates.
Stock
Repurchase Program
Our board
of directors has adopted a stock repurchase program that enables our
stockholders to sell their stock to us in limited circumstances. Our
board of directors may amend, suspend or terminate the program at any time upon
thirty days prior notice to our stockholders.
As long
as our common stock is not listed on a national securities exchange, our
stockholders who have held their stock for at least one year may be able to have
all or any portion of their shares of stock redeemed. At that time,
we may, subject to the conditions and limitations described below, redeem the
shares of stock presented for redemption for cash to the extent that we have
sufficient funds available to us to fund such redemption. Currently,
the amount that we may pay to redeem stock will be the redemption price set
forth in the following table which is based upon the number of years the stock
is held:
Number Years Held
|
Redemption Price
|
|
Less
than 1
|
No
Redemption Allowed
|
|
1
or more but less than 2
|
90%
of your purchase price
|
|
2
or more but less than 3
|
95%
of your purchase price
|
|
Less
than 3 in the event of death
|
100%
of your purchase price
|
|
3
or more but less than 5
|
100%
of your purchase price
|
|
5
or more
|
Estimated
liquidation value
|
We have
no obligation to repurchase our stockholders’ shares of stock. Our stock
repurchase program has limitations and restrictions and may be cancelled. We
intend to redeem shares using proceeds from our distribution reinvestment plan
but we may use other available cash to repurchase the shares of a deceased
shareholder. Our board of directors may modify our stock repurchase program so
that we can also redeem stock using the proceeds from the sale of our properties
or other sources.
Until
September 21, 2012 our stock repurchase program limits the number of shares
of stock we can redeem (other than redemptions due to death of a stockholder) to
those that we can purchase with net proceeds from the sale of stock under our
distribution reinvestment plan in the prior calendar year. Until
September 21, 2012 we do not intend to redeem more than the lesser of
(i) the number of shares that could be redeemed using the proceeds from our
distribution reinvestment plan in the prior calendar year or (ii) 5% of the
number of shares outstanding at the end of the prior calendar year.
For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase
price of such shares will be deemed to be equal to the purchase price paid by
the stockholder for shares held by the stockholder immediately prior to the
special 10% stock distribution. For example, if, immediately prior to the
special 10% stock distribution, you owned 1,010 shares of our common stock,
1,000 of which you had purchased in the primary offering at $8.00 per share and
the remaining 10 of which you had purchased under the distribution reinvestment
plan at $7.60 per share, then, of the 101 shares you received as part of the
special stock distribution, 100 of these shares would be deemed to have a
purchase price of $8.00 per share and one share would be deemed to have a
purchase price of $7.60. These deemed purchase prices would be used in
conjunction with the holding period thresholds set forth as above to calculate
the stock redemption price for the additional shares. Therefore, if you
were to submit a redemption request after holding the 101 additional shares for
more than one year, but less than two years, the stock redemption price for 100
of these shares would be 90% of $8.00, or $7.20 per share, and the stock
redemption price for the remaining share would be 90% of $7.60, or $6.84. In the
event that all of your shares of stock will be repurchased, shares purchased
pursuant to our distribution reinvestment plan may be excluded from the
foregoing one-year holding period requirement, in the discretion of the board of
directors.
25
The
estimated liquidation value for the repurchase of shares of stock held for 5 or
more years will be determined by our advisor or another person selected for such
purpose and will be approved by our board of directors. The stock repurchase
price is subject to adjustment as determined from time to time by our board of
directors. At no time will the stock repurchase price exceed the price at which
we are offering our common stock for sale at the time of the repurchase.
We do not charge any fees for participating in our stock repurchase
program, however the transfer agent we have appointed to administer the program
may charge a transaction fee for processing a redemption request.
During
the twelve months ended December 31, 2009, we redeemed shares pursuant to our
stock repurchase program follows (in thousands, except per-share
amounts):
Period
|
Total Number of
Shares Redeemed(1)
|
Average Price Paid
per Share
|
Approximate Dollar Value of Shares
Available That May Yet Be
Redeemed Under the Program
(1)
|
|||||||||
January
|
40,873
|
$
|
6.77
|
$
|
3,805,000
|
|||||||
February
|
137,395
|
$
|
7.51
|
$
|
2,773,000
|
|||||||
March
|
152,984
|
$
|
7.61
|
$
|
1,608,000
|
|||||||
April
|
83,284
|
$
|
7.55
|
$
|
979,000
|
|||||||
May
|
43,057
|
$
|
7.51
|
$
|
655,000
|
|||||||
June
|
65,453
|
$
|
7.67
|
$
|
152,000
|
|||||||
July
|
23,079
|
$
|
7.39
|
$
|
—
|
|||||||
August
|
8,113
|
$
|
7.99
|
$
|
—
|
|||||||
September
|
8,178
|
$
|
7.98
|
$
|
—
|
|||||||
October
|
—
|
$
|
—
|
$
|
—
|
|||||||
November
|
3,560
|
$
|
7.96
|
$
|
—
|
|||||||
December
|
11,566
|
$
|
7.97
|
$
|
—
|
|||||||
577,542
|
|
(1)
|
Until
September 21, 2012 our stock repurchase program limits the number of
shares of stock we can redeem (other than redemptions due to death of a
stockholder) to those that we can purchase with net proceeds from the sale
of stock under our distribution reinvestment plan in the prior calendar
year. Until September 21, 2012 we do not intend to redeem more than
the lesser of (i) the number of shares that could be redeemed using
the proceeds from our distribution reinvestment plan in the prior calendar
year or (ii) 5% of the number of shares outstanding at the end of the
prior calendar year. After September 21, 2012, the number of shares
that we redeem under the stock repurchase program is not expected to
exceed 10% of the number outstanding at the end of the prior year. Our
board of directors may modify our stock repurchase program so that we can
redeem stock using the proceeds from the sale of our real estate
investments or other sources.
|
Stockholders
As of
March 26, 2010, we had approximately 22.7 million shares of common stock
outstanding held by approximately 4,846 stockholders of record.
Distributions
In order
to meet the requirements for being treated as a REIT under the Internal Revenue
Code, we must pay distributions to our shareholders each taxable year equal to
at least 90% of our net ordinary taxable income. Until proceeds from
our offerings are invested and generating operating cash flow sufficient to make
distributions to stockholders, we intend to pay all or a substantial portion of
our distributions from the proceeds of our offering and or from borrowings in
anticipation of future cash flow. Our board generally declares
distributions on a quarterly basis and paid on a monthly
basis. Monthly distributions are paid based on daily record and
distribution declaration dates so our investor will be entitled to be paid
distributions beginning on the day that they purchase shares.
26
During
the years ended December 31, 2009 and 2008, we paid distributions, including any
distributions reinvested, aggregating approximately $10.5 million and $6.8
million, respectively to our stockholders. The following table shows
the distributions paid based on daily record dates for each day during the
period from January 1, 2008 through December 31, 2009, aggregated by
quarter as follows:
Distribution Declared (1)
|
||||||||||||||||||||
Period
|
Cash
|
Reinvested
|
Total
|
Funds
from Operations
|
Cash
flows from operating activities
|
|||||||||||||||
First
quarter 2008
|
$
|
486,000
|
$
|
719,000
|
$
|
1,205,000
|
$
|
236,000
|
$
|
253,000
|
||||||||||
Second
quarter 2008
|
610,000
|
926,000
|
1,536,000
|
535,000
|
1,041,000
|
|||||||||||||||
Third
quarter 2008
|
831,000
|
1,298,000
|
2,129,000
|
882,000
|
1,090,000
|
|||||||||||||||
Fourth
quarter 2008
|
957,000
|
1,442,000
|
2,399,000
|
467,000
|
157,000
|
|||||||||||||||
$
|
2,884,000
|
$
|
4,385,000
|
$
|
7,269,000
|
$
|
2,120,000
|
$
|
2,541,000
|
|||||||||||
First
quarter 2009
|
$
|
1,020,000
|
$
|
1,464,000
|
$
|
2,484,000
|
$
|
706,000
|
$
|
1,090,000
|
||||||||||
Second
quarter 2009
|
1,125,000
|
1,523,000
|
2,648,000
|
819,000
|
733,000
|
|||||||||||||||
Third
quarter 2009 (2)
|
1,181,000
|
1,554,000
|
2,735,000
|
(4,074,000
|
)
|
1,126,000
|
||||||||||||||
Fourth
quarter 2009 (3)
|
1,231,000
|
1,546,000
|
2,777,000
|
(1,913,000
|
)
|
(61,000
|
)
|
|||||||||||||
$
|
4,557,000
|
$
|
6,087,000
|
$
|
10,644,000
|
$
|
(4,462,000
|
)
|
$
|
2,888,000
|
(1)
|
100%
and 95.07% of the distributions declared during 2008 and 2009 represented
a return of capital for federal income tax purposes,
respectively.
|
(2)
|
Funds
from operations includes note receivable impairment reserve charge of
approximately $4.6 million.
|
(3)
|
Funds
from operations includes real estate impairment reserve charge of
approximately $2.4 million.
|
The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis. The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deem relevant.
Funds
from Operations
Funds
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance. We compute FFO in
accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures and subsidiaries. Our FFO may not be
comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than we do. We believe that FFO is helpful
to investors and our management as a measure of operating performance because it
excludes depreciation and amortization, gains and losses from property
dispositions, and extraordinary items, and as a result, when compared year to
year, reflects the impact on operations from trends in occupancy rates, rental
rates, operating costs, development activities, general and administrative
expenses, and interest costs, which is not immediately apparent from net
income. Historical cost accounting for real estate assets in accordance
with GAAP implicitly assumes that the value of real estate diminishes
predictably over time. Since real estate values have historically risen or
fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies that
use historical cost accounting alone to be insufficient. As a result, our
management believes that the use of FFO, together with the required GAAP
presentations, provide a more complete understanding of our performance.
Factors that impact FFO include start-up costs, fixed costs, delay in buying
assets, lower yields on cash held in accounts pending investment, income from
portfolio properties and other portfolio assets, interest rates on acquisition
financing and operating expenses. FFO should not be considered as an
alternative to net income (loss), as an indication of our performance, nor is it
indicative of funds available to fund our cash needs, including our ability to
make distributions. FFO may be used to fund all or a portion of certain
capitalizable items that are excluded from FFO, such as capital expenditures
and payments of principal on debt, each of which may impact the amount
of cash available for distribution to our stockholders. Our calculation of FFO
for each of the last four quarters is presented below:
27
Year
Ended December 31,
|
||||||||||||
2009(1)
|
2008
|
2007
|
||||||||||
Net
loss
|
$
|
(8,111,000
|
)
|
$
|
(1,452,000
|
)
|
$
|
(2,604,000
|
)
|
|||
Adjustments:
|
||||||||||||
Net
(loss) income attributable to noncontrolling interest
|
(8,000
|
)
|
3,000
|
(3,000
|
)
|
|||||||
Real
estate assets depreciation and amortization
|
3,641,000
|
3,575,000
|
1,529,000
|
|||||||||
Funds
from operations (FFO)
|
$
|
(4,462,000
|
)
|
$
|
2,120,000
|
$
|
(1,072,000
|
)
|
||||
Weighted
average shares
|
21,806,219
|
14,241,215
|
7,070,155
|
|||||||||
FFO
per weighted average shares
|
$
|
(0.20
|
)
|
$
|
0.15
|
$
|
(0.15
|
)
|
(1)
|
During
the third quarter of 2009, we recorded a note receivable impairment
reserve of approximately $4.6 million and during the fourth quarter of
2009, we recorded an impairment of real estate of approximately $2.4
million.
|
Recent
Sales of Unregistered Securities
On August
6, 2008, we granted our non-employee directors nonqualified stock options to
purchase an aggregate of 20,000 shares of our common stock at an exercise price
at $8.00 per share under our Employee and Director Incentive Stock Plan pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933.
We did
not sell any equity securities that were not registered under the Securities Act
of 1933 during the period covered by this Form 10-K.
Use
of Proceeds from Registered Securities
Initial
Public Offering
Our
registration statement (SEC File No. 333-121238) for our initial public
offering of up to 44,400,000 shares of our common stock at $8.00 per
share and up to 11,000,000 additional shares at $7.60 per share pursuant to our
distribution reinvestment plan was declared effective on September 22,
2005. The aggregate offering amount of the shares registered for sale
in our initial public offering, assuming the maximum number of shares is sold,
is $438,800,000. The offering commenced on January 6, 2006 and
was terminated June 1, 2009 prior to the sale of all shares
registered.
As of the
termination of the offering on June 1, 2009, excluding issuance of approximately
1.2 million shares under our distribution reinvestment plan, we had sold
approximately 20.5 million shares of common stock in our initial public
offering, raising gross offering proceeds of approximately $163.7
million. From this amount, we incurred approximately $16.2 million in
selling commissions and dealer manager fees payable to our dealer manager and
approximately $3.3 million in acquisition fees payable to the
advisor. We have used approximately $93 million of the net offering
proceeds to acquire properties and reduce notes payable balance as of December
31, 2009. As of December 31, 2009, the advisor and its affiliates had
incurred on our behalf organizational and offering costs totaling approximately
$4.5 million, including approximately $0.1 million of organizational costs that
have been expensed, approximately $4.4 million related to offering costs which
reduce net proceeds of our initial public offering.
Follow-on
Public Offering
Our
registration statement (SEC File No. 333-155640) for our follow-on public
offering of up to 56,250,000 shares of our common stock at $8.00 per share and
up to 21,100,000 additional shares at $7.60 per share pursuant to our
distribution reinvestment plan was declared effective on June 10,
2009. We also retained PCC to conduct our follow-on public offering
on a best-efforts basis. The aggregate offering amount of the shares
registered for sale in our follow-on public offering is
$610,360,000. The offering commenced on June 10, 2009 and has not
terminated.
As of
December 31, 2009, excluding issuance of approximately 0.4 million shares under
our distribution reinvestment plan, we had sold approximately 0.3 million shares
of common stock in our follow-on offering, raising gross offering proceeds of
approximately $2.2 million. From this amount, we incurred
approximately $207,000 in selling commissions and dealer manager fees payable to
our dealer manager and approximately $44,000 in acquisition fees payable to the
advisor. As of December 31, 2009, the advisor and its affiliates had
incurred on our behalf organizational and offering costs totaling approximately
$0.7 million which reduce net proceeds of our follow-on public offering
provided, however, we will have no obligation to reimburse of advisor for
organizational and offering costs totaling in excess of 3.5% of the gross
proceeds of our follow-on offering at the conclusion of the
offering.
28
Equity
Compensation Plans
Information
about securities authorized for issuance under our equity compensation plans
required for this Item is incorporated by reference from our definitive Proxy
Statement to be filed in connection with our 2010 annual meeting of
stockholders.
ITEM
6. SELECTED FINANCIAL DATA
The
following should be read with the sections titled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and the notes thereto.
As
of December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Total
assets
|
$
|
157,252,000
|
$
|
165,104,000
|
$
|
129,922,000
|
$
|
50,012,000
|
$
|
224,000
|
||||||||||
Investments
in real estate, net
|
$
|
127,079,000
|
$
|
132,955,000
|
$
|
120,994,000
|
$
|
36,057,000
|
$
|
-
|
||||||||||
Notes
payable
|
$
|
38,884,000
|
$
|
45,626,000
|
$
|
65,699,000
|
$
|
20,180,000
|
$
|
-
|
||||||||||
Stockholders’
equity
|
$
|
115,024,000
|
$
|
116,333,000
|
$
|
60,248,000
|
$
|
26,719,000
|
$
|
(93,000
|
)
|
|||||||||
Year
Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Operating
Data:
|
||||||||||||||||||||
Revenues
|
$
|
11,130,000
|
$
|
10,793,000
|
$
|
5,865,000
|
$
|
404,000
|
$
|
-
|
||||||||||
General
and administrative expense
|
$
|
1,911,000
|
$
|
1,421,000
|
$
|
2,359,000
|
$
|
1,294,000
|
$
|
95,000
|
||||||||||
Impairment
of notes receivable
|
$
|
4,626,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Impairment
of real estate
|
$
|
2,360,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Net
loss attributable to common stockholders
|
$
|
(8,103,000
|
)
|
$
|
(1,455,000
|
)
|
$
|
(2,601,000
|
)
|
$
|
(1,306,000
|
)
|
$
|
(94,000
|
)
|
|||||
Noncontrolling
interest
|
$
|
(8,000
|
)
|
$
|
3,000
|
$
|
(3,000
|
)
|
$
|
(11,000
|
)
|
$
|
-
|
|||||||
Basic
and diluted net loss per common share attributable to common stockholders
(1)
|
$
|
(0.37
|
)
|
$
|
(0.10
|
)
|
$
|
(0.37
|
)
|
$
|
(1.44
|
)
|
$
|
(752.00
|
)
|
|||||
Distributions
declared
|
$
|
10,644,000
|
$
|
7,269,000
|
$
|
3,196,000
|
$
|
586,000
|
$
|
-
|
||||||||||
Distributions
per common share
|
$
|
0.48
|
$
|
0.47
|
$
|
0.43
|
$
|
0.40
|
$
|
-
|
||||||||||
Weighted
average number of shares outstanding (1):
|
||||||||||||||||||||
Basic
and diluted
|
21,806,219
|
14,241,215
|
7,070,155
|
909,860
|
125
|
|||||||||||||||
Other
Data:
|
||||||||||||||||||||
Cash
flows provided by (used in) operating activities
|
$
|
2,888,000
|
$
|
2,541,000
|
$
|
(1,156,000
|
)
|
$
|
(139,000
|
)
|
$
|
(84,000
|
)
|
|||||||
Cash
flows used in investing activities
|
$
|
(10,708,000
|
)
|
$
|
(11,973,000
|
)
|
$
|
(84,799,000
|
)
|
$
|
(37,447,000
|
)
|
$
|
-
|
||||||
Cash
flows provided by financing activities
|
$
|
212,000
|
$
|
29,065,000
|
$
|
81,562,000
|
$
|
48,510,000
|
$
|
200,000
|
(1)
|
Net
loss per share is based upon the weighted average number of shares of
common stock outstanding. All per share computations have been adjusted to
reflect the common stock dividends for all periods
presented.
|
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated
financial statements and notes appearing elsewhere in this Form 10-K. See
also the “Special Note about Forward-looking Statements” preceding Item 1 of
this report.
Overview
We were
incorporated on October 22, 2004 for the purpose of engaging in the
business of investing in and owning commercial real estate. On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan. On June 10,
2009, we commenced a follow-on offering of up 77,350,000 shares of our common
stock, consisting of 56,250,000 shares for sale pursuant to a primary offering
and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan. We retained Pacific Cornerstone Capital, Inc. (“PCC”), an
affiliate of the advisor, to serve as the dealer manager for our
offerings. PCC is responsible for marketing our shares currently
being offered pursuant to the follow-on offering.
We used
the net proceeds from our initial public offering to invest primarily in
investment real estate including multi-tenant industrial real estate located in
major metropolitan markets in the United States. We intend to use the
net proceeds from our follow-on offering to acquire additional real estate
investments and pay down temporary acquisition financing on our existing
asset.
As of
December 31, 2009, we had raised approximately $165.9 million of gross proceeds
from the sale of approximately 20.8 million shares of our common stock in our
initial public offering and follow-on offering and had acquired twelve
properties.
Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to increase rental income and other earned income from
leases by increasing rental rates and occupancy levels and control operating and
other expenses. Our operations are impacted by property specific, market
specific, general economic and other conditions.
Market
Outlook – Real Estate and Real Estate Finance Markets
During
2008 and 2009, significant and widespread concerns about credit risk and access
to capital have been present in the global capital markets. Both the national
and most global economies have experienced substantially increased unemployment
and a downturn in economic activity. In addition, recent failure or near failure
of several large financial institutions, together with government interventions
in the financial system, including interventions in bankruptcy proceedings and
restrictions on businesses, have led to increased market uncertainty and
volatility. Despite certain recent positive economic indicators and improved
stock market performance, the aforementioned conditions, combined with stagnant
business activity and low consumer spending, have resulted in an unprecedented
global recession and continue to contribute to a challenging macro-economic
environment that may interfere with the implementation of our business
strategies.
As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also been experiencing deteriorating fundamentals across all
major property types and most geographic markets. Tenant defaults are on the
rise, while demand for commercial real estate space is contracting. It is
expected that this will create a highly competitive leasing environment that
should result in downward pressure on both occupancy and rental rates, resulting
in leasing incentives becoming more common. Mortgage delinquencies and defaults
have trended upward, with many industry analysts predicting significant credit
defaults, foreclosures and principal losses, in particular for subordinate
securitized debt instruments.
From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.
Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.
30
These
market conditions have and will likely continue to have a significant impact on
our real estate investments. In addition, these market conditions have impacted
our tenants’ businesses, which makes it more difficult for them to meet current
lease obligations and places pressure on them to negotiate favorable lease terms
upon renewal in order for their businesses to remain viable. Increases in rental
concessions given to retain tenants and maintain our occupancy level, which is
vital to the continued success of our portfolio, has resulted in lower current
cash flow. Projected future declines in rental rates, slower or potentially
negative net absorption of leased space and expectations of future rental
concessions, including free rent to retain tenants who are up for renewal or to
sign new tenants, are expected to result in additional decreases in cash flows.
Historically low interest rates have helped offset some of the impact of these
decreases in operating cash flow for properties financed with variable rate
mortgages; however, interest rates may not remain at these historically low
levels for the remaining life of many of our investments.
Based on
these market outlooks, we may limit capital expenditures during 2010 compared to
prior years by focusing on those capital expenditures that preserve value.
However, if we experience an increase in vacancies, we may incur costs to
re-lease properties and pay leasing commissions.
Our cash
position remains strong. Despite the current economic crisis, we expect to have
sufficient cash flow from operations to cover a majority of cash distribution
and capital improvements in the next twelve months.
Results
of Operations
Our
results of operations are not indicative of those expected in future periods as
we expect that rental income, tenant reimbursements, operating expenses, asset
management fees, depreciation, amortization, and net income will each increase
in future periods as a result of assets acquired since inception and
anticipation of future acquisition of real estate assets.
As of
December 31, 2009, we owned twelve properties. These properties were
acquired from June of 2006 through April 2008. During 2009, we owned twelve
properties for a full year. During 2008, we owned eleven properties
for a full year, and one for eight and one-half months. During 2007
we owned seven properties for a full year and four properties for one and
one-half months. Accordingly, the results of our operations for the
years ended December 31, 2009, 2008 and 2007 are not directly
comparable.
In
January 2009, we made a $14.0 million mortgage loan to Caruth Haven L.P, a
wholly-owned subsidiary of Cornerstone Healthcare Plus REIT, Inc., sponsored by
affiliates of our sponsor. The loan was to mature on January 21,
2010. On December 16, 2009, Caruth Haven L.P. fully repaid the
loan.
On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA. The loan matures on January 1, 2015, with no option to extend and
bears interest at a fixed rate of 8.0% for the term of the
loan. Interest will be paid monthly with principal due at
maturity. In addition, under the terms of the loan, we are entitled
to receive additional interest in the form of a 40% participation in the "shared
appreciation" of the property, which is calculated based on the net sales
proceeds if the property is sold, or the property's appraised value, less
ordinary disposition costs, if the Property has not been sold by the time the
loan matures. Prepayment of the loan is not permitted without our consent and
the loan is not assumable.
We have
no paid employees advised and managed by Cornerstone Realty Advisors,
LLC.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Rental
revenue, tenant reimbursements and other income decreased to approximately $9.8
million for the year ended December 31, 2009 from approximately $10.6 million
for the year ended December 31, 2008. The decrease is primarily due
to lower occupancy rates, lower lease rental rates and longer lease up periods
for vacant units as a result of the current economic environment partially
offset by Monroe North’s additional one and a half months of revenue in
2009.
Interest
income from a note receivable increased to approximately $1.3 million for the
year ended December 31, 2009 from $0.2 million for the year ended December 31,
2008. The increase is due to higher notes receivable balances
outstanding during 2009.
Property
operating and maintenance costs increased to approximately $3.4 million for the
year ended December 31, 2009 from approximately $3.1 million for the year
ended December 31, 2008. The increase is primarily due to an
increase in property taxes, bad debt expense and legal collection
costs as a result of current economic conditions partially offset by decrease in
property management fees.
31
Real
estate acquisition costs increased to approximately $0.4 million for the year
ended December 31, 2009 from $0 for the year ended December 31, 2008. The
increase relates to the portion of the acquisition fee paid to advisor on
receipt of offering proceeds which the adoption of an accounting provision
in 2009 required us to expense.
Depreciation
and amortization is comparable for year ended December 31, 2009 and
2008.
General
and administrative expenses increased to approximately $1.9 million for the year
ended December 31, 2009 from approximately $1.4 million for the year
ended December 31, 2008. The increase is primarily due to higher
professional fees, reimbursement of operating costs to the advisor related to
the services on our behalf, and a one-time abandoned project refund received in
2008.
Asset
management fees increased to approximately $1.5 million for the year ended
December 31, 2009 from approximately $1.3 million for the year ended December
31, 2008. The increase is due to higher average assets under management in
2009.
A note
receivable impairment reserve of approximately $4.6 million was recorded for the
year ended December 31, 2009. There was no impairment reserve
recorded in the year ended December 31, 2008. The 2009 impairment was
based on our evaluation of collectability that involves judgment, estimates and
a review of the borrower’s business models and their future operations. While we
remain confident of the borrower’s ability to successfully execute its business
plans, changes in the economic environment and market conditions have delayed
planned initiatives, and we concluded that the collectability cannot be
reasonably assured.
Impairment
of real estate increased to approximately $2.4 million for the year ended
December 31, 2009 from $0 for the year ended December 31, 2008. The
2009 impairment is due to adjustments to reflect a decline in the market
value of one of our real estate properties, based on current occupancy and
rental rates.
Interest
income decreased to approximately $8,000 for the year ended December 31, 2009
from approximately $0.3 million for the year ended December 31, 2008. The
decrease is primarily due to lower rates paid on short term investments combined
with lower average cash balances available for investment.
Interest
expense decreased to approximately $1.4 million for the year ended
December 31, 2009 from approximately $3.1 million for the year ended
December 31, 2008. The decrease is primarily due to lower interest rates on
our credit agreements with HSH Nordbank and Wachovia Bank and a lower debt
balance as a result of a $25.0 million principal reduction in the third quarter
of 2008.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
The increase
in rental income and tenant reimbursements and other income as well as the
increase in operating costs, asset management fees and depreciation and
amortization are primarily due to acquisition of properties during 2007 which
were owned for a full year in 2008 and from the acquisition of one additional
property during 2008.
Rental
revenue, tenant reimbursements and other income increased to approximately $10.6
million for the year ended December 31, 2008 from approximately $5.9 million for
the year ended December 31, 2007.
Interest
income from a note receivable increased to approximately $0.2 million for the
year ended December 31, 2008 from $0 for the year ended December 31, 2007, due
to the origination of a note receivable to a real estate operating company in
2008.
Property
operating and maintenance costs, which include bad debt expense, increased to
approximately $3.1 million for the year ended December 31, 2008 from
approximately $1.3 million for the year ended December 31,
2007.
Depreciation
of real estate and amortization of lease costs increased to approximately $3.6
million for the year ended December 31, 2008 from approximately $1.5
million for the year ended December 31, 2007. The increases in
depreciation and amortization resulted primarily from the acquisitions of
properties in 2007 which were owned for a full year in 2008. In addition,
amortization of intangible lease assets increased due to tenant departures
before the end of their lease term.
General
and administrative expenses decreased to approximately $1.4 million for the year
ended December 31, 2008 from approximately $2.4 million for the year
ended December 31, 2007. The 2007 expense included a charge of
approximately $0.8 million related to an abandoned
project.
Asset
management fees increased to approximately $1.3 million for the year ended
December 31, 2008 from approximately $0.7 million for the year ended December
31, 2007 as a result of property acquisitions in 2007 and 2008.
Interest
income decreased to approximately $0.3 million for the year ended
December 31, 2008 from approximately $0.6 million for the year ended
December 31, 2007 primarily due to lower investment rates on short term
investments in 2008 partially offset by higher average cash balances in
2008.
32
Interest
expense is comparable for year ended December 31, 2008 and 2007.
Liquidity
and Capital Resources
We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations. We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements and leasing
commissions, operating expenses, interest expense on any outstanding
indebtedness, cash distributions, and for the repayment of notes payable. In
addition, we will continue to use temporary debt financing to facilitate our
acquisitions of properties in anticipation of receipt of offering
proceeds.
On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan. On June 10,
2009, we commenced a follow-on offering of up 77,350,000 shares of our common
stock, consisting of 56,250,000 shares for sale pursuant to a primary offering
and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan. As of December 31, 2009, a total of approximately 20.8 million
shares of our common stock had been sold in our combined offerings for aggregate
gross proceeds of approximately $165.9 million.
As of
December 31, 2009, we had approximately $18.7 million in cash and cash
equivalents on hand and approximately $34.1 million available under our
acquisition credit facility with HSH Nordbank. We may use the
available credit to acquire real estate investments and we may use up to 10% of
the credit facility for working capital. We are entitled to prepay
the borrowings under the credit facility at any time without
penalty. The repayment of obligations under the credit
agreement may be accelerated in the event of a default, as defined in the credit
agreement. The facility contains various covenants including
financial covenants with respect to consolidated interest and fixed charge
coverage and secured debt to secured asset value. As of December 31,
2009, we were in compliance with all these financial covenants. We
anticipate paying down the existing debt obligation with proceeds raised from
our follow-on offering.
In
addition, on August 17, 2009, we notified Wachovia Bank of our intent to
exercise the option to extend our outstanding $22.4 million loan for one year to
November 13, 2010. On November 10, 2009, we received a letter from Wachovia Bank
approving the loan extension which required an approximate principal reduction
of $6.5 million and satisfaction of certain conditions expressed per the loan
agreement. On November 12, 2009, we reduced our outstanding debt with
Wachovia Bank by paying down $6.5 million. On November 13, 2009, we
satisfied conditions expressed by Wachovia Bank and extended our loan maturity
date to November 13, 2010.
For the
notes payable that are due within the next twelve months, we are in the process
of negotiating with other financial institutions to refinance our debt maturing
in 2010. We plan to refinance all or a portion of the debt maturing in 2010 and
repay the other portion with proceeds from our follow-on offering.
Our
liquidity will increase as additional subscriptions are accepted and decrease as
net offering proceeds are expended in connection with the acquisition and
operation of properties and distributions in excess of operating cash flow are
made.
There may
be a delay between the sale of our shares and the purchase of
properties. During this period, net offering proceeds will be
temporarily invested in short-term, liquid investments that could yield lower
returns than investments in real estate.
Until
proceeds from our offerings are invested and generating operating cash flow
sufficient to fully fund distributions to stockholders, we intend to pay a
portion of our distributions from the proceeds of our offering or from
borrowings in anticipation of future cash flow. For the twelve months
ended December 31, 2009, distributions to stockholders were paid partially from
funds from operations and the remainder was paid from proceeds of our offerings
and general borrowings in anticipation of future cash flow.
As of
December 31, 2009, our advisor had incurred $4.5 million of organization and
offering costs on our behalf, including approximately $0.1 million of
organizational costs that have been expensed, approximately $4.4 million of
offering costs which reduce net proceeds of our Primary Offering. At
December 31, 2009, organization and offering costs incurred and reimbursed to
our advisor are approximately 2.8% of the gross proceeds of our Primary
Offering. In addition, our advisor will pay all of our organization and
offering expenses that, when combined with the sales commissions and dealer
manager fees that we incur exceed 13.5% of the gross proceeds from our initial
public offering.
The
advisor and its affiliates had incurred organizational and offering costs on our
behalf for our follow-on offering in the amount of approximately $0.7 million
and $0.3 million as of December 31, 2009 and December 31, 2008.
In no
event will we have any obligation to reimburse the advisor for these costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering or our follow-on public offering. As of December 31, 2009,
we had reimbursed to our advisor a total of $4.5 million for our initial
public offering and $0.7 million for our follow-on offering.
33
We will
not rely on advances from our advisor to acquire properties but our advisor and
its affiliates may loan funds to special purposes entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our
initial public offering to purchase the properties from the special purpose
entity.
We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our follow-on public offering. To the extent
sufficient proceeds from our follow-on offering is unavailable to repay such
debt financing within a reasonable time as determined by our board of directors,
we will endeavor to raise additional equity or sell properties to repay such
debt so that we will own our properties with no permanent
financing. In the event that our follow-on public offering is not
fully sold, our ability to diversify our investments may be
diminished. We are not aware of any material trends or uncertainties,
favorable or unfavorable, other than national economic conditions affecting real
estate generally, which we anticipate may have a material impact on either
capital resources or the revenues or income to be derived from the operation of
real estate properties.
Financial
markets have recently experienced unusual volatility and
uncertainty. Liquidity has tightened in all financial markets, including
the debt and equity markets. Our ability to fund property
acquisitions or development projects, as well as our ability to repay or
refinance debt maturities could be adversely affected by an inability to secure
financing at reasonable terms, if at all.
Election
as a REIT
We
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended, for the year ended December 31, 2009. Under the Internal
Revenue Code of 1986, we are not subject to federal income tax on income that we
distribute to our stockholders. REITs are subject to numerous
organizational and operational requirements in order to avoid taxation as a
regular corporation, including a requirement that they generally distribute at
least 90% of their annual taxable income to their stockholders. If we
fail to qualify for taxation as a REIT in any year, our income will be taxed at
regular corporate rates, and we may be precluded from qualifying for treatment
as a REIT for the four-year period following our failure to
qualify. Our failure to qualify as a REIT could result in us having a
significant liability for taxes.
Other
Liquidity Needs
Property
Acquisitions
We expect
to purchase properties and have expenditures for capital improvements, tenant
improvements and lease commissions in the next twelve months, however, those
amounts cannot be estimated at this time. We cannot assure, however,
that we will have sufficient funds to make any acquisitions or related capital
expenditures at all.
Debt
Service Requirements
On
June 30, 2006, we entered into a credit agreement with HSH Nordbank AG, New
York Branch, for a temporary credit facility that we will use during the
offering period to facilitate our acquisitions of properties in anticipation of
the receipt of offering proceeds. The credit agreement permits us to
borrow up to $50,000,000 secured by real property at a borrowing rate based on
LIBOR plus a margin ranging from 1.15% to 1.35% and requires payment of a usage
premium of up to 0.15% and an annual administrative fee. We may use
the entire credit facility to acquire real estate investments and we may use up
to 10% of the credit facility for working capital.
We are
entitled to prepay the obligations at any time without penalty. On
March 24, 2009, we notified HSH Nordbank of our intent to exercise the second of
two one-year options to extend the loan maturity date. On June 30,
2009, we satisfied conditions expressed by the lender and extended our loan
maturity date to June 30, 2010. The obligations under the credit
agreement may be accelerated in the event of a default as defined in the credit
agreement. As of December 31, 2009, the outstanding balance of
borrowings under this credit facility was approximately $15.9
million.
On
November 13, 2007, we entered into a loan agreement with Wachovia Bank in
connection with the acquisition of Orlando Small Bay
portfolio. Pursuant to the terms of the loan agreement, we may borrow
$22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured
by specified real estate properties. The loan agreement has a
maturity date of November 13, 2010. As of December 31, 2009, we have an
outstanding balance of approximately $15.9 million under this loan
agreement. The loan may be prepaid without penalty.
In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”). Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan. The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum. As of December
31, 2009, we have an outstanding balance of approximately $7.1 million under
this loan agreement. The monthly payment on this loan is
approximately $50,369.
We expect
to use net cash flows from operations and net proceeds from the sale of our
common stock to repay our outstanding debts.
34
Contractual
Obligations
The
following table reflects our contractual obligations as December 31, 2009,
specifically our obligations under long-term debt agreements and purchase
obligations:
Payment due by period
|
|||||||||||||||||||||
Contractual Obligations
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
||||||||||||||||
Notes
payable (1)
|
$
|
38,884,000
|
$
|
31,999,000
|
$
|
651,000
|
$
|
6,234,000
|
$
|
-
|
|||||||||||
Interest
expense related to long term debt (2)
|
$
|
2,238,000
|
$
|
774,000
|
$
|
1,162,000
|
$
|
302,000
|
$
|
-
|
|||||||||||
Note
receivable (3)
|
$
|
2,500,000
|
$
|
2,500,000
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||||
Note
receivable from related party (4)
|
$
|
1,100,000
|
$
|
1,100,000
|
$
|
-
|
$
|
-
|
$
|
-
|
(1) This
represents the sum of a credit agreement with HSH Nordbank, AG and loan
agreements with Wachovia Bank National Association and Transamerica Life
Insurance Company.
(2) Interest
expenses related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wachovia Bank National Association are calculated based on the
loan balances outstanding at December 31, 2009, one month LIBOR at December 31,
2009 plus appropriate margin ranging from 1.15% and 1.40%. Interest expense
related to loan agreement with Transamerica Life Insurance Company is based on a
fixed rate of 5.89% per annum.
(3)
We have committed to fund $10.0 million to entities that are parties to an
alliance with the managing member of our advisor. As of December 31,
2009, we have funded approximately $7.5 million of this amount.
(4)
On December 14, 2009, we committed to fund $8.0 million to a related party, an
affiliate of our advisor. As of December 31, 2009, we have funded
approximately $6.9 million of this amount.
Off-Balance
Sheet Arrangements
There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Inflation
Although
the real estate market has not been affected significantly by inflation in the
recent past due to the relatively low inflation rate, we expect that the
majority of our tenant leases will include provisions that would protect us to
some extent from the impact of inflation. Where possible, our leases
will include provisions for rent escalations and partial reimbursement to us of
expenses. Our ability to include provisions in the leases that
protect us against inflation is subject to competitive conditions that vary from
market to market.
Subsequent
Events
Sale
of Shares of Common Stock
Subsequent
to December 31, 2009, and through the issuance date of this report, we raised
approximately $0.7 million through the issuance of approximately 85,955 shares
of our common stock under our offering.
Critical
Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, or GAAP, requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We believe that our critical accounting policies are
those that require significant judgments and estimates such as those related to
real estate purchase price allocation, evaluation of possible impairment of real
property assets, revenue recognition and valuation of receivables, income
taxes, notes receivable and uncertain tax positions. These estimates
are made and evaluated on an on-going basis using information that is currently
available as well as various other assumptions believed to be reasonable under
the circumstances. Actual results could vary from those estimates,
perhaps in material adverse ways, and those estimates could be different under
different assumptions or conditions. Our significant accounting
policies are described in more details in Note 3 to the consolidated financial
statements.
35
Investments
in Real Estate
Upon
acquisition of a property, we allocate the purchase price of the property based
upon the fair value of the assets acquired, which generally consist of land,
buildings, site improvements and intangible lease assets or liabilities
including in-place leases, above market and below market leases. We
allocated the purchase price to the fair value of the tangible assets of an
acquired property by valuing the property as if it were vacant. The value of the
building is depreciated over an estimated useful life of 39 years.
In-place
lease values are calculated based on management’s evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with the
respective tenant.
Acquired
above and below market leases is valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term. The value of acquired above and below market leases is
amortized over the remaining non-cancelable terms of the respective leases as an
adjustment to rental revenue on our consolidated statements of
operations.
We amortize the value of in-place
leases and above and below market leases over the initial term of the respective
leases. Should a tenant terminate its lease, the unamortized portion of the
above or below market lease value is charged to revenue. If a
lease is terminated prior to its expiration, the unamortized portion of the
tenant improvements, and the in-place lease value is immediately charged to
expense.
Should a
significant tenant terminate their lease, the unamortized portion of intangible
assets or liabilities is charged to revenue.
The
estimated useful lives for lease intangibles range from 1 month to 10
years.
Impairment
of Real Estate Assets
Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles are individually evaluated for impairment when
conditions exist which may indicate that it is probable that the sum of expected
future undiscounted cash flows is less than the carrying amount.
Impairment indicators for our rental properties, properties undergoing
development and redevelopment, and land held for development is assessed by
project and include, but is not limited to, significant fluctuations in
estimated net operating income, occupancy changes, construction costs, estimated
completion dates, rental rates and other market factors. We assess
the expected undiscounted cash flows based upon numerous factors, including, but
not limited to, appropriate capitalization rates, construction costs, available
market information, historical operating results, known trends and
market/economic conditions that may affect the property and our assumptions
about the use of the asset, including, if necessary, a probability-weighted
approach if multiple outcomes are under consideration. Upon
determination that impairment has occurred and that the future undiscounted cash
flows are less than the carrying amount, a write-down will be recorded to reduce
the carrying amount to its estimated fair value.
Revenue
Recognition and Valuation of Receivables
Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Since
our leases may provide for free rent, lease incentives or rental increases at
specified intervals, we will be required to straight-line the recognition of
revenue, which will result in the recording of a receivable for rent not yet due
under the lease terms. Accordingly, our management will be required
to determine, in its judgment, to what extent the unbilled rent receivable
applicable to each specific tenant is collectible. Management will
review unbilled rent receivable on a quarterly basis and take into consideration
the tenant’s payment history, the financial condition of the tenant, business
conditions in the industry in which the tenant operates and economic conditions
in the area in which the property is located. In the event that the
collectability of unbilled rent with respect to any given tenant is in doubt, we
will record an increase in our allowance for doubtful accounts or record a
direct write-off of the specific rent receivable.
Income
Taxes
We have
elected to be taxed as a REIT for federal income tax purposes beginning with our
taxable year ending December 31, 2006. To qualify as a REIT, we must
meet certain organizational and operational requirements, including a
requirement to currently distribute at least 90% of the REIT’s ordinary taxable
income to stockholders. As a REIT, we generally will not be subject
to federal income tax on taxable income that it distributes to its
stockholders. If we fail to qualify as a REIT in any taxable year, we
will then be subject to federal income taxes on our taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT for
federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service granted us relief
under certain statutory provisions. Such an event could materially
adversely affect our net income and net cash available for distribution to
stockholders. However, we believe that we will be organized and
operate in such a manner as to qualify for treatment as a REIT, beginning with
our taxable year ending December 31, 2007, and intend to operate in the
foreseeable future in such a manner so that we will remain qualified as a REIT
in subsequent tax years for federal income tax purposes. 100% of the
distributions declared during 2008 represented a return of capital for federal
income tax purposes. 95.07% of the distributions declared during 2009
represented a return of capital for federal income tax purposes.
36
Notes
Receivable
On a
quarterly basis, we evaluate the collectability of our notes
receivable. Our evaluation of collectability involves judgment,
estimates and a review of the underlying collateral and borrower's business
models and future operations. During the quarter ended September 30, 2009, we
concluded that the collectability with regard to one of our notes cannot be
reasonably assured and therefore, we recorded a note receivable reserve of
approximately $4.6 million against the balance of the note. The amount of this
reserve has been included in our consolidated statements of operations under
impairment of notes receivable.
Uncertain
Tax Positions
In
accordance with the requirements of ASC 740-10, Income Taxes, favorable
tax positions are included in the calculation of tax liabilities if it is more
likely than not that our adopted tax position will prevail if challenged by tax
authorities. As a result of our REIT status, we are able to claim a
dividends-paid deduction on our tax return to deduct the full amount of common
dividends paid to stockholders when computing our annual taxable income, which
results in our taxable income being passed through to our stockholders. A REIT
is subject to a 100% tax on the net income from prohibited transactions. A
“prohibited transaction” is the sale or other disposition of property held
primarily for sale to customers in the ordinary course of a trade or business.
There is a safe harbor which, if met, expressly prevents the Internal Revenue
Service from asserting the prohibited transaction test. We have not had any
sales of properties to date. We have no income tax expense, deferred tax assets
or deferred tax liabilities associated with any such uncertain tax positions for
the operations of any entity included in the consolidated results of
operations.
Recently
Issued Accounting Pronouncements
Please
refer to Note 3 of the Notes to the Financial Statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. We invest our cash and cash
equivalents in government backed securities and FDIC insured savings account
which, by its nature, are subject to interest rate
fluctuations. However, we believe that the primary market risk to
which we will be exposed is interest rate risk relating to our credit
facilities.
Our
credit facility with HSH Nordbank AG, permits us to borrow up to $50,000,000
secured by real property at a borrowing rate based on LIBOR plus a margin
ranging from 1.15% to 1.35% and requires payment of a usage premium of up to
0.15% and an annual administrative fee. We may use the entire credit
facility to acquire real estate investments and we may use up to 10% of the
credit facility for working capital. We are entitled to prepay the
obligations at any time without penalty. On June 30, 2009, we satisfied
conditions expressed by the lender and extended our loan maturity date to June
30, 2010. The repayment of obligations under the credit agreement may be
accelerated in the event of a default, as defined in the credit
agreement. As of December 31, 2009, we have an outstanding balance of
approximately $15.9 million outstanding on this credit facility.
Our loan
agreement entered with Wachovia Bank, National Association permits us to $22.4
million at an interest rate 140 basis points over 30-day LIBOR, secured by
specified real estate properties. The loan agreement had a maturity
date of November 13, 2009, with a one-year extension at the option of the
borrower. On November 13, 2009, we satisfied conditions expressed by
Wachovia Bank and extended our loan maturity date to November 13, 2010. As of
December 31, 2009, we have an outstanding balance of approximately $15.9 million
under this loan agreement. The loan may be prepaid without
penalty.
We may be
exposed to the effects of interest rate changes primarily as a result of debt
under our credit facilities used to maintain liquidity and fund expansion of our
real estate investment portfolio and operations. Our interest rate
risk management objectives will be to monitor and manage the impact of interest
rate changes on earnings and cash flows by considering using certain derivative
financial instruments such as interest rate swaps and caps in order to mitigate
our interest rate risk on variable rate debt. We will not enter into
derivative or interest rate transactions for speculative purposes.
As of
December 31, 2009, we had borrowed approximately $31.8 million under our
variable rate credit facility and loan agreement. An increase in the
variable interest rate on the facilities constitutes a market risk as a change
in rates would increase or decrease interest incurred and therefore cash flows
available for distribution to shareholders. Based on the debt
outstanding as of December 31, 2009, a 1% change in interest rates would result
in a change in interest expense of approximately $318,000 per
year.
In
addition to changes in interest rates, the value of our real estate is subject
to fluctuations based on changes in the real estate capital markets, market
rental rates for office space, local, regional and national economic conditions
and changes in the credit worthiness of tenants. All of these factors
may also affect our ability to refinance our debt if
necessary.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the
index included at Item 15. Exhibits, Financial Statement
Schedules.
37
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not
applicable.
ITEM 9A(T). CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our senior management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. Our
Chief Executive Officer and our Chief Financial Officer have reviewed the
effectiveness of our disclosure controls and procedures and have concluded that
the disclosure controls and procedures were effective as of the end of the
period covered by this report.
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Our Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining adequate internal control over financial reporting, as such term
is defined in Rules 13a-15(f) under the Securities and Exchange Act of
1934. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Based on
their evaluation as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that we maintained
effective internal control over financial reporting as of December 31,
2009.
There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the our
registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.
ITEM
9B. OTHER INFORMATION
None.
38
PART III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2010.
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2010.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2010.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2010.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2010.
39
PART IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial
Statements
The
following financial statements are included in a separate section of
this Annual Report on Form 10-K commencing on the page numbers
specified below:
|
Report
of Independent Registered Public Accounting Firm
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
Consolidated
Statements of Equity for the Years Ended December 31, 2009, 2008, and
2007
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and
2007
|
Notes
to Financial Statements
|
(2) Financial
Statement Schedule
Schedule
II – Valuation and Qualifying Accounts
Schedule III
- Real Estate and Accumulated Depreciation
Schedule
IV – Mortgage Loan and Real Estate
(3) Exhibits
The
exhibits listed on the Exhibit Index (following the signatures section of
this report) are included, or incorporated by reference, in this annual
report
40
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Cornerstone
Core Properties REIT, Inc.
We have
audited the accompanying consolidated balance sheets of Cornerstone Core
Properties REIT, Inc. and subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of operations, equity and
cash flows for each of the three years in the period ended December 31,
2009. Our audit also included the financial statement schedules
listed in the index at Item 15. These consolidated financial
statements and the financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Cornerstone Core Properties REIT, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects,
the information set forth therein.
As
discussed in Note 3 to the consolidated financial statements, on January 1,
2009, the Company adopted a new accounting provision with respect to
noncontrolling interests and retrospectively adjusted all periods presented in
the financial statements.
/s/
DELOITTE & TOUCHE LLP
Costa
Mesa, California
March 29,
2010
F-2
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31, 2009 and 2008
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
18,673,000
|
$
|
26,281,000
|
||||
Investments
in real estate
|
||||||||
Land
|
38,604,000
|
39,138,000
|
||||||
Buildings
and improvements, net
|
87,671,000
|
92,327,000
|
||||||
Intangible
lease assets, net
|
804,000
|
1,490,000
|
||||||
127,079,000
|
132,955,000
|
|||||||
Notes
receivable, net
|
2,875,000
|
3,875,000
|
||||||
Notes
receivable from related party
|
6,911,000
|
—
|
||||||
Deferred
costs and deposits
|
29,000
|
351,000
|
||||||
Deferred
financing costs, net
|
174,000
|
211,000
|
||||||
Tenant
and other receivables, net
|
863,000
|
802,000
|
||||||
Other
assets, net
|
648,000
|
629,000
|
||||||
Total
assets
|
$
|
157,252,000
|
$
|
165,104,000
|
||||
LIABILITIES
AND EQUITY
|
||||||||
Liabilities:
|
||||||||
Notes
payable
|
$
|
38,884,000
|
$
|
45,626,000
|
||||
Accounts
payable and accrued liabilities
|
698,000
|
683,000
|
||||||
Payable
to related parties
|
347,000
|
122,000
|
||||||
Prepaid
rent, security deposits and deferred revenue
|
1,010,000
|
969,000
|
||||||
Intangible
lease liabilities, net
|
217,000
|
393,000
|
||||||
Distributions
payable
|
941,000
|
827,000
|
||||||
Total
liabilities
|
42,097,000
|
48,620,000
|
||||||
Commitments
and contingencies (Note 11)
|
||||||||
Equity:
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; no shares were
issued or outstanding at December 31, 2009 and
2008
|
—
|
—
|
||||||
Common
stock, $0.001 par value; 290,000,000 shares authorized; 23,114,201 and
20,570,120 shares issued and outstanding at December 31, 2009 and
2008, respectively
|
24,000
|
21,000
|
||||||
Additional
paid-in capital
|
128,559,000
|
121,768,000
|
||||||
Accumulated
deficit
|
(13,559,000
|
)
|
(5,456,000
|
)
|
||||
Total
stockholders’ equity
|
115,024,000
|
116,333,000
|
||||||
Noncontrolling
interest
|
131,000
|
151,000
|
||||||
Total
equity
|
115,155,000
|
116,484,000
|
||||||
Total
liabilities and equity
|
$
|
157,252,000
|
$
|
165,104,000
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2009, 2008 and 2007
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues:
|
||||||||||||
Rental
revenues
|
$
|
7,829,000
|
$
|
8,376,000
|
$
|
4,723,000
|
||||||
Tenant
reimbursements & other income
|
1,993,000
|
2,243,000
|
1,142,000
|
|||||||||
Interest
income from notes receivable
|
1,308,000
|
174,000
|
—
|
|||||||||
11,130,000
|
10,793,000
|
5,865,000
|
||||||||||
Expenses:
|
||||||||||||
Property
operating and maintenance
|
3,368,000
|
3,111,000
|
1,332,000
|
|||||||||
General
and administrative
|
1,911,000
|
1,421,000
|
2,359,000
|
|||||||||
Asset
management fees
|
1,519,000
|
1,328,000
|
707,000
|
|||||||||
Real
estate acquisition costs
|
430,000
|
—
|
—
|
|||||||||
Depreciation
and amortization
|
3,641,000
|
3,575,000
|
1,529,000
|
|||||||||
Provisions
for impairment
|
6,986,000
|
—
|
—
|
|||||||||
17,855,000
|
9,435,000
|
5,927,000
|
||||||||||
Operating
(loss) income
|
(6,725,000
|
)
|
1,358,000
|
(62,000
|
)
|
|||||||
Interest
income
|
8,000
|
250,000
|
605,000
|
|||||||||
Interest
expense
|
(1,394,000
|
)
|
(3,060,000
|
)
|
(3,147,000
|
)
|
||||||
Net
loss
|
(8,111,000
|
)
|
(1,452,000
|
)
|
(2,604,000
|
)
|
||||||
Less:
Net (loss) income attributable to the noncontrolling
interest
|
(8,000
|
)
|
3,000
|
(3,000
|
)
|
|||||||
Net
loss attributable to common stockholders
|
$
|
(8,103,000
|
)
|
$
|
(1,455,000
|
)
|
$
|
(2,601,000
|
)
|
|||
Basic
and diluted net loss per common share attributable to common
stockholders
|
$
|
(0.37
|
)
|
$
|
(0.10
|
)
|
$
|
(0.37
|
)
|
|||
Weighted
average number of common shares
|
21,806,219
|
14,241,215
|
7,070,155
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY
For
the Years Ended December 31, 2009, 2008 and 2007
Common Stock
|
||||||||||||||||||||||||||||
Number of
Shares
|
Common
Stock
Par Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
Noncontrolling
Interest
|
Total
|
||||||||||||||||||||||
BALANCE
— December 31, 2006
|
4,328,186 | $ | 4,000 | $ | 28,115,000 | $ | (1,400,000 | ) | $ | 26,719,000 | $ | 181,000 | $ | 26,900,000 | ||||||||||||||
Issuance
of common stock
|
5,637,800 | 6,000 | 45,008,000 | — | 45,014,000 | — | 45,014,000 | |||||||||||||||||||||
Redeemed
shares
|
(57,435 | ) | — | (417,000 | ) | — | (417,000 | ) | — | (417,000 | ) | |||||||||||||||||
Offering
costs
|
— | — | (5,271,000 | ) | — | (5,271,000 | ) | — | (5,271,000 | ) | ||||||||||||||||||
Distributions
declared
|
— | — | (3,196,000 | ) | — | (3,196,000 | ) | (14,000 | ) | (3,210,000 | ) | |||||||||||||||||
Noncontrolling
interest contribution
|
— | — | — | — | — | 145,000 | 145,000 | |||||||||||||||||||||
Net
loss
|
— | — | — | (2,601,000 | ) | (2,601,000 | ) | (3,000 | ) | (2,604,000 | ) | |||||||||||||||||
BALANCE
— December 31, 2007
|
9,908,551 | 10,000 | 64,239,000 | (4,001,000 | ) | 60,248,000 | 309,000 | 60,557,000 | ||||||||||||||||||||
Issuance
of common stock
|
9,264,536 | 10,000 | 73,891,000 | — | 73,901,000 | — | 73,901,000 | |||||||||||||||||||||
Redeemed
shares
|
(198,108 | ) | — | (1,437,000 | ) | — | (1,437,000 | ) | — | (1,437,000 | ) | |||||||||||||||||
Special
stock dividend
|
1,595,141 | 1,000 | (1,000 | ) | — | — | — | — | ||||||||||||||||||||
Offering
costs
|
— | — | (7,655,000 | ) | — | (7,655,000 | ) | — | (7,655,000 | ) | ||||||||||||||||||
Distributions
declared
|
— | — | (7,269,000 | ) | — | (7,269,000 | ) | (16,000 | ) | (7,285,000 | ) | |||||||||||||||||
Noncontrolling
interest distribution
|
— | — | — | — | — | (145,000 | ) | (145,000 | ) | |||||||||||||||||||
Net
(loss) income
|
— | — | — | (1,455,000 | ) | (1,455,000 | ) | 3,000 | (1,452,000 | ) | ||||||||||||||||||
BALANCE
— December 31, 2008
|
20,570,120 | 21,000 | 121,768,000 | (5,456,000 | ) | 116,333,000 | 151,000 | 116,484,000 | ||||||||||||||||||||
Issuance
of common stock
|
3,121,623 | 3,000 | 24,650,000 | — | 24,653,000 | — | 24,653,000 | |||||||||||||||||||||
Redeemed
shares
|
(577,542 | ) | — | (4,413,000 | ) | — | (4,413,000 | ) | — | (4,413,000 | ) | |||||||||||||||||
Offering
costs
|
— | — | (2,802,000 | ) | — | (2,802,000 | ) | — | (2,802,000 | ) | ||||||||||||||||||
Distributions
declared
|
— | — | (10,644,000 | ) | — | (10,644,000 | ) | (12,000 | ) | (10,656,000 | ) | |||||||||||||||||
Net
loss
|
— | — | — | (8,103,000 | ) | (8,103,000 | ) | (8,000 | ) | (8,111,000 | ) | |||||||||||||||||
BALANCE
– December 31, 2009
|
23,114,201 | $ | 24,000 | $ | 128,559,000 | $ | (13,559,000 | ) | $ | 115,024,000 | $ | 131,000 | $ | 115,155,000 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2009, 2008 and 2007
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$
|
(8,111,000
|
)
|
$
|
(1,452,000
|
)
|
$
|
(2,604,000
|
)
|
|||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||
Amortization
of deferred financing costs
|
236,000
|
435,000
|
505,000
|
|||||||||
Depreciation
and amortization
|
3,641,000
|
3,575,000
|
1,529,000
|
|||||||||
Straight
line rents and amortization of acquired above/below market lease
intangibles
|
(27,000
|
)
|
326,000
|
(41,000
|
)
|
|||||||
Provisions
for bad debt
|
409,000
|
323,000
|
—
|
|||||||||
Provisions
for impairment
|
6,986,000
|
—
|
—
|
|||||||||
Change
in operating assets and liabilities:
|
||||||||||||
Tenant
and other receivables
|
(406,000
|
)
|
(255,000
|
)
|
(299,000
|
)
|
||||||
Other
assets
|
(165,000
|
)
|
(36,000
|
)
|
(443,000
|
)
|
||||||
Account
payable and accrued liabilities
|
15,000
|
(381,000
|
)
|
668,000
|
||||||||
Payable
to related parties
|
351,000
|
6,000
|
(532,000
|
)
|
||||||||
Prepaid
rent, security deposits and deferred revenue
|
(41,000
|
)
|
—
|
61,000
|
||||||||
Net
cash provided by (used in) operating activities
|
2,888,000
|
2,541,000
|
(1,156,000
|
)
|
||||||||
Cash
flows from investing activities:
|
||||||||||||
Real
estate acquisitions
|
—
|
(8,192,000
|
)
|
(84,513,000
|
)
|
|||||||
Additions
to real estate
|
(171,000
|
)
|
(56,000
|
)
|
(36,000
|
)
|
||||||
Notes
receivable disbursements
|
(3,626,000
|
)
|
(3,875,000
|
)
|
—
|
|||||||
Notes
receivable disbursements to related parties
|
(20,911,000
|
)
|
—
|
—
|
||||||||
Note
receivable proceeds from related party
|
14,000,000
|
—
|
—
|
|||||||||
Escrow
deposits
|
—
|
150,000
|
(250,000
|
)
|
||||||||
Net
cash used in investing activities
|
(10,708,000
|
)
|
(11,973,000
|
)
|
(84,799,000
|
)
|
||||||
Cash
flows from financing activities
|
||||||||||||
Issuance
of common stock
|
18,596,000
|
69,791,000
|
43,309,000
|
|||||||||
Redeemed
shares
|
(4,413,000
|
)
|
(1,437,000
|
)
|
(417,000
|
)
|
||||||
Noncontrolling
interest contributions
|
—
|
—
|
145,000
|
|||||||||
Proceeds
from notes payable
|
—
|
—
|
49,809,000
|
|||||||||
Repayment
of notes payable
|
(6,742,000
|
)
|
(27,448,000
|
)
|
(4,161,000
|
)
|
||||||
Other
receivables
|
—
|
—
|
211,000
|
|||||||||
Offering
costs
|
(2,544,000
|
)
|
(8,462,000
|
)
|
(5,828,000
|
)
|
||||||
Deferred
offering costs
|
—
|
(285,000
|
)
|
—
|
||||||||
Distributions
paid to stockholders
|
(4,474,000
|
)
|
(2,699,000
|
)
|
(1,272,000
|
)
|
||||||
Distributions
paid to noncontrolling interest
|
(12,000
|
)
|
(161,000
|
)
|
(14,000
|
)
|
||||||
Deferred
financing costs
|
(199,000
|
)
|
(234,000
|
)
|
(220,000
|
)
|
||||||
Net
cash provided by financing activities
|
212,000
|
29,065,000
|
81,562,000
|
|||||||||
Net
(decrease) increase in cash and cash equivalents
|
(7,608,000
|
)
|
19,633,000
|
(4,393,000
|
)
|
|||||||
Cash
and cash equivalents - beginning of period
|
26,281,000
|
6,648,000
|
11,041,000
|
|||||||||
Cash
and cash equivalents - end of period
|
$
|
18,673,000
|
$
|
26,281,000
|
$
|
6,648,000
|
||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid for interest
|
$
|
1,199,000
|
$
|
2,904,000
|
$
|
2,215,000
|
||||||
Supplemental
disclosure of noncash activities:
|
||||||||||||
Distributions
declared not paid
|
$
|
941,000
|
$
|
827,000
|
$
|
364,000
|
||||||
Distributions
reinvested
|
$
|
6,057,000
|
$
|
4,110,000
|
$
|
1,703,000
|
||||||
Offering
costs payable to related parties
|
$
|
1,000
|
$
|
39,000
|
$
|
854,000
|
||||||
Accrued
distribution to noncontrolling interest
|
$
|
—
|
$
|
—
|
$
|
3,000
|
||||||
Accrued
additions to real estate
|
$
|
—
|
$
|
—
|
$
|
25,000
|
||||||
Receivable
from seller
|
$
|
—
|
$
|
—
|
$
|
96,000
|
||||||
Assumption
of loan in connection with property acquisition
|
$
|
—
|
$
|
7,375,000
|
$
|
—
|
||||||
Security
deposits and other liabilities assumed upon acquisition of real
estate
|
$
|
—
|
$
|
127,000
|
$
|
503,000
|
||||||
Loan
origination fee receivable
|
$
|
80,000
|
$
|
—
|
$
|
—
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009, 2008 and 2007
1.
Organization
Cornerstone
Core Properties REIT, Inc., a Maryland Corporation, was formed on
October 22, 2004 under the General Corporation Law of Maryland for the
purpose of engaging in the business of investing in and owning commercial real
estate. As used in this report, “we,” “us” and “our” refer to
Cornerstone Core Properties REIT, Inc. and its consolidated subsidiaries
except where the context otherwise requires. We are recently formed
and are subject to the general risks associated with a start-up enterprise,
including the risk of business failure. Subject to certain
restrictions and limitations, our business is managed by an affiliate,
Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was
formed on November 30, 2004 (the “advisor”), pursuant to an advisory
agreement.
Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004. At December 31,
2009, we owned a 99.88% general partner interest in the Operating Partnership
while the advisor owned a 0.12% limited partnership interest. We
anticipate that we will conduct all or a portion of our operations through the
Operating Partnership. Our financial statements and the financial
statements of the Operating Partnership are consolidated in the
accompanying consolidated financial
statements. All intercompany accounts and transactions
have been eliminated in consolidation.
2.
Public
Offerings
On
January 6, 2006, we commenced a public offering of a minimum of 125,000
shares and a maximum of 55,400,000 shares of our common stock, consisting of
44,400,000 shares for sale to the public (the “Primary Offering”) and 11,000,000
shares for sale pursuant to our distribution reinvestment plan. We
stopped making offers under our initial public offering on June 1, 2009 upon
raising gross offering proceeds of approximately $172.7 million from the sale of
approximately 21.7 million shares, including shares sold under the distribution
reinvestment plan. On June 10, 2009, SEC declared our follow-on
offering effective and we commenced a follow-on offering of up to 77,350,000
shares of our common stock, consisting of 56,250,000 shares for sale to the
public (the “Follow-On Offering”) and 21,100,000 shares for sale pursuant to our
dividend reinvestment plan. The Primary Offering and Follow-On
Offering are collectively referred to as the “Offerings”. We retained Pacific
Cornerstone Capital, Inc. (“PCC”), an affiliate of our advisor, to
serve as the dealer manager for the Offerings. PCC is responsible for
marketing our shares being offered pursuant to the Offerings. PCC and Terry
G. Roussel, the majority owner of our dealer manager and one of our officers and
directors, have been the subject of a non-public inquiry by the Financial
Industry Regulatory Authority ("FINRA") focused on private placements conducted
by our dealer manager during the period from January 1, 2004 through May 30,
2009. We are not the issuer of any of the securities offered in the
private placements that are the subject of FINRA’s investigation. One
such issuer is, however, the managing member of our Advisor. Without
admitting or denying the findings, our dealer manager and Terry G. Roussel have
settled the FINRA inquiry, which alleges that they violated NASD rules relating
to communications with the public (Rule 2210); supervision (Rule 3010) and
standards of commercial honor and principles of trade (Rule
2110). FINRA’s allegations, in sum, focus on claimed material
misstatements and omissions with respect to certain performance
targets. Our dealer manager consented to a censure and fine of
$700,000. Mr. Roussel consented to a fine of $50,000, suspension from
association with a FINRA member in all capacities for 20 business days, and
suspension from association with a FINRA member firm in a principal capacity for
an additional three months. Terry G. Roussel served as our dealer
manager’s president and chief compliance officer until October 1, 2009, when he
resigned as president. In January 2010, Terry G. Roussel transferred his chief
compliance officer responsibilities to a qualified registered principal. He
presently serves as one of our dealer manager’s two directors. Our
dealer manager has also provided additional disclosures, satisfactory to FINRA,
to investors in the private offerings.
We intend
to invest the net proceeds from the initial public and follow-on offerings
primarily in investment real estate including multi-tenant industrial real
estate located in major metropolitan markets in the United States. As
of December 31, 2009, a total of 20.8 million shares of our common stock had
been sold for aggregate gross proceeds of $165.9 million under the
Offerings.
3. Summary
of Significant Accounting Policies
The
summary of significant accounting policies presented below is designed to assist
in understanding our consolidated financial statements. Such
financial statements and accompanying notes are the representations of our
management, who is responsible for their integrity and
objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America, or GAAP, in all
material respects, and have been consistently applied in preparing the
accompanying consolidated financial statements.
F-7
Cash
and Cash Equivalents
We
consider all short-term, highly liquid investments that are readily convertible
to cash with a maturity of three months or less at the time of purchase to be
cash equivalents.
Investments
in Real Estate
In
December 2007, the Financial Accounting Standards Board (the “FASB”) issued
Accounting Standard Codification (“ASC”) ASC 805-10, Business
Combinations. In summary, ASC 805-10 requires the acquirer of
a business combination to measure at fair value the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, with limited exceptions. In addition, this standard
requires acquisition costs to be expensed as incurred. The standard
is effective for fiscal years beginning after December 15, 2008, and is to be
applied prospectively, with no earlier adoption permitted. We adopted
this standard on January 1, 2009 and have expensed acquisition costs
accordingly.
We
allocate the purchase price of our properties in accordance with ASC 805-10.
Upon acquisition of a property, we allocate the purchase price of the property
based upon the fair value of the assets acquired, which generally consist of
land, buildings, site improvements and intangible lease assets or liabilities
including in-place leases, above market and below market leases. We
allocated the purchase price to the fair value of the tangible assets of an
acquired property by valuing the property as if it were vacant. We are required
to make subjective assessments as to the useful lives of our depreciable
assets. We consider the period of future benefit of the asset to
determine the appropriate useful lives. Depreciation of our assets is being
charged to expense on a straight-line basis over the assigned useful
lives. The value of the building and improvements are depreciated over an
estimated useful life of 15 to 39 years.
In-place
lease values are calculated based on management’s evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with the
respective tenant.
Acquired
above and below market leases is valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term. The value of acquired above and below market leases is
amortized over the remaining non-cancelable terms of the respective leases as an
adjustment to rental revenue on our consolidated statements of
operations.
We will
amortize the value of in-place leases and above and below market leases over the
initial term of the respective leases. Should a tenant terminate its lease, the
unamortized portion of the above or below market lease value will be charged to
revenue. If a lease is terminated prior to its expiration, the
unamortized portion of the tenant improvements, intangible lease assets or
liabilities and the in-place lease value will be immediately charged to
expense. Should
a significant tenant terminate their lease, the unamortized portion of
intangible assets or liabilities of above and below market leases will be
charged to revenue.
Depreciation
of Real Property Assets
We are
required to make subjective assessments as to the useful lives of our
depreciable assets. We consider the period of future benefit of the
asset to determine the appropriate useful lives.
Depreciation
of our assets is being charged to expense on a straight-line basis over the
assigned useful lives.
Impairment
of Real Estate Assets
Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles are individually evaluated for impairment in when
conditions exist which may indicate that it is probable that the sum of expected
future undiscounted cash flows is less than the carrying
amount. Impairment indicators for our rental properties, properties
undergoing development and redevelopment, and land held for development is
assessed by project and include, but is not limited to, significant fluctuations
in estimated net operating income, occupancy changes, construction costs,
estimated completion dates, rental rates and other market factors. We
assess the expected undiscounted cash flows based upon numerous factors,
including, but not limited to, appropriate capitalization rates, construction
costs, available market information, historical operating results, known trends
and market/economic conditions that may affect the property and our assumptions
about the use of the asset, including, if necessary, a probability-weighted
approach if multiple outcomes are under consideration. Upon
determination that impairment has occurred and that the future undiscounted cash
flows are less than the carrying amount, a write-down will be recorded to reduce
the carrying amount to its estimated fair value. In the fourth quarter
of 2009, we recorded an impairment charge on one of our properties of
approximately $2.4 million accordingly.
Notes
Receivable
Notes
receivable represent mortgage notes and acquisition loans made to related
parties and notes made to real estate operating companies that are parties to an
alliance with the managing member of our advisor. On a quarterly basis, we
evaluate the collectability of our notes receivable. Our evaluation
of collectability involves judgment, estimates, and a review of the underlying
collateral and borrower’s business models and future operations in accordance
with ASC 450-20, Contingencies
– Loss Contingencies and ASC 310-10, Receivables.
F-8
Tenant
and Other Receivables, net
Tenant
and other receivables are comprised of rental and reimbursement billings due
from tenants and the cumulative amount of future adjustments necessary to
present rental income on a straight-line basis. Tenant receivables are recorded
at the original amount earned, less an allowance for any doubtful accounts,
which approximates fair value. Management assesses the realizability of
tenant receivables on an ongoing basis and provides for allowances as such
balances, or portions thereof, that become
uncollectible. For the years ended December 31, 2009, 2008 and 2007,
provisions for bad debt amounted to approximately $409,000, $323,000 and $0,
respectively, which are included in property operating and maintenance expenses
in the accompanying consolidated statements of operations.
Other
Asset, net
Other
assets consist primarily of leasing commissions net of amortization and prepaid
insurance. Additionally, other assets will be amortized to expense
over their future service periods. Balances without future
economic benefit are expensed as they are identified.
Deferred
Costs and Deposits
Included
in deferred costs and deposits as of December 31, 2008 are deferred offering
costs which consist of legal, accounting fees, and other administrative costs
incurred through the balance sheet date that related to the follow-on offering
of our shares. These deferred offering costs were charged to
stockholders’ equity upon commencement of the secondary offering in June
2009. Deposits primarily consist of utility deposits.
Deferred
Financing Costs
Costs
incurred in connection with debt financing are recorded as deferred financing
costs. Deferred financing costs are amortized using the straight-line basis
which approximates the effective interest rate method, over the contractual
terms of the respective financings.
Consolidation
Considerations for Our Investments in Joint Ventures
ASC
810-10, Consolidation,
which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity. Before concluding that it
is appropriate to apply the voting interest consolidation model to an entity, an
enterprise must first determine that the entity is not a variable interest
entity. We evaluate, as appropriate, our interests, if any, in joint
ventures and other arrangements to determine if consolidation is
appropriate.
Revenue
Recognition and Valuation of Receivables
Revenue
is recorded in accordance with ASC 840-10, Leases, and SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements, as amended” (“SAB 104”). Such accounting provisions require
that revenue be recognized after four basic criteria are met. These four
criteria include persuasive evidence of an arrangement, the rendering of
service, fixed and determinable income and reasonably assured collectability.
Leases with fixed annual rental escalators are generally recognized on a
straight-line basis over the initial lease period, subject to a collectability
assessment. Rental income related to leases with contingent rental
escalators is generally recorded based on the contractual cash rental payments
due for the period. Because our leases provide for free rent, lease incentives,
or other rental increases at specified intervals, we straight-line the
recognition of revenue, which results in the recording of a receivable for rent
not yet due under the lease terms. Our revenues are comprised largely of rental
income and other income collected from tenants. Tenant receivables are recorded
at the original amount earned, less an allowance for any doubtful
accounts. Management assesses the reliability of tenant receivables
on an ongoing basis and provides for allowances as such balances, or portions
thereof, become uncollectible.
Organizational
and Offering Costs
We are
required to reimburse the advisor for such organization and offering costs up to
3.5% of the cumulative capital raised in our public
offerings. Organization and offering costs include items such as
legal and accounting fees, marketing, due diligence, promotional and printing
costs and amounts to reimburse our advisor for all costs and expenses such as
salaries and direct expenses of employees of our advisor and its affiliates in
connection with registering and marketing our shares. Our public
offerings costs are recorded as an offset to additional paid-in capital, and all
organization costs are recorded as an expense at the time we become liable for
the payment of these amounts.
F-9
Noncontrolling
Interest in Consolidated Subsidiary
Noncontrolling
interest relates to the interest in the consolidated entities that are not
wholly-owned by us.
On
January 1, 2009, we adopted ASC 810-10-65, Consolidation, which
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. ASC 810-10-65 also requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest and requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling
interest.
ASC
810-10-65 was required to be applied prospectively after adoption, with the
exception of the presentation and disclosure requirements, which were applied
retrospectively for all periods presented. As a result of the adoption of ASC
810-10-65, we reclassified noncontrolling interests to permanent equity in the
accompanying consolidated balance sheet as of December 31, 2008 and
reclassified the noncontrolling interest’s proportionate share of losses and
income to be in included in net loss for the years ended December 31, 2008 and
2007. We will periodically evaluate individual noncontrolling
interests for the ability to continue to recognize the noncontrolling interest
as permanent equity in the consolidated balance sheets. Any noncontrolling
interest that fails to qualify as permanent equity will be reclassified as
temporary equity and adjusted to the greater of (a) the carrying amount, or (b)
its redemption value as of the end of the period in which the determination is
made.
Income
Taxes
We have
elected to be taxed as a REIT, under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the “Code) beginning with
our taxable year ending December 31, 2006. To qualify as a
REIT, we must meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90% of the REIT’s
ordinary taxable income to stockholders. As a REIT, we generally will not
be subject to federal income tax on taxable income that we distribute to our
stockholders. If we fail to qualify as a REIT in any taxable year, we will
then be subject to federal income taxes on our taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT for
federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service granted us relief
under certain statutory provisions. Such an event could materially
adversely affect our net income and net cash available for distribution to
stockholders. However, we believe that we will be organized and operate in
such a manner as to qualify for treatment as a REIT and intend to operate in the
foreseeable future in such a manner so that we will remain qualified as a REIT
for federal income tax purposes.
Uncertain
Tax Positions
In
accordance with the requirements of ASC 740-10, Income Taxes, favorable
tax positions are included in the calculation of tax liabilities if it is more
likely than not that our adopted tax position will prevail if challenged by tax
authorities. As a result of our REIT status, we are able to claim a
dividends-paid deduction on our tax return to deduct the full amount of common
dividends paid to stockholders when computing our annual taxable income, which
results in our taxable income being passed through to our stockholders. A REIT
is subject to a 100% tax on the net income from prohibited transactions. A
“prohibited transaction” is the sale or other disposition of property held
primarily for sale to customers in the ordinary course of a trade or business.
There is a safe harbor which, if met, expressly prevents the Internal Revenue
Service from asserting the prohibited transaction test. We have not had any
sales of properties to date. We have no income tax expense, deferred tax assets
or deferred tax liabilities associated with any such uncertain tax positions for
the operations of any entity included in the consolidated results of
operations.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to a concentration of credit risk are
primarily cash investments; cash is generally invested in investment-grade
short-term instruments. Currently, the Federal Deposit Insurance
Corporation, or FDIC, generally insures amounts up to $250,000 per depositor per
insured bank. This amount is scheduled to be reduced to $100,000 after December
31, 2013. As of December 31, 2009 we had cash accounts in excess of
FDIC insured limits.
As of
December 31, 2009, we owned three properties in the state of California, three
properties in the state of Arizona and six properties in the state of
Florida. Accordingly, there is a geographic concentration of risk
subject to fluctuations in each State’s economy.
Fair
Value of Financial Instruments
On
January 1, 2008, we adopted ASC 820-10, Fair Value Measurements and
Disclosures. ASC 820-10 defines fair value, establishes a framework for
measuring fair value in GAAP and provides for expanded disclosure about fair
value measurements.
We
adopted ASC 820-10 with respect to our non-financial assets and non-financial
liabilities on January 1, 2009. The adoption of ASC 820-10 with respect to our
non-financial assets and liabilities did not have a material impact on our
consolidated financial statements.
F-10
ASC
825-10, Financial
Instruments, requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.
We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.
Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, tenant and other receivables, payable to related parties,
prepaid rent and security deposits, deferred revenue, accounts payable and
accrued liabilities, note receivable from related party and notes payable. We
consider the carrying values of cash and cash equivalents, tenant and other
receivables, payable to related parties, note payable, prepaid rent and security
deposits, deferred revenue, accounts payable and accrued liabilities to
approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected
payment.
The fair
value of notes payable is estimated using lending rates available to
us for financial instruments with similar terms and maturities. As of
December 31, 2009 and 2008, the fair value of notes payable was $38,943,000
and $42,196,000, respectively, compared to the carrying value of $38,884,000 and
$45,626,000, respectively.
Basic
and Diluted Net Loss per Common Share Attributable to Common Stockholders
Basic net
loss per common share attributable to common stockholders per share is computed
by dividing net loss attributable to common stockholder by the
weighted-average number of common shares outstanding for the
period. For the years ended December 31, 2009, 2008 and 2007, stock
options of 65,000, 65,000 and 60,000, respectively have been excluded from
weighted-average number of common shares outstanding since their effect was
anti-dilutive.
Basic and
diluted net loss per share is calculated as follows:
Year Ended
December
31, 2009
|
Year Ended
December
31, 2008
|
Year Ended
December 31,
2007
|
||||||||||
Net
loss attributable to common stockholders
|
$
|
(8,103,000
|
)
|
$
|
(1,455,000
|
)
|
$
|
(2,601,000
|
)
|
|||
Basic
and diluted net loss per common share attributable to common
stockholders
|
$
|
(0.37
|
)
|
$
|
(0.10
|
)
|
$
|
(0.37
|
)
|
|||
Weighted
average number of shares outstanding — basic and
diluted
|
21,806,219
|
14,241,215
|
7,070,155
|
Use
of Estimates
The
preparation of our financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
the assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the reporting period. Actual results could
materially differ from those estimates.
Segment
Disclosure
ASC
280-10, Segment
Reporting, establishes standards for reporting financial and descriptive
information about an enterprise’s reportable segments. Our current
business consists of acquiring and operating real estate
assets. Management evaluates operating performance on an individual
property level. However, as each of our properties has similar economic
characteristics, our properties have been aggregated into one reportable
segment.
Recently
Issued Accounting Pronouncements
In
January 2010, the FASB issued an Accounting Standard Update (“ASU”) to
address implementation issues associated with the accounting for decreases in
the ownership of a subsidiary. The new guidance clarified the scope of the
entities covered by the guidance related to accounting for decreases in the
ownership of a subsidiary and specifically excluded in-substance real estate or
conveyances of oil and gas mineral rights from the scope. Additionally,
the new guidance expands the disclosures required for a business combination
achieved in stages and deconsolidation of a business or nonprofit activity. The
new guidance became effective for interim and annual periods ending on or after
December 31, 2009 and must be applied on a retrospective basis to the first
period that an entity adopted the new guidance related to noncontrolling
interests. The adoption of this new guidance did not have an impact on our
consolidated financial statements.
In
June 2009, the FASB established the FASB Accounting Standards Codification
(the “Codification”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange Commission
(“SEC”) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. The Codification became
effective for interim or annual financial periods ending after
September 15, 2009. The adoption of the Codification did not have a
material impact on our consolidated financial statements.
F-11
In
June 2009, the FASB issued new accounting literature with respect to the
consolidation of variable interest entity (“VIE”). The new guidance
impacts the consolidation guidance applicable to VIEs and among other things
require a qualitative rather than a quantitative analysis to determine the
primary beneficiary of a VIE, continuous assessments of whether a company is the
primary beneficiary of a VIE and enhanced disclosures about a company’s
involvement with a VIE. The new guidance applies to our fiscal year
beginning on January 1, 2010 and early adoption is prohibited. The
adoption of the new guidance did not have a material impact on our consolidated
financial statements.
In August
2009, the FASB issued Accounting Standards Update, or ASU, 2009-05, Measuring Liabilities at Fair
Value, ASU 2009-05 provides guidance on measuring the fair value of
liabilities under FASB Codification Topic 820, Fair Value Measurements and
Disclosure. Specifically, the guidance reaffirms that fair value
measurement of a liability assumes the transfer of a liability to a market
participant as of the measurement date, and presumes that the liability is to
continue and is not settled with a counterparty. Further, nonperformance risk
does not change after transfer of the liability. ASU 2009-05 also provides
guidance on the valuation techniques to estimate fair value of a liability in an
active and inactive market. ASU 2009-05 is effective for the first interim or
annual reporting period beginning after issuance. We adopted ASU 2009-05 on
October 1, 2009, which only applied to the disclosures fair value of financial
instruments. The adoption of ASU 2009-05 did not have a material impact on our
footnote disclosures.
4.
Investments
in Real Estate
As of
December 31, 2009, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
Land
|
Buildings
and Improvements
|
Acquired
Above-Market Leases
|
In-Place
Lease Value
|
Acquired
Below-Market Leases
|
||||||||||||||||
Investment
in real estate
|
$ | 38,604,000 | $ | 94,513,000 | $ | 1,666,000 | $ | 1,971,000 | $ | (824,000 | ) | |||||||||
Less:
accumulated depreciation and amortization
|
— | (6,842,000 | ) | (1,419,000 | ) | (1,414,000 | ) | 607,000 | ||||||||||||
Net
investments in real estate and related lease intangibles
|
$ | 38,604,000 | $ | 87,671,000 | $ | 247,000 | $ | 557,000 | $ | (217,000 | ) |
As of
December 31, 2008, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
Land
|
Buildings
and Improvements
|
Acquired
Above-Market Leases
|
In-Place
Lease Value
|
Acquired
Below-Market Leases
|
||||||||||||||||
Investments
in real estate
|
$ | 39,138,000 | $ | 96,431,000 | $ | 1,692,000 | $ | 2,009,000 | $ | (834,000 | ) | |||||||||
Less:
accumulated depreciation and amortization
|
— | (4,104,000 | ) | (1,232,000 | ) | (979,000 | ) | 441,000 | ||||||||||||
Net
investments in real estate and related lease intangibles
|
$ | 39,138,000 | $ | 92,327,000 | $ | 460,000 | $ | 1,030,000 | $ | (393,000 | ) |
Depreciation
expense associated with buildings and improvements for the years ended December
31, 2009, 2008 and 2007 was $3,001,000, $2,830,000 and $1,197,000,
respectively.
The
estimated useful lives for lease intangibles range from 1 month to 10 years. The
weighted-average amortization period for in-place lease, acquired above market
leases and acquired below market leases are 4.1 years, 4.8 years and 3.5 years,
respectively.
Amortization
associated with the lease intangible assets and liabilities for the years ended
December 31, 2009, 2008 and 2007 were $511,000, $1,308,000 and $434,000,
respectively.
F-12
Anticipated
amortization for each of the five following years ended December 31 is as
follows:
Lease
Intangibles
|
||||
2010
|
$
|
296,000
|
||
2011
|
$
|
164,000
|
||
2012
|
$
|
65,000
|
||
2013
|
$
|
41,000
|
||
2014
|
$
|
12,000
|
||
2015
and thereafter
|
$
|
9,000
|
Future
Minimum Lease Payments
The
future minimum lease payments to be received under existing operating leases for
properties owned as of December 31, 2009 are as follows:
Years ending December 31,
|
||||
2010
|
$
|
6,452,000
|
||
2011
|
4,968,000
|
|||
2012
|
3,155,000
|
|||
2013
|
1,425,000
|
|||
2014
|
402,000
|
|||
2015
and thereafter
|
621,000
|
|||
$
|
17,023,000
|
The
schedule does not reflect future rental revenues from the potential renewal or
replacement of existing and future leases and excludes property operating
expense reimbursements. Additionally, leases where the tenant can terminate the
lease with short-term notice are not included. Industrial space in the
properties is generally leased to tenants under lease terms that provide for the
tenants to pay increases in operating expenses in excess of specified
amounts.
5.
Notes
Receivable
In May
2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two
real estate operating companies, Servant Investments, LLC and Servant Healthcare
Investments, LLC (collectively, “Servant”). The loans mature on May 19,
2013. Servant is party to an alliance with the managing member
of our advisor. As of December 31, 2009, advances to
Servant were approximately $7.5 million. For the
year ended December 31, 2009 we earned interest income of approximately
$396,000. On a quarterly basis, we evaluate the collectability of our
notes receivable. Our evaluation of collectability involves judgment,
estimates and a review of the Servant business models and their future
operations. During the quarter ended September 30, 2009, we concluded
that the collectability of one note cannot be reasonably assured and therefore,
we recorded a note receivable reserve of approximately $4.6 million against the
balance of that note. The amount of this reserve has been included in our
consolidated statements of operations under provisions for
impairment.
6. Notes Receivable from Related
Parties
On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly-owned subsidiary of
Cornerstone Healthcare Plus REIT, Inc., a publicly offered, non-traded REIT
sponsored by affiliates of our sponsor. The loan was to mature on January
21, 2010 subject to the borrower's right to repay the loan, in whole or in part,
on or before January 21, 2010 without incurring any prepayment
penalty. On December 16, 2009, Caruth Haven L.P. repaid the full loan
amount. For the year ended December 31, 2009, we earned interest
income of approximately $0.8 million.
On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA. The loan matures on January 1, 2015, with no option to extend
and bears interest at a fixed rate of 8.0% for the term of the
loan. Interest will be paid monthly with principal due at
maturity. In addition, under the terms of the loan, we are entitled
to receive additional interest in the form of a 40% participation in the "shared
appreciation" of the property, which is calculated based on the net sales
proceeds if the property is sold, or the property's appraised value, less
ordinary disposition costs, if the Property has not been sold by the time the
loan matures. Prepayment of the loan is not permitted without our consent and
the loan is not assumable. As of December 31, 2009, the loan balance was
approximately $6.9 million. For the year ended December 31, 2009, we earned
interest income of approximately $31,000.
7.
Payable
to Related Parties
Payable
to related parties at December 31, 2009 and December 31, 2008 consists of
acquisition fees, expense reimbursement payable, sales commissions and
dealer manager fees to the advisor and PCC.
F-13
8. Equity
Common
Stock
Our
articles of incorporation authorize 290,000,000 shares of common stock with a
par value of $0.001 and 10,000,000 shares of preferred stock with a par value of
$0.001. As of December 31, 2009, we had cumulatively issued approximately
20.8 million shares of common stock for a total of approximately $165.9 million
of gross proceeds, exclusive of shares issued under our distribution
reinvestment plan. As of December 31, 2008, we had issued
approximately 18.4 million shares of common stock for a total of approximately
$147.3 million of gross proceeds, exclusive of shares issued under our
distribution reinvestment plan.
Distribution
Reinvestment Plan
We have
adopted a distribution reinvestment plan that allows our stockholders to have
distributions and other distributions otherwise distributable to them invested
in additional shares of our common stock. We have registered
21,100,000 shares of our common stock for sale pursuant to the distribution
reinvestment plan. The purchase price per share is 95% of the
price paid by the purchaser for our common stock, but not less than $7.60 per
share. As of December 31, 2009, approximately 1.59 million
shares had been issued under the distribution reinvestment plan. As
of December 31, 2008, approximately 794,000 shares had been issued under the
distribution reinvestment plan. We may amend or terminate the
distribution reinvestment plan for any reason at any time upon 10 days prior
written notice to participants.
Special
10% Stock Distribution
Our board
of directors authorized a special 10% stock distribution that was paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering. We reached this threshold on July 23, 2008.
The investors who purchased our stock on or before July 23, 2008 received
one additional share of stock for every 10 shares of stock they owned as of that
date. Due to this special 10% stock distribution on the first $125.0 million
raised in our initial public offering, we have issued 1,595,141 shares for which
we received no consideration.
For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase price of
such shares will be deemed to be equal to the purchase price paid by the
stockholder for shares held by the stockholder immediately prior to the special
10% stock distribution.
Stock
Repurchase Program
We have
adopted a share redemption program for investors who have held their shares for
at lease one year, unless the shares are being redeemed in connection with a
stockholder’s death. Under our current stock repurchase program, the repurchase
price will vary depending on the purchase price paid by the stockholder and the
number of years the shares are held. Our board of directors may
amend, suspend or terminate the program at anytime upon thirty (30) days prior
notice to our stockholders.
During
the year ended December 31, 2009 and 2008, we redeemed shares pursuant to our
stock repurchase program follows (in thousands, except per-share
amounts):
Period
|
Total
Number of
Shares
Redeemed
(1)
|
Average Price
Paid per Share
|
Approximate
Dollar Value of Shares Available That
May Yet Be
Redeemed Under the
Program
(1)
|
||||||||||
January
2008
|
12,500
|
$
|
7.20
|
$
|
2,050,000
|
||||||||
February
2008
|
12,484
|
$
|
7.36
|
$
|
2,275,000
|
||||||||
March
2008
|
2,016
|
$
|
7.15
|
$
|
2,573,000
|
||||||||
April
2008
|
396
|
$
|
7.09
|
$
|
2,856,000
|
||||||||
May
2008
|
14,616
|
$
|
7.61
|
$
|
3,031,000
|
||||||||
June
2008
|
31,607
|
$
|
7.51
|
$
|
3,219,000
|
||||||||
July
2008
|
56,504
|
$
|
7.59
|
$
|
3,357,000
|
||||||||
August
2008
|
22,569
|
$
|
7.15
|
$
|
4,013,000
|
||||||||
September
2008
|
6,600
|
$
|
6.76
|
$
|
4,584,000
|
||||||||
October 2008
|
5,299
|
$
|
6.60
|
$
|
5,048,000
|
||||||||
November 2008
|
21,992
|
$
|
6.55
|
$
|
5,421,000
|
||||||||
December 2008
|
11,525
|
$
|
6.53
|
$
|
5,959,000
|
||||||||
198,108
|
(1)
|
As
long as our common stock is not listed on a national securities exchange
or traded on any over-the-counter market, our stockholders who have held
their stock for at least one year may be able to have all or any portion
of their shares redeemed in accordance with the procedures outlined in the
prospectus relating to the shares they purchased. Under our
current stock repurchase program, the repurchase price will vary depending
on the purchase price paid by the stockholder and the numbers of years the
shares were held. During our offering and until September 12,
2012, we do not intend to redeem more than the lesser of (i) the
number of shares that could be redeemed using the proceeds from our
distribution reinvestment plan or (ii) 5% of the number of shares
outstanding at the end of the prior calendar year. After
September 12, 2012 the number of shares that we redeem under the stock
repurchase program is not expected to exceed 10% of the number outstanding
at the end of the prior year. Our board of directors may modify our stock
repurchase program so that we can redeem stock using the proceeds from the
sale of our real estate investments or other sources. We have no
obligations to repurchase our stockholders'
stock.
|
F-14
Period
|
Total
Number of
Shares
Redeemed
(1)
|
Average Price
Paid per Share
|
Approximate
Dollar Value of Shares Available That
May Yet Be
Redeemed Under the
Program
(1)
|
|||||||||
January
2009
|
40,873
|
$
|
6.77
|
$
|
3,805,000
|
|||||||
February
2009
|
137,395
|
$
|
7.51
|
$
|
2,773,000
|
|||||||
March
2009
|
152,984
|
$
|
7.61
|
$
|
1,608,000
|
|||||||
April
2009
|
83,284
|
$
|
7.55
|
$
|
979,000
|
|||||||
May
2009
|
43,057
|
$
|
7.51
|
$
|
655,000
|
|||||||
June
2009
|
65,454
|
$
|
7.67
|
$
|
152,000
|
|||||||
July
2009
|
23,079
|
$
|
7.39
|
$
|
—
|
|||||||
August
2009
|
8,113
|
$
|
7.99
|
$
|
—
|
|||||||
September
2009
|
8,178
|
$
|
7.98
|
$
|
—
|
|||||||
October 2009
|
—
|
$
|
—
|
$
|
—
|
|||||||
November 2009
|
3,560
|
$
|
7.96
|
$
|
—
|
|||||||
December 2009
|
11,565
|
$
|
7.97
|
$
|
—
|
|||||||
577,542
|
(1)
|
Until
September 21, 2012 our stock repurchase program limits the number of
shares of stock we can redeem (other than redemptions due to death of a
stockholder) to those that we can purchase with net proceeds from the sale
of stock under our distribution reinvestment plan in the prior calendar
year. Until September 21, 2012 we do not intend to redeem more than
the lesser of (i) the number of shares that could be redeemed using
the proceeds from our distribution reinvestment plan in the prior calendar
year or (ii) 5% of the number of shares outstanding at the end of the
prior calendar year. After September 21, 2012, the number of shares
that we redeem under the stock repurchase program is not expected to
exceed 10% of the number outstanding at the end of the prior year. Our
board of directors may modify our stock repurchase program so that we can
redeem stock using the proceeds from the sale of our real estate
investments or other sources.
|
Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources. We have no obligations to repurchase our stockholders' shares of
stock.
Employee
and Director Incentive Stock Plan
We have
adopted an Employee and Director Incentive Stock Plan (“the Plan”) which
provides for the grant of awards to our directors and full-time employees, as
well as other eligible participants that provide services to us. We have no
employees, and we do not intend to grant awards under the Plan to persons who
are not directors of ours. Awards granted under the Plan may consist of
nonqualified stock options, incentive stock options, restricted stock, share
appreciation rights, and distribution equivalent rights. The term of
the Plan is 10 years. The total number of shares of common stock
reserved for issuance under the Plan is equal to 10% of our outstanding shares
of stock at any time.
As of
December 31, 2009, we had granted our nonemployee directors nonqualified stock
options to purchase an aggregate of 80,000 shares of common stock, at an
exercise price of $8.00 per share. Of these options, 15,000 shares
lapsed and were canceled on November 8, 2008 due to the resignation of one
director from the board of directors on August 6, 2008.
Outstanding
stock options became immediately exercisable in full on the grant date, expire
in ten years after the grant date, and have no intrinsic value as of December
31, 2009. We did not incur any non-cash compensation expense for the
years ended December 31, 2009, 2008 and 2007, respectively. No stock
options were exercised or canceled during the twelve months ended December 31,
2009. No stocks options were exercised and 15,000 shares were
canceled during the twelve months ended December 31, 2008. We
record compensation expense for non-employee stock options based on the
estimated fair value of the options on the date of grant using the Black-Scholes
option-pricing model. These assumptions include the risk-free
interest rate, the expected life of the options, the expected stock price
volatility over the expected life of the options, and the expected distribution
yield. Compensation expense for employee stock options is recognized ratably
over the vesting term.
The
expected life of the options is based on evaluations of expected future exercise
behavior. The risk free interest rate is based on the U.S. Treasury
yield curve at the date of grant with maturity dates approximately equal to the
expected term of the options at the date of the
grant. Volatility is based on historical volatility of our
stock. The valuation model applied in this calculation utilizes
highly subjective assumptions that could potentially change over time, including
the expected stock price volatility and the expected life of an
option. Therefore, the estimated fair value of an option does not
necessarily represent the value that will ultimately be realized by a
non-employee director.
F-15
Equity
Compensation Plan Information
Our
equity compensation plan information as of December 31, 2009 and 2008 is as
follows:
Plan Category
|
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
|
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
Number of Securities
Remaining Available
for Future Issuance
|
|||||
Equity
compensation plans approved by security holders
|
65,000
|
$
|
8.00
|
See
footnote
|
(1)
|
|||
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||
Total
|
65,000
|
$
|
8.00
|
See
footnote
|
(1)
|
(1)
|
Our
Employee and Director Incentive Stock Plan was approved by our security
holders and provides that the total number of shares issuable under the
plan is a number of shares equal to ten percent (10%) of our outstanding
common stock. The maximum number of shares that may be granted
under the plan with respect to “incentive stock options” within the
meaning of Section 422 of the Internal Revenue Code is
5,000,000. As of December 31, 2009 and 2008, there were
approximately 23.1 million and 20.6 million shares of our common stock
issued and outstanding,
respectively.
|
Tax
Treatment of Distributions
The
income tax treatment for the distributions per share to common stockholders
reportable for the years ended December 31, 2009, 2008, and 2007 as
follows:
Per
Common Shares
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
Ordinary
income
|
$
|
0.02
|
4.93
|
%
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||||||
Return
of capital
|
$
|
0.46
|
95.07
|
%
|
$
|
0.47
|
100.00
|
%
|
$
|
0.43
|
100.00
|
%
|
9.
Related
Party Transactions
Our
company has no employees. Our advisor is primarily responsible for managing our
business affairs and carrying out the directives of our board of
directors. We have an advisory agreement with the advisor and a
dealer manager agreement with PCC which entitle the advisor and PCC to specified
fees upon the provision of certain services with regard to the Offering and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the advisor in providing services to us.
Advisory
Agreement
Under the
terms of the advisory agreement, our advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors. The advisory agreement
calls for our advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of
directors, and to perform other duties.
The fees
and expense reimbursements payable to our advisor under the advisory agreement
are described below.
Organizational and Offering
Costs. Costs of the offerings had been paid by the advisor on
our behalf and had been reimbursed to the advisor from the proceeds of the
offering. Organizational and offering costs consist of all expenses
(other than sales commissions and the dealer manager fee) to be paid by us in
connection with the offering, including our legal, accounting, printing, mailing
and filing fees, charges of our escrow holder and other accountable offering
expenses, including, but not limited to, (i) amounts to reimburse our
advisor for all marketing related costs and expenses such as salaries and direct
expenses of employees of or advisor and its affiliates in connection with
registering and marketing our shares (ii) technology costs associated with
the offering of our shares; (iii) our costs of conducting our training and
education meetings; (iv) our costs of attending retail seminars conducted
by participating broker-dealers; and (v) payment or reimbursement of bona
fide due diligence expenses. In no event will we have any
obligation to reimburse the advisor for organizational and offering costs
totaling in excess of 3.5% of the gross proceeds from our public
offerings.
F-16
As
of December 31, 2009, the advisor and its affiliates had incurred on our
behalf organizational and offering costs totaling approximately $5.2 million,
including approximately $0.1 million of organizational costs that have been
expensed and approximately $5.1 million of offering costs which reduce net
proceeds of our Offerings. Of this amount $4.4 million reduced the
net proceeds of our Primary Offering and $0.7 million reduced the net proceeds
of our Follow-on Offering. As of December 31, 2008, the advisor and
its affiliates had incurred on our behalf organizational and offering costs
totaling for our Primary Offering totaling approximately $4.5 million, including
approximately $0.1 million of organizational costs that have been expensed,
approximately $4.1 million of offering costs which reduced net proceeds of our
Primary Offering and $0.3 million which were deferred in anticipation of our
Follow-On Offering.
Acquisition Fees and
Expenses. The advisory agreement requires us to pay the
advisor acquisition fees in an amount equal to 2% of the gross proceeds of our
public offerings. We will pay the acquisition fees upon receipt of the
gross proceeds from our offerings. However, if the advisory agreement is
terminated or not renewed, the advisor must return acquisition fees not yet
allocated to one of our investments. In addition, we are required to
reimburse the advisor for direct costs the advisor incurs and amounts the
advisor pays to third parties in connection with the selection and acquisition
of a property, whether or not ultimately acquired. For the years ended
December 31, 2009, 2008 and 2007, the advisor earned approximately $0.4 million,
$1.4 million and $0.9 million of acquisition fees, respectively.
Management
Fees. The advisory agreement requires us to pay the advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
basis book carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with generally accepted accounting principals in the United States of
America (GAAP). In addition, we will reimburse the advisor for the direct
costs and expenses incurred by the advisor in providing asset management
services to us. These fees and expenses are in addition to management fees
that we expect to pay to third party property managers. For the years
ended 2009, 2008 and 2007, the advisor earned approximately $1.5 million, $1.3
million and $0.7 million, of asset management fees, respectively, which were
expensed.
Operating Expenses.
The advisory agreement provides for reimbursement of our advisor’s direct and
indirect costs of providing administrative and management services to
us. For years ended December 31, 2009, 2008 and 2007, approximately
$558,000, $798,000 and $517,000 of such costs, respectively, were
reimbursed. The advisor must pay or reimburse us the amount by which
our aggregate annual operating expenses exceed the greater of 2% of our average
invested assets or 25% of our net income unless a majority of our independent
directors determine that such excess expenses were justified based on unusual
and non-recurring factors.
Disposition
Fee. The advisory agreement provides that if the advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties. This disposition fee may
be paid in addition to real estate commissions paid to non-affiliates, provided
that the total real estate commissions (including such disposition fee) paid to
all persons by us for each property shall not exceed an amount equal to the
lesser of (i) 6% of the aggregate contract sales price of each property or
(ii) the competitive real estate commission for each property. We
will pay the disposition fees for a property at the time the property is
sold. For the years ended 2009, 2008 and 2007, we did not incur any
of such fees.
Subordinated Participation
Provisions. The advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or
termination of the advisor, as follows:
|
·
|
After
stockholders have received cumulative distributions equal to $8 per
share (less any returns of capital) plus cumulative, non-compounded annual
returns on net invested capital, the advisor will be paid a subordinated
participation in net sale proceeds ranging from a low of 5% of net sales
provided investors have earned annualized returns of 6% to a high of 15%
of net sales proceeds if investors have earned annualized returns of 10%
or more.
|
|
·
|
Upon
termination of the advisory agreement, the advisor will receive the
subordinated performance fee due upon termination. This fee
ranges from a low of 5% of the amount by which the sum of the appraised
value of our assets minus our liabilities on the date the advisory
agreement is terminated plus total distributions (other than stock
distributions) paid prior to termination of the advisory agreement exceeds
the amount of invested capital plus annualized returns of 6%, to a high of
15% of the amount by which the sum of the appraised value of our assets
minus its liabilities plus all prior distributions (other than stock
distributions) exceeds the amount of invested capital plus annualized
returns of 10% or more.
|
|
·
|
In
the event we list our stock for trading, the advisor will receive a
subordinated incentive listing fee instead of a subordinated participation
in net sales proceeds. This fee ranges from a low of 5% of the
amount by which the market value of our common stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 6%, to a high of 15% of the
amount by which the sum of the market value of our stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 10% or
more.
|
F-17
For the
years ended 2009, 2008 and 2007, we did not incur any of such fees.
Dealer
Manager Agreement
PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in our primary offerings. PCC, as Dealer Manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in the Offerings. The Dealer Manager is also entitled
to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the
gross proceeds from sales in the Offerings. The advisory agreement
requires the advisor to reimburse us to the extent that offering expenses
including sales commissions, dealer manager fees and organization and offering
expenses (but excluding acquisition fees and acquisition expenses discussed
above) are in excess of 13.5% of gross proceeds from the Offerings when combined
with the shares sold under the related distribution reinvestment
plan. For the years ended December 31, 2009, 2008 and 2007, we
incurred approximately $1.8 million, $7.0 million and $4.3 million,
respectively, payable to PCC for dealer manager fees and sales
commissions. Much of this amount was reallowed by PCC to third party
broker dealers. Dealer manager fees and sales commissions paid to PCC are a cost
of capital raised and, as such, are included as a reduction of additional paid
in capital in the accompanying consolidated balance sheets.
10.
Notes
Payable
On
June 30, 2006, we entered into a credit agreement with HSH Nordbank AG, for
a temporary credit facility that we will use during the offering period to
facilitate our acquisitions of properties in anticipation of the receipt of
offering proceeds. As of December 31, 2009 and 2008, we had net
borrowings of approximately $15.9 million, under the credit
agreement.
The
credit agreement permits us to borrow up to $50,000,000 secured by real property
at a borrowing rate based on LIBOR plus a margin ranging from 1.15% to 1.35% and
requires payment of a usage premium of up to 0.15% and an annual administrative
fee. One month LIBOR rates as of December 31, 2009 and 2008 were
0.23% and 0.44%, respectively. Margin used during the years ended
December 31, 2009 and 2008 was 1.15%. We may use the entire credit
facility to acquire real estate investments and we may use up to 10% of the
credit facility for working capital. We are entitled to prepay the
borrowings under the credit facility at any time without penalty. The repayment of obligations
under the credit agreement may be accelerated in the event of a default, as
defined in the credit agreement. On March 24, 2009, we notified HSH
Nordbank of our intent to exercise the second of two one-year options to extend
the loan maturity date. On June 30, 2009, we satisfied conditions expressed
by the lender and extended our loan maturity date to June 30, 2010. The
repayment of obligations under the credit agreement may be accelerated in the
event of a default, as defined in the credit agreement. The facility
contains various covenants including financial covenants with respect to
consolidated interest and fixed charge coverage and secured debt to secured
asset value. As of December 31, 2009, we were in compliance with all
these financial covenants. During the years ended 2009, 2008 and
2007, we incurred approximately $356,000, $1,393,000 and $2,455,000,
respectively, of interest expense related to the credit agreement.
On
November 13, 2007, we entered into a loan agreement with Wachovia Bank,
National Association to facilitate the acquisition of properties during our
offering period. Pursuant to the terms of the loan agreement, we may
borrow $22.4 million at an interest rate of 140 basis points over 30-day LIBOR
secured by specified real estate properties. The loan agreement had a
maturity date of November 13, 2009, with a one year extension at the
borrower’s option. It may be prepaid without penalty. On
November 12, 2009, we reduced our outstanding debt with Wachovia Bank by paying
down $6.5 million, and on November 13, 2009, we satisfied conditions expressed
by Wachovia Bank and extended our loan maturity date to November 13, 2010.
During the years ended December 31, 2009, 2008 and 2007, we incurred $380,000,
$927,000 and $187,000 of interest expense, respectively, related to the loan
agreement. As of December 31, 2009 and 2008, we had net borrowings of
approximately $15.9 million and $22.4 million, respectively, under the
credit agreement.
On April
17, 2008, in connection with our acquisition of Monroe North CommerCenter, we
entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”). Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan. The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum. As of December
31, 2009, we had net borrowings of approximately $7.1 million. During the years
ended 2009 and 2008, we incurred approximately $422,000 and $304,000,
respectively, of interest expense related to the loan
agreement. As of December 31, 2009 and 2008, we had net
borrowings of approximately $7.1 million and $7.3 million, respectively, under
the Loan Assumption Agreement.
F-18
The
principal payments due on Monroe North CommerCenter mortgage loan as of December
31, 2009 for each of the next five years are as follows:
Year
|
Principal
amount
|
|||
2010
|
$
|
193,000
|
||
2011
|
$
|
204,000
|
||
2012
|
$
|
217,000
|
||
2013
|
$
|
230,000
|
||
2014
|
$
|
6,234,000
|
In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.6 million and $1.4 million, as of December 31, 2009 and
December 31, 2008, respectively. These financing costs have been
capitalized and are being amortized over the life of the
agreements. During the years ended December 31, 2009, 2008 and 2007,
approximately $236,000, $435,000 and $505,000, respectively, of deferred
financing costs were amortized and included in interest expense in the
consolidated statements of operations.
For the
notes payable that are due within the next twelve months, we are in the process
of negotiating with other financial institutions to refinance our debt maturing
in 2010. We plan to refinance all or a portion of the debt maturing in 2010 and
repay the other portion with proceeds from our follow-on
offering.
11. Commitments
and Contingencies
On
January 22, 2009, our board of directors increased our commitment to loan funds
up to $10.0 million from $5.0 million to entities that are parties to an
alliance agreement with the managing member of our advisor. As of
December 31, 2009, we had funded approximately $7.5 million.
On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA. As of December 31, 2009, we had funded approximately $6.9
million.
We
monitor our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows. Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.
Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business. In the opinion
of management, these matters are not expected to have a material impact on our
consolidated financial position, results of operations, and cash flows. We
are not presently subject to any material litigation nor, to our knowledge, is
any material litigation threatened against us which if determined unfavorably to
us would have a material adverse effect on our cash flows, financial condition
or results of operations.
12. Selected
Quarterly Data (unaudited)
Set forth
below is certain unaudited quarterly financial information. We
believe that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly,
and in accordance with generally accepted accounting principles, the selected
quarterly information when read in conjunction with the consolidated financial
statements.
Quarters Ended
|
||||||||||||||||
December 31,
2009
|
September 30,
2009
|
June 30,
2009
|
March 31,
2009
|
|||||||||||||
Revenues
|
$
|
2,624,000
|
$
|
2,657,000
|
$
|
2,903,000
|
$
|
2,946,000
|
||||||||
Expenses
|
5,071,000
|
(4)
|
7,387,000
|
(3)
|
2,591,000
|
2,806,000
|
||||||||||
Operating
(loss) income
|
(2,447,000
|
)
|
(4,730,000
|
)
|
312,000
|
140,000
|
||||||||||
Net
loss
|
$
|
(2,771,000
|
)
|
$
|
(5,068,000
|
)
|
$
|
(47,000
|
)
|
$
|
(225,000
|
)
|
||||
Net
loss attributable to common stockholders
|
$
|
(2,768,000
|
)
|
$
|
(5,063,000
|
)
|
$
|
(47,000
|
)
|
$
|
(225,000
|
)
|
||||
Basic
& diluted net loss per common share attributable to common
stockholders
|
$
|
(0.12
|
)
|
$
|
(0.22
|
)
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
||||
Weighted
average shares
|
22,907,170
|
22,584,321
|
22,020,217
|
20,931,999
|
F-19
Quarters Ended
|
||||||||||||||||
December 31,
2008
|
September 30,
2008
|
June 30,
2008
|
March 31,
2008
|
|||||||||||||
Revenues
|
$
|
2,345,000
|
(2)
|
$
|
2,952,000
|
$
|
2,931,000
|
$
|
2,565,000
|
|||||||
Expenses
|
2,298,000
|
2,443,000
|
2,465,000
|
2,229,000
|
||||||||||||
Operating
income
|
47,000
|
509,000
|
466,000
|
336,000
|
||||||||||||
Net
loss
|
$
|
(488,000
|
)
|
$
|
(66,000
|
)
|
$
|
(342,000
|
)
|
$
|
(556,000
|
)
|
||||
Net
loss attributable to common stockholders
|
$
|
(488,000
|
)
|
$
|
(66,000
|
)
|
$
|
(347,000
|
)
|
$
|
(554,000
|
)
|
||||
Basic
& diluted net loss per common share attributable to common
stockholders
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
||||
Weighted
average shares (1)
|
19,721,231
|
17,677,146
|
13,829,889
|
11,535,060
|
(1)
|
All
per share computations have been adjusted to reflect common stock
dividends declared for all periods presented.
|
(2)
|
Revenue
was negatively impacted by approximately $0.6 million of intangible asset
write-offs during the three months ended December 31,
2008.
|
(3)
|
Included
in expenses for the three months ended September 30, 2009 is approximately
$4.6 million of notes receivable impairment
provision.
|
(4)
|
Included
in expenses for the three months ended December 31, 2009 is approximately
$2.4 million of real estate impairment
provision.
|
13.
Subsequent
Events
Sale
of Shares of Common Stock
Subsequent
to December 31, 2009 and through the issuance date of this report, we raised
approximately $0.7 million through the issuance of approximately 85,955 shares
of our common stock under our follow-on offering.
F-20
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
December 31,
2009
Description
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Deductions
|
Balance
at
End
of
Period
|
|||||||||||||
Year
Ended December 31, 2007:
|
|||||||||||||||||
Allowance
for doubtful accounts
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
Allowance
for notes receivable
|
-
|
-
|
-
|
-
|
|||||||||||||
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Year
Ended December 31, 2008:
|
|||||||||||||||||
Allowance
for doubtful accounts
|
$
|
-
|
$
|
323,000
|
$
|
(7,000
|
)
|
$
|
316,000
|
||||||||
Allowance
for notes receivable
|
-
|
-
|
-
|
-
|
|||||||||||||
$
|
-
|
$
|
323,000
|
$
|
(7,000
|
)
|
$
|
316,000
|
|||||||||
Year
Ended December 31, 2009:
|
|||||||||||||||||
Allowance
for doubtful accounts
|
$
|
316,000
|
$
|
409,000
|
$
|
(234,000
|
)
|
$
|
491,000
|
||||||||
Allowance
for notes receivable
|
-
|
4,626,000
|
-
|
4,626,000
|
|||||||||||||
$
|
316,000
|
$
|
5,035,000
|
$
|
(234,000
|
)
|
$
|
5,117,000
|
F-21
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
Schedule III
REAL
ESTATE AND ACCUMULATED DEPRECIATION
December
31, 2009
Initial
Cost
|
Costs
Captialized
|
Gross
Amount Invested
|
Accum
|
Life
on which
Depreciation
in
Latest
Income
|
|||||||||||||||||||||||||||||||
Description
|
Emcumbr
ance
|
Land
|
Building
&
Improv.
|
Subsequent
to Acquisition
|
Impairment
|
Land
|
Building
and
Improv.
|
Total
|
ulated Depreciation
|
Date of Construct
|
Date
Acquired
|
Statement
is Computed
|
|||||||||||||||||||||||
2111
S. Industrial Park, Tempe, AZ
|
$ | — | $ | 589,000 | $ | 1,479,000 | $ | 39,000 | $ | — | $ | 589,000 | $ | 1,518,000 | $ | 2,107,000 | $ | 152,000 |
1974
|
06/01/06
|
39
years
|
||||||||||||||
Shoemaker
Industrial Building Santa Fe Spring, CA
|
— | 952,000 | 1,521,000 | 6,000 | — | 952,000 | 1,527,000 | 2,479,000 | 140,000 |
2001
|
06/30/06
|
39
years
|
|||||||||||||||||||||||
15172
Goldenwest CircleWestminister, CA
|
(1)— | 7,186,000 | 4,335,000 | 46,000 | — | 7,186,000 | 4,381,000 | 11,567,000 | 352,000 |
1968
|
12/01/06
|
39
years
|
|||||||||||||||||||||||
20100
Western Avenue Torrance, CA
|
— | 7,775,000 | 11,265,000 | 156,000 | — | 7,775,000 | 11,421,000 | 19,196,000 | 1,001,000 |
2001
|
12/01/06
|
39
years
|
|||||||||||||||||||||||
Mack Deer Valley Phoenix,
AZ
|
(1)— | 6,305,000 | 17,056,000 | 18,000 | — | 6,305,000 | 17,074,000 | 23,379,000 | 1,329,000 |
2005
|
01/21/07
|
39
years
|
|||||||||||||||||||||||
Marathon
Tampa Bay, FL
|
— | 979,000 | 3,562,000 | 52,000 | 2,360,000 | 445,000 | 1,526,000 | 1,971,000 | — | 1989- 1994 |
04/02/07
|
37
years
|
|||||||||||||||||||||||
Pinnacle Peak Phoenix,
AZ
|
(1)— | 6,766,000 | 13,301,000 | — | — | 6,766,000 | 13,301,000 | 20,067,000 | 836,000 |
2006
|
10/02/07
|
39
years
|
|||||||||||||||||||||||
Orlando Small Bay
Portfolio Orlando, FL
|
(2)— | 6,612,000 | 30,957,000 | 133,000 | — | 6,612,000 | 31,090,000 | 37,702,000 | 2,321,000 | 2002- 2005 |
11/15/07
|
39
years
|
|||||||||||||||||||||||
Monroe
North CommerCenter Sanford, FL
|
7,078,000 | 1,974,000 | 12,675,000 | — | — | 1,974,000 | 12,675,000 | 14,649,000 | 711,000 | 2002- 2005 |
04/17/08
|
39
years
|
|||||||||||||||||||||||
Totals
|
$ | 7,078,000 | $ | 39,138,000 | $ | 96,151,000 | $ | 450,000 | $ | 2,360,000 | $ | 38,604,000 | $ | 94,513,000 | $ | 133,117,000 | $ | 6,842,000 |
(1)
The credit agreement with HSH Nordbank AG is secured by these properties. As of
December 31, 2009, the balance related to this credit agreement was $15.9
million.
(2)
The loan agreement with Wachovia Bank is secured by this portfolio. As of
December 31, 2009, the balance related to this loan agreement was $15.9
million.
F-22
(a) The
changes in total real estate for the years ended December 31, 2009, 2008 and
2007 are as follows.
Cost
|
Accumulated
Depreciation
|
|||||||
Balance
at December 31, 2006
|
$
|
34,802,000
|
$
|
(76,000
|
)
|
|||
2007
Acquisitions
|
84,600,000
|
(1,197,000
|
)
|
|||||
2007
Additions
|
74,000
|
—
|
||||||
Balance
at December 31, 2007
|
$
|
119,476,000
|
$
|
(1,273,000
|
)
|
|||
2008
Acquisitions
|
15,972,000
|
(2,831,000
|
)
|
|||||
2008
Additions
|
121,000
|
—
|
||||||
Balance
at December 31, 2008
|
$
|
135,569,000
|
$
|
(4,104,000
|
)
|
|||
2009
Impairment of real estate
|
(2,623,000
|
)
|
263,000
|
|||||
2009
Additions
|
171,000
|
(3,001,000
|
)
|
|||||
Balance
at December 31, 2009
|
$
|
133,117,000
|
$
|
(6,842,000
|
)
|
(b) For
federal income tax purposes, the aggregate cost of our 12 properties is
approximately $135.6 million.
F-23
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
SCHEDULE
IV - MORTGAGE LOAN ON REAL ESTATE
December 31,
2009
Description
|
|
Interest
Rate
|
Maturity
Date
|
|
Periodic
Payment
Terms
|
Prior
Liens
|
|
Face Amount
of
Mortgages
|
|
Carrying
Amount of
Mortgages
|
|||||||
First
mortgage on property:
|
|
|
|
|
|||||||||||||
Sherburne
Commons Mortgage Loan
Nantucket,
Massachusetts
|
|
8.0
|
%
|
1/1/2015
|
|
(3)
|
—
|
|
$
|
8,000,000
|
(1)
|
$
|
6,900,000
|
|
|||
|
|
|
$
|
8,000,000
|
|
$
|
6,900,000
|
(2)
|
(1)
|
The
loan commitment is for $8.0 million. As of December 31, 2009,
we have funded approximately $6.9
million.
|
(2)
|
The
following shows the changes in the carrying amounts of mortgage loans
during the year:
|
|
2009
|
|||
Balance
at beginning of year
|
|
$
|
—
|
|
New
mortgage loan
|
|
6,900,000
|
||
Deductions
during the year:
|
|
—
|
|
|
Collections
of principal
|
|
—
|
|
|
Foreclosures
|
|
—
|
|
|
|
||||
Balance
at the close of year
|
|
$
|
6,900,000
|
|
(3)
|
Interest
only payments are due monthly. Principal is due at
maturity.
|
F-24
SIGNATURES
Pursuant
to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORNERSTONE
CORE PROPERTIES REIT, INC.
|
||
Date:
March 30, 2010
|
By:
|
/s/ Terry G. Roussel |
TERRY
G. ROUSSEL
|
||
Chief
Executive Officer, President and
|
||
Chairman
of the Board of Directors
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 30, 2010.
Name
|
Title
|
|
Chief
Executive Officer and Director
|
||
/s/
Terry G. Roussel
|
(Principal
Executive Officer)
|
|
Terry
G. Roussel
|
||
Chief
Financial Officer (Principal
|
||
/s/
Sharon C. Kaiser
|
Financial
and Accounting Officer)
|
|
Sharon
C. Kaiser
|
||
/s/ Paul Danchik |
Director
|
|
Paul
Danchik
|
||
/s/
Jody J. Fouch
|
Director
|
|
Jody
J. Fouch
|
||
/s/
Daniel L. Johnson
|
Director
|
|
Daniel
L. Johnson
|
||
/s/
Lee Powell Stedman
|
Director
|
|
Lee
Powell Stedman
|
EXHIBIT INDEX
Ex.
|
Description
|
|
3.1
|
Amendment
and Restatement of Articles of Incorporation (incorporated by reference to
Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed
on March 24, 2006)
|
|
3.2
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.3 to
Post-Effective Amendment No. 1) to the Registration
Statement on Form S-11 (No. 333-121238) filed on December 23, 2005
(“Post-Effective Amendment No. 1”)
|
|
4.1
|
Subscription
Agreement (incorporated by reference to Appendix A to the prospectus
included on Post-Effective Amendment No. 5 to the Registration
Statement on Form S-11 (No. 333-121238) filed on
February 28, 2007)
|
|
4.2
|
Statement
regarding restrictions on transferability of shares of common stock (to
appear on stock certificate or to be sent upon request and without charge
to stockholders issued shares without certificates) (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-11 (No. 333-121238) filed on December 14,
2004)
|
|
4.3
|
Distribution
Reinvestment Plan (incorporated by reference to Appendix B to the
prospectus included on Post-Effective Amendment
No. 1)
|
|
4.4
|
Escrow
Agreement between registrant and U.S. Bank, N.A. (incorporated by
reference to Exhibit 4.4 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-121238) filed on
May 25, 2005)
|
|
10.1
|
Amended
and Restated Advisory Agreement (incorporated by reference to
Exhibit 10.1 to Post-Effective Amendment
No. 1)
|
|
10.2
|
Agreement
of Limited Partnership of Cornerstone Operating Partnership, L.P.
(incorporated by reference to Exhibit 10.2 to Pre-Effective Amendment
No. 4 to the Registration Statement on Form S-11
(No. 333-121238) filed on August 30,
2005)
|
|
10.3
|
Form of
Employee and Director Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-121238) filed on
May 25, 2005)
|
|
10.4
|
Purchase
and Sale Agreement, dated April 28, 2006, by and between Cornerstone
Operating Partnership, L.P. and Mack Deer Valley Phase II, LLC
(incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on May 18,
2006)
|
|
10.5
|
Purchase
and Sale Agreement, dated April 6, 2006, as amended as of
May 23, 2006, by and between Cornerstone Operating Partnership, L.P.,
Squamar Limited Partnership and IPM, Inc. (incorporated by reference
to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K
filed on May 26, 2006)
|
|
10.6
|
Purchase
and Sale Agreement, dated June 16, 2006, by and between Cornerstone
Operating Partnership, L.P. and First Industrial Harrisburg, LP
(incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on June 29,
2006)
|
|
10.7
|
Amendment
to Agreement of Purchase and Sale, dated June 19, 2006, by and
between Cornerstone Operating Partnership, L.P. and First Industrial
Harrisburg, LP (incorporated by reference to Exhibit 99.2 to the
Registrant’s Current Report on Form 8-K filed on June 29,
2006)
|
Ex.
|
Description
|
|
10.8
|
Credit
Agreement, dated as of June 30, 2006, among Cornerstone Operating
Partnership, L.P., Cornerstone Core Properties REIT, Inc.,
Cornerstone Realty Advisors, LLC, and HSH Nordbank AG, New York Branch
(incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on July 7,
2006)
|
|
10.9
|
Purchase
and Sale Agreement by and between Cornerstone Operating Partnership, L.P.
and See Myin & Ock Ja Kymm Family Trust dated August 17,
2006 (incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on October 13,
2006)
|
|
10.10
|
Amendment
to Agreement of Purchase and Sale by and between Cornerstone Operating
Partnership, L.P. and Myin & Ock Ja Kymm Family Trust, dated
September 18, 2006 (incorporated by reference to Exhibit 99.2 to
the Registrant’s Current Report on Form 8-K filed on October 13,
2006)
|
|
10.11
|
Purchase
and Sale Agreement by and between the registrant and WESCO Harbor Gateway,
L.P. dated November 1, 2006 (incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report on Form 8-K
filed on November 21, 2006)
|
|
10.12
|
15172
Goldenwest Circle Lease (incorporated by reference to Exhibit 99.1 to
the Registrant’s Current Report on Form 8-K filed on December 1,
2006)
|
|
10.13
|
Purchase
and Sale Agreement, as amended, by and between Cornerstone Operating
Partnership, L.P. and CP 215 Business Park, LLC dated March 16, 2007
(incorporated by reference to Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on May 7,
2007)
|
|
10.14
|
Purchase
and Sale Agreement (Building M-1) by and between Cornerstone Operating
Partnership, L.P. and CP 215 Business Park, LLC, a California limited
Liability company, dated May 2, 2007 (incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report of Form 8-K
filed on May 23, 2007).
|
|
10.15
|
Purchase
and Sale Agreement (Buildings W-4, W-5 and W-6) by and between Cornerstone
Operating Partnership, L.P. and CP 215 Business Park, LLC, a California
limited Liability company, dated May 2, 2007 (incorporated by
reference to Exhibit 99.2 to the Registrant’s Current Report of
Form 8-K filed on May 23, 2007).
|
|
10.16
|
Purchase
and Sale Agreement, as amended, by and between Cornerstone Operating
Partnership, L.P. and LaPour Deer Valley North, LLC, an Arizona limited
liability company dated August 10, 2007 (incorporated by reference to
Exhibit 99.1 to the Registrants Current Report on Form 8-K filed
on September 14, 2007)
|
|
10.17
|
Agreement
of Purchase and Sale between Cornerstone Operating Partnership and Small
Bay Partners, LLC dated September 14, 2007 (incorporated by reference
to Exhibit 99.1 to the Registrants Current Report on Form 8-K
filed on November 21, 2007)
|
|
10.18
|
Second
Amendment to Agreement of Purchase and Sale between Cornerstone Operating
Partnership and Small Bay Partners, LLC dated October 24, 2007
(incorporated by reference to Exhibit 99.2 to the Registrants Current
Report on Form 8-K filed on November 21,
2007)
|
|
10.19
|
Loan
Agreement, dated November 13 2007, by and among COP-Monroe, LLC,
COP-Carter, LLc, COP-Hanging Moss, LLC and COP-Goldenrod, LLC, as
borrower, and Wachovia Bank, National Association, as Lender (incorporated
by reference to Exhibit 99.3 to the Registrant’s Current Report on
Form 8-K filed on November 21, 2007)
|
|
10.20
|
Purchase
and Sale Agreement, by and between Cornerstone Operating Partnership, L.P.
and Realvest-Monroe Commercenter LLC, a Florida limited liability company,
dated November 29, 2007 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on April 23, 2008)
|
|
10.21
|
First
Amendment to Purchase and Sale Agreement, by and between Cornerstone
Operating Partnership, L.P. and Realvest-Monroe Commercenter LLC, a
Florida limited liability company, dated January 15, 2008
(incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed on April 23,
2008)
|
Ex.
|
Description
|
|||
10.22
|
Second
Amendment to Purchase and Sale Agreement, as amended, by and between
Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
LLC, a Florida limited liability company, dated January 28, 2008
(incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on April 23,
2008)
|
|||
10.23
|
Third
Amendment to Purchase and Sale Agreement, as amended, by and between
Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
LLC, a Florida limited liability company, dated February 20, 2008
(incorporated by reference to Exhibit 10.4 to the Registrant’s
Current Report on Form 8-K filed on April 23,
2008)
|
|||
10.24
|
Fourth
Amendment to Purchase and Sale Agreement, as amended, by and between
Cornerstone Operating Partnership, L.P. and Realvest-Monroe Commercenter
LLC, a Florida limited liability company, dated April 1, 2008
(incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K filed on April 23,
2008)
|
|||
10.25
|
Assumption
and Amendment of Note, Mortgage and Other Loan Documents, by and between
Cornerstone Operating Partnership, L.P. and TransAmerica Life Insurance
Company, an Iowa corporation, dated April 17, 2008 (incorporated by
reference to Exhibit 10.6 to the Registrant’s Current Report on
Form 8-K filed on April 23, 2008)
|
|||
10.26
|
Promissory
Note in the amount of $6,640,000.00 made as of December 14, 2009 by
NANTUCKET ACQUISITION LLC, to and in favor of CORNERSTONE OPERATING
PARTNERSHIP, L.P. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 17,
2009)
|
|||
10.27
|
Promissory
Note (with Shared Appreciation) in the amount of $1,360,000.00 made as of
December 14, 2009 by NANTUCKET ACQUISITION LLC, to and in favor of
CORNERSTONE OPERATING PARTNERSHIP, L.P. (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on
December 17, 2009)
|
|||
10.28
|
Leasehold
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture
Filing made as of December 14, 2009, by NANTUCKET ACQUISITION LLC, as
Borrower to CORNERSTONE OPERATING PARTNERSHIP, L.P., as Lender
(incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed on December 17, 2009)
|
|||
10.29
|
Operating
Agreement for Nantucket Acquisition LLC dated as of December 14, 2009
(incorporated by reference to Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K filed on December 17,
2009)
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference to
Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K
filed on March 24, 2006)
|
|||
21.1
|
List
of Subsidiaries (filed herewith)
|
|||
31.1
|
Certification
of Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|||
31.2
|
Certification
of Interim Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|||
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002 (filed
herewith)
|