UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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þ 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
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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: 1-13589
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
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Maryland
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36-4173047 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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330 North Wabash Avenue, Suite 2800, |
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Chicago, Illinois
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60611 |
(Address of principal executive offices)
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(Zip Code) |
(312) 917-1300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Series B Cumulative Redeemable
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New York Stock Exchange |
Preferred Shares of Beneficial Interest, |
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$0.01 par value per share |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). o Yes
o No
Indicate by check mark 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 the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. (See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act).
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Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer þ
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). o Yes þ No
The aggregate market value of the registrants common shares held by non-affiliates as of June
30, 2009 was $0 as the common shares were de-listed from the New York Stock Exchange as a result of
our acquisition by an affiliate of The Lightstone Group, LLC.
The number of the registrants common shares outstanding was 236,483 as of April 1, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Forward-Looking Statements
Forward-Looking Statements contained in this Annual Report on Form 10-K, including the section
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations,
include certain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, which reflect managements current view with respect to future events and
financial performance. Such forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those anticipated, and
include but are not limited to, the effects of future events on our financial performance; risks
associated with our high level of indebtedness and our ability to refinance our indebtedness as it
becomes due; the risk that we or our subsidiaries will not be able to satisfy scheduled debt
service obligations or will not remain in compliance with existing loan covenants; the effects of
future events, including tenant bankruptcies and defaults; risks associated with conflicts of
interest that exist with certain members of our board of trustees (Board) as a result of such
members affiliation with our sole common shareholder; the risks related to the office and, to a
lesser extent, industrial markets in which our properties compete, including the adverse impact of
external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and
preferences; the risk of potential increase in market interest rates from current rates; and risks
associated with real estate ownership, such as the potential adverse impact of changes, in the
local, economic climate on the revenues and the value of our properties as well as our tenants and
vendors operations. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of December 31, 2009.
Among the matters about which we have made assumptions are the following:
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future economic and market conditions which may impact the demand for office and
industrial space either at current or increased levels; |
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the extent of any tenant bankruptcies or defaults that may occur; |
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our ability or inability to renew existing tenant leases and lease up vacant space; |
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prevailing interest rates; |
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the effect of inflation and other factors on operating expenses and real estate taxes; |
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our ability to minimize various expenses as a percentage of our revenues; and |
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the availability of financing and capital. |
In addition, historical results and percentage relationships set forth in this Annual Report
on Form 10-K are not necessarily indicative of future operations.
3
PART I
ITEM 1. BUSINESS
Background and General
We are a fully-integrated, self-administered and self-managed real estate investment trust
(REIT) which owns, manages, leases, develops and redevelops office and industrial real estate,
primarily in metropolitan Chicago. As of December 31, 2009, our portfolio of properties consists of
8 office properties, containing an aggregate of 3.3 million net rentable square feet (see the
Properties section for detailed information concerning the individual properties). In addition,
we have a joint venture interest in one office property located in Phoenix, Arizona containing an
aggregate of 101,000 net rentable square feet which is accounted for as an investment in
unconsolidated joint venture under the equity method of accounting. We lease and manage
3.3 million square feet comprising all of our whollyowned properties. We are also the asset and
development manager for an approximately 1.1 million square foot office building located at 1407
Broadway Avenue in New York, New York, which is owned by affiliates of Lightstone, although we are
currently scheduled to cease performing these services effective April 4, 2010.
We were organized in Maryland on July 21, 1997 as a REIT under the Internal Revenue Code of
1986, as amended (the Code), for federal income tax purposes. On November 17, 1997, we completed
our initial public offering and contributed the net proceeds to Prime Group Realty, L.P. (our
Operating Partnership) in exchange for common and preferred partnership interests.
Prior to our acquisition (the Acquisition) by an affiliate of The Lightstone Group, LLC
(Lightstone), we were the sole general partner of the Operating Partnership and owned all of the
preferred units and 88.5% of the common units of the Operating Partnership then issued. Each
preferred unit and common unit entitled the owners thereof to receive distributions from our
Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares
are based upon the distributions received by us with respect to the common units and preferred
units we own in the Operating Partnership.
On June 28, 2005, our common shareholders approved the Acquisition by Lightstone and on
July 1, 2005, the Acquisition was completed. The Acquisition closed pursuant to the terms of the
previously announced agreement and plan of merger dated as of February 17, 2005, among certain
affiliates of Lightstone, the Operating Partnership and us. As a result of the Acquisition, each of
our common shares and limited partnership units of the Operating Partnership were cancelled and
converted into the right to receive cash in the amount of $7.25 per common share or unit, without
interest. In connection with the Acquisition, all outstanding options with an exercise price equal
to or greater than the sales price of $7.25 per share/unit were cancelled and each outstanding
option for a common share with an exercise price less than the sales price was entitled to be
exchanged for cash in an amount equal to the difference between $7.25 and the exercise price. Our
Series B Cumulative Redeemable Preferred Shares (the Series B Shares) remain outstanding after
the completion of the Acquisition and continue to be publicly traded on the New York Stock Exchange
(NYSE).
On January 11, 2010, we announced our intention to delist the Series B Shares from the NYSE
and remove the Series B Shares from registration under the Securities and Exchange Act of 1934, as
amended. We expect to voluntarily cease trading on the NYSE. After voluntarily delisting the
Series B Shares from the NYSE, we expect that the trading of the Series B Shares will be reported
in the Pink Sheets with Pink OTC Markets Inc. We also expect to subsequently file a Form 15 with
the SEC to deregister the Series B Shares under Sections 12(b) and 12(g) of the Exchange Act, and
to suspend the reporting obligations under Section 15(d) of the Exchange
Act. These actions are consistent with our previous disclosures and our obligations under the
Agreement and Plan of Merger (the Merger Agreement) relating to the July 2005 Acquisition of our
common shares. Upon filing for deregistration with the SEC, we will become a voluntary filer of
our reports under the Exchange Act through June 30, 2010 in accordance with our obligations under
the Merger Agreement. Our Board of Trustees has approved the delisting from the NYSE and
deregistration of the Series B Shares under the Exchange Act in order to save significant costs
associated with compliance with these regulatory provisions.
4
As a result of the Acquisition, Prime Office Company LLC (Prime Office), a subsidiary of
Lightstone, owns 100.0%, or 236,483, common shares and 99.1%, or 26,488,389, of the outstanding
common units in the Operating Partnership. Prime Group Realty Trust (the Company or PGRT) owns
0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred
units in the Operating Partnership, and remains the sole general partner of the Operating
Partnership and thus consolidates the Operating Partnership and its wholly-owned subsidiaries for
financial reporting purposes.
We conduct substantially all of our business through the Operating Partnership and its
subsidiaries. Certain services requested by our tenants, certain management and consulting
contracts and certain build-to-suit construction activities are conducted through Prime Group
Realty Services, Inc., a Maryland corporation and a wholly-owned subsidiary of the Operating
Partnership, and its affiliates (collectively, the Services Company). Our executive offices are
located at 330 North Wabash Avenue, Suite 2800, Chicago, Illinois 60611, and our telephone number
is (312) 917-1300.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT,
we will not be subject to federal income tax at the corporate level on our income as long as we
distribute 90.0% of our taxable income (excluding any net capital gain) each year to our
shareholders. Since our inception, we believe that we have complied with the tax rules and
regulations to maintain our REIT status. If we fail to qualify as a REIT in any taxable year, we
will be subject to federal income tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates. Even if we qualify as a REIT, we are subject to certain
state and local taxes on our income and property. In addition, our Services Companys income is
subject to state and federal income taxation.
Business Strategy
Our business strategy is to operate our portfolio of properties to create the optimum level of
service and value to our tenants, to retain our existing tenant base as their leases expire, to
search for and identify prospective tenants for space in our properties which is unoccupied or is
subject to expiring leases and to create maximum portfolio value for our shareholders.
Ongoing Operations. Our primary business is to focus on the operation, leasing and management
of our existing real estate properties.
We strive to enhance our property-level net operating income and cash flow by:
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engaging in pro-active leasing programs and effective property management; |
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managing operating expenses through the use of in-house management expertise; |
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maintaining and developing long-term relationships with a diverse tenant group; |
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attracting and retaining motivated employees by providing financial and other incentives;
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emphasizing value-added capital improvements to maintain and enhance our properties
competitive advantages in their submarkets. |
5
Liquidity and Capital Requirements. We require cash to pay our operating expenses, make
capital expenditures, fund tenant improvements, pay leasing and redevelopment costs, pay dividends
which are currently in arrears on our Series B Shares and service our debt and other short-term and
long-term liabilities. Cash on hand and net cash provided from operations represent our primary
sources of liquidity to fund these expenditures. In assessing our liquidity, key components include
our net income, adjusted for non-cash and non-operating items, and current assets and liabilities,
in particular accounts receivable, accounts payable and accrued expenses. For the longer term, our
debt and long-term liabilities are also considered key to assessing our liquidity.
In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our
taxable income (excluding capital gains) annually. See Item 5 Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for more information
regarding dividends on our common shares and on our Series B Shares.
For a discussion of recent transactions which may affect our liquidity and capital resources,
see Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources Recent Developments.
Our anticipated cash on hand (including restricted cash escrows) is expected to be sufficient
to fund our anticipated short-term capital needs over the next twelve months. In 2010, we
anticipate the need to fund significant capital expenditures to retenant and/or redevelop space
that has been previously vacated, or is anticipated to be vacated, or renew leases which are
expiring during the year. In order to fund these and our other short-term and long-term capital
needs, we expect to utilize available funds from cash on hand and existing or future escrows with
lenders. In addition, we may enter into capital transactions, which could include asset sales,
refinancings and modifications or extensions of existing loans. There can be no assurances that any
capital transactions will occur or, if they do occur, that they will yield adequate proceeds to
fund our short-term or long-term capital needs or will be on terms favorable to us.
The financial covenants contained in some of our loan agreements and guarantee agreements with
our lenders include minimum ratios for debt service coverage and other financial covenants. As of
December 31, 2009, we were in compliance with the requirements of all of our financial covenants.
On January 14, 2010, we received a notice of maturity date default from the special servicer of the
non-recourse mortgage note on our Brush Hill property. The loan matured on January 1, 2010 and was
not paid off. We are currently in the process of renegotiating the terms of a loan extension with
the special servicer and the lender. A default on the Brush Hill property loan does not cause a
default on any of the Companys other loans.
On February 26, 2010, our two subsidiaries which own separate portions of our Continental
Towers property notified the lender of the non-recourse mortgage notes on the Continental Towers
property that they were each in default under the terms of their respective loan documents due to
the property encumbered by one of the loans generating negative cash flows. On March 5, 2010,
these two subsidiaries and the Operating Partnership received notices from the lender that the
lender was accelerating the maturity date of the loans and demanding payment of all amounts due
under the loans. We are currently in discussions with the lender on these loans regarding a
potential deed in lieu of foreclosure transaction with the lender and other related matters. A
default on the Continental Towers property loans does not cause a default on any of the Companys
other loans.
Given our current level of debt, limited availability of unencumbered collateral and our
current financing arrangements, we may not be able to obtain additional debt financing or
replacement financing at interest rates that are below the rates of current return on our
properties.
6
Recent Developments
Dispositions. During the period from January 1, 2009 through December 31, 2009, we disposed
the following operating property:
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Net |
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Mortgage |
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Rentable |
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Sales Price |
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Debt |
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Month |
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Property |
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Location |
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Square Feet |
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(in millions) |
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(in millions) |
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Disposed |
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800-810 Jorie
Boulevard (1) |
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Oak Brook, IL |
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193,688 |
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N/A |
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$ |
21.3 |
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July |
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(1) |
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On July 28, 2009, we conveyed the property to the lender in exchange for a release of the
loan. The Company recorded an asset impairment charge of $6.9 million in the second quarter
to reduce the net book value of the property to its estimated fair value and recorded a gain
on extinguishment of debt of $8.3 million representing the difference between the extinguished
loan balance and accrued interest and the carrying value of the property. |
Indebtedness. During 2009, we completed the following transactions with respect to our
indebtedness:
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Loan |
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Principal |
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Amount |
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Interest |
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Transaction |
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Maturity |
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Collateral |
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(in millions) |
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Rate |
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Date |
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Date |
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Indebtedness Retirement |
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800-810 Jorie Boulevard (1) |
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First Mortgage |
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$ |
21.3 |
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13.33 |
% |
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7/09 |
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12/10 |
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PGRT ESH, Inc./Citicorp |
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Non-recourse |
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80.0 |
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Various |
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7/09 |
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6/09 |
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Loans (2) |
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Principal Payments |
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PGRT ESH, Inc./Citicorp Loan |
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Non-recourse |
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1.5 |
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Various |
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Various |
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6/09 |
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Amortization |
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Various |
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$ |
1.8 |
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Various |
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Various |
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Various |
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(1) |
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Default rate of interest since October 20, 2008. Due to the property generating negative cash flows, debt
service payments were discontinued as of September 1, 2008. Property conveyed to lender on July 28, 2009 in
exchange for a release of the loan. |
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PGRT ESH, Inc. assigned its membership interest in BHAC Capital IV, L.L.C. to an affiliate of the Companys
Chairman of the Board and our parent company, Prime Office. PGRT ESH, Inc. was released from liability for the
obligations under the Citicorp Loan. |
Total interest paid on mortgage notes payable was $26.1 million for the year ended
December 31, 2009, $33.6 million for the year ended December 31, 2008 and $38.6 million for the
year ended December 31, 2007. No capitalization of interest occurred in the years ended December
31, 2009, 2008 and 2007.
Shareholders and Board of Trustees Developments. On July 9, 2009, we held our Annual Meeting
of Shareholders, at which all of our existing Board Members were re-elected for additional one-year
terms. Our Board consists of (i) Messrs. David Lichtenstein, the Chairman and Principal of
Lightstone, Jeffrey Patterson, our President and Chief Executive Officer, Peyton Owen, Jr. the
President and Chief Operating Officer of Lightstone, and Bruno de Vinck, a Senior Vice President of
Lightstone, each of whom were re-elected as non-independent trustees, and (ii)
Messrs. George R. Whittemore, John M. Sabin, and Shawn R. Tominus, each of whom
were re-elected as independent trustees. Mr. Whittemore is the Chairman of our audit
committee and Messrs. Whittemore and Sabin were each named as financial experts of our audit
committee.
7
Competition
We compete with many other owners and developers of office and industrial real estate, some of
which may have greater financial and marketing resources or expertise. In addition, the amount of
available space in competitive properties in any particular market or submarket in which our
properties are located could have a material adverse effect on both our ability to lease space and
on the rents charged at our properties.
Services Company
We provide certain services requested by tenants through our Services Company. As a taxable
REIT subsidiary, our Services Company can provide services to tenants of our properties, even if
these services are not considered services customarily furnished in connection with the rental of
real estate property, without causing the rental income from the properties to be treated as other
than rents from real property by the Internal Revenue Service under the Code.
Government Regulations
Environmental Matters. Phase I or similar environmental assessments have been performed by
independent environmental consultants on all of our properties. Phase I assessments are intended to
discover information regarding, and to evaluate the environmental condition of, the surveyed
property and surrounding properties. Phase I assessments generally include a historical review, a
public records review, an investigation of the surveyed site and surrounding properties and the
preparation and issuance of a written report, but do not include soil sampling or subsurface
investigations.
In November 2001, at the request of the Department of the Army of the United States of America
(the DOA), we granted the DOA a right of entry for environmental assessment and response in
connection with our property known as the Atrium located at 280 Shuman Boulevard in Naperville,
Illinois. The DOA informed us that the property was located north of a former Nike missile base and
that the DOA was investigating whether certain regional contamination of the groundwater by
trichloethene (TCE) emanated from the base and whether the DOA would be required to restore the
environmental integrity of the region under the Defense Environmental Restoration Program for
Formerly Used Defense Sites. In December 2001, the results from the tests of the groundwater from
the site indicated elevated levels of TCE. It is currently our understanding based on information
provided by the DOA and an analysis prepared by its environmental consultants that (i) the source
of the TCE contamination did not result from the past or current activities on the Atrium property,
and (ii) the TCE contamination is a regional problem that is not confined to the Atrium. Our
environmental consultants have advised us that the United States Environmental Protection Agency
(the EPA) has issued a Statement of Policy towards owners of property containing contaminated
aquifers. According to this policy, it is the EPAs position that where hazardous substances have
come to be located on a property solely as a result of subsurface migration in an aquifer from an
offsite source, the EPA will not take enforcement actions against the owner of the property. The
groundwater underneath this property is relatively deep, and the property obtains its potable water
supply from the City of Naperville and not from a groundwater well. Accordingly, we do not
anticipate any material liability because of this TCE contamination.
8
Our 330 N. Wabash Avenue office property currently contains asbestos in the form of sprayon
insulation located on the decking and beams of the building. We have been informed by our
environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly
maintained and no remediation of the asbestos is necessary. However, we have in the past and we
may in the future voluntarily decide to remove or otherwise remediate some or all of this asbestos
in connection with the releasing and/or redevelopment of this property. Pursuant to the existing
accounting rules, a conditional asset retirement obligation is an unconditional legal obligation to
perform an asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the entity. Therefore,
we are required to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. We recorded an asset of
$10.2 million, $8.7 million and $4.3 million and a liability related to asbestos abatement of $9.7
million, $7.8 million and $4.5 million as of December 31, 2009, 2008 and 2007, respectively.
We believe that our other properties are in compliance in all material respects with all
federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances.
We have not been notified by any governmental authority, and are not otherwise aware of any
material noncompliance, liability or claim relating to hazardous or toxic substances in connection
with any of our other properties. None of the environmental assessments of our properties have
revealed any environmental liability that we believe would have a material adverse effect on our
financial condition or results of operations taken as a whole, nor are we aware of any such
material environmental liability. Nonetheless, it is possible that our assessments do not reveal
all environmental liabilities or that there are material environmental liabilities of which we are
unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current environmental condition of our
properties will not be affected by tenants, by the condition of land or operations in the vicinity
of our properties (such as the presence of underground storage tanks) or by third parties unrelated
to us. If compliance with the various laws and regulations, now existing or hereafter adopted,
exceeds our budgets for such items, our financial condition could be further adversely affected.
Costs of Compliance with Americans with Disabilities Act of 1990 (the ADA). Under the ADA,
all public accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements became effective in
1992. Compliance with the ADA requirements could require removal of access barriers, and
noncompliance could result in the imposition of fines by the federal government or an award of
damages to private litigants. We believe that our properties are substantially in compliance with
these requirements; however, we may incur additional costs to fully comply with the ADA. Although
we believe that such costs will not have a material adverse effect on our financial position, if
required changes involve a greater amount of expenditures than we currently anticipate, our capital
and operating resources could be adversely affected.
Other Regulations. Our properties are also subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety requirements. Failure to
comply with these requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. We believe that our properties are currently in material
compliance with all such regulatory requirements. However, there can be no assurance that these
requirements will not be changed or that new requirements will not be imposed which would require
us to make significant unanticipated expenditures and could have an adverse effect on our net
income and our capital and operating resources.
9
Insurance
In the regular course of our business, we maintain commercial general liability and all-risk
property insurance with respect to our properties provided by reputable companies with commercially
reasonable deductibles, limits and policy specifications customarily covered for similar
properties. Our management believes that such insurance adequately covers our properties.
On April 30, 2009, we obtained new property insurance policies in combination with
Lightstones overall insurance program for it and its affiliates consisting of (i) a primary
property policy in the amount of $10.0 million covering risk of physical damage to the properties
in our portfolio and (ii) several layers of excess property insurance in an aggregate amount of
$540.0 million covering physical property damages to our properties in excess of our primary policy
(the excess policies). Our primary policy and excess policies include insurance for acts of
terrorism as a covered loss. We are at risk for financial loss, which could be material, relating
to losses in excess of our policy limits. In addition, we are at risk under our insurance policies
for losses of any amount relating to occurrences which are not covered by our insurance policies,
such as occurrences excluded under the standard coverage exclusions such as acts of war, military
action, nuclear hazards, governmental action, illegal acts of the insured and pollution, which in
the event of such losses could be material.
Our primary policy and excess policies include coverage for flood and earthquake losses. In
certain instances our policy sub-limits for these losses may be less than the value of specific
properties. Our properties are not located in geographical areas typically subject to flood or
earthquake losses. However, we may be at risk of financial losses resulting from losses that exceed
these policy sub-limits.
We maintain liability insurance including but not limited to commercial general liability,
auto liability, garage liability and commercial umbrella insurance (the liability policies) in
amounts and limits that are similar to other property owners in geographic areas similar to that of
our properties. Our liability policies include coverage for acts of terrorism as a covered loss.
Additionally, we maintain workers compensation in compliance with statutory limits and requirements
as well as employers liability insurance. These policies contain standard exclusions that are
typical of liability insurance policies. We may be at financial risk for losses that exceed our
limits of liability or which may be excluded from the insurance policies, which could be material.
10
In connection with the ownership of our properties, certain events may occur that would
require us to expend funds for environmental remediation of some of our properties and adjacent
properties. Certain environmental exposures are excluded from coverage under our insurance
policies. Effective April 30, 2003, we obtained a pollution legal liability policy having a limit
of $10.0 million, which we have renewed on an annual basis since then and which includes coverage
for liability, third party property damage and remediation costs as a result of pollution
conditions. Pre-existing pollution conditions are excluded from the policy and certain property
locations may be excluded in the future by our insurers based on their ongoing due diligence as
policies are renewed or replaced. Costs not covered under our pollution legal liability policy
could be material, which could adversely affect our financial condition. We are unable to predict
changes in future environmental laws and the financial impact we may incur as result of these
changes.
Employees
As of December 31, 2009, we had 64 full-time employees. We believe that our relations with our
employees are satisfactory.
Available Information
We make available, free of charge, on our Internet web site, www.pgrt.com, 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 or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the reports are electronically filed with
the United States Securities and Exchange Commission. Copies of our governance guidelines, code of
ethics and the charter of our audit committee are also available, free of charge, on our Internet
web site, and are available in print to any shareholder who requests it from our investor relations
representative c/o Prime Group Realty Trust, Investor Relations, 330 North Wabash Avenue, Suite
2800, Chicago, Illinois 60611.
11
ITEM 1A. RISK FACTORS
Investment in us presents risks. If any of the risk events described below actually occurs,
our business, financial condition or results of operations could be adversely affected. Some
statements in the following risk factors discussion, constitute forward-looking statements.
Please refer to the section above entitled Forward-Looking Statements.
The current economic crises has resulted in a substantial loss in the value of office
properties in general across the United States and in our portfolio in particular.
During the current economic crises over the past approximately 18 months, market conditions
relating to office properties generally in the United States, and specifically in the Chicago area,
have significantly deteriorated, with vacancy rates increasing, rents decreasing, prices for
office properties falling and financing for such assets becoming difficult to obtain. This has
caused and may continue to cause in the future a substantial loss in the value of office properties
generally in the United States, and specifically in the Chicago area, including in our portfolio.
This decline in value has required us to take non-cash asset impairment charges on six of the
properties in our portfolio for calendar year 2009, in order to write-down the value of these
properties in our financial statements to their estimated fair values. This decline in property
values has also resulted in a net equity value per share for our Series B Shares that is
significantly less than their liquidation preference of $25.00 per share. This loss in value has
also resulted, and may in the future result, in the value of certain of our assets being less than
the amount of debt on such asset, in which case, if the income from the asset becomes insufficient
to service its debt, or if the debt on the asset matures and we are not able to refinance it on
acceptable terms, the property may be foreclosed on by the lender or we may agree to deed the
affected asset back to the lender in lieu of foreclosure. We may in the future have to take
additional impairment charges on these and/or other of our properties to the extent market
conditions continue to deteriorate or for other specific reasons applicable to a particular
property.
Our properties depend upon the Chicago metropolitan area economy and its demand for office
space.
With the exception of our joint venture interest in a building in Phoenix, Arizona, all of our
properties are located in the Chicago metropolitan area, which exposes us to greater economic risks
than if we owned properties in several geographic regions. Moreover, because our portfolio of
properties consists primarily of office buildings, a decrease in the demand for office space may
have a greater adverse effect on our business and financial condition than if we owned a more
diversified real estate portfolio. We are susceptible to adverse developments in the Chicago
metropolitan area, such as business layoffs or downsizing, industry slowdowns, relocations of
businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise
structures, infrastructure quality, increases in real estate and other taxes, costs of complying
with government regulations or increased regulation and other factors. We are also subject to
adverse developments in the national and Chicago regional office space markets, such as oversupply
of or reduced demand for office space. Any adverse economic or real estate developments in the
Chicago metropolitan area, or any decrease in demand for office space, including those resulting
from Chicagos or Illinois regulatory environment, business climate or fiscal problems, could
adversely impact our financial condition, results of operations, cash flow and our ability to
satisfy our debt service obligations, resume payment of dividends to holders of our Series B Shares
and our common shareholder and pay a significant portion of the amount due holders of the Series B
Shares upon redemption of such shares.
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Our debt level reduces cash available for operations, capital expenditures and dividends to
holders of our Series B Shares and our common shareholder, and has exposed us to the risk of
default under our debt obligations.
Payments of principal and interest on borrowings may leave us with insufficient cash resources
to operate our properties, fund necessary capital expenditures or to pay the distributions
necessary to maintain our REIT qualification. Our relatively high level of debt and the limitations
imposed on us by our loan agreements have and will probably continue to have significant adverse
consequences to us, including the following:
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our cash flow has been with respect to certain properties and may be in the
future with respect to additional properties insufficient to meet our required
principal and interest payments on the debt encumbering such properties; |
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we may be unable to borrow additional funds as needed or on favorable terms; |
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we may be unable to refinance our existing or future indebtedness at maturity
or the refinancing terms may be less favorable than the terms of our existing
indebtedness; |
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because a portion of our debt bears interest at variable rates, increases in
interest rates could increase our interest expense; |
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we may be forced to dispose of one or more of our properties, possibly on
disadvantageous terms; |
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we have defaulted on our obligations on certain properties and may in the
future default on our obligations on additional properties and the lenders or
mortgagees may foreclose on our affected properties that secure their loans and
receive an assignment of rents and leases, or we may convey the affected
properties to the lenders or mortgagees pursuant to a deed in lieu of foreclosure
or similar transaction; |
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we may violate restrictive covenants in our loan agreements, which would
entitle the lenders to accelerate our debt obligations; and |
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one of our subsidiaries that owns a parcel at the Continental Towers complex
has defaulted on its indebtedness, which has triggered a cross-default provision
in the indebtedness of a separate subsidiary that owns a parcel at the Continental
Towers complex and the relevant lender has accelerated the maturity date of both
loans. |
If and when all or any of these events occur, our financial condition, results of operations,
cash flow and our ability to satisfy our debt service obligations, resume payment of dividends to
holders of Series B Shares and our common shareholder and pay a significant portion of the amount
due holders of the Series B Shares upon redemption of such shares could be adversely affected. In
addition, foreclosures could create taxable income without accompanying cash proceeds, a
circumstance which could hinder our ability to meet the REIT distribution requirements imposed by
the Code.
In July 2009, we conveyed our 800-810 Jorie Boulevard property to the lender in exchange for a
release of the loan because the cash flow from the property was insufficient to make required debt
service payments.
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On February 26, 2010, our two subsidiaries which own separate portions of our Continental
Towers property notified the lender of the non-recourse notes on the property that they were each
in default under the terms of their respective loan documents due to the property encumbered by one
of the loans generating negative cash flow. On March 5, 2010, these two subsidiaries and the
Operating Partnership received notices from the lender that the lender was accelerating the
maturity date of the loans and demanding payment of all amounts due under the loans. It is highly
likely that these properties will be conveyed to the lender pursuant to a deal in lieu of
foreclosure or be foreclosed on by the lenders.
Additional properties we own may experience similar events if cash flow from such properties
are insufficient to make debt service payments or if the related loan matures and we are not able
to refinance it.
Domestic and international financial markets have experienced unusual volatility and
uncertainty and financing has become difficult to obtain on satisfactory terms.
Recently, domestic and international financial markets have experienced unusual volatility and
uncertainty. Financing has become difficult to obtain on satisfactory terms making it difficult to
refinance maturing debt or to obtain additional funds as they are needed. Our ability to borrow
additional funds as needed or on favorable terms and our ability to refinance our existing or
future indebtedness at maturity has already been significantly adversely impacted by these events.
If we are unable to borrow additional funds or refinance indebtedness at maturity, the probability
that one or more of the adverse consequences listed in the foregoing risk factors may occur will be
increased.
One or more of our properties may face foreclosure by our lenders or we may voluntarily decide
to convey one or more of our properties to a lender if a propertys cash flow is not enough to
service its debt, operating expenses and capital requirements or if we cannot refinance a property
upon debt maturity.
Many of our properties are encumbered by debt that is non-recourse to us (except for customary
non-recourse carve out provisions relating to matters such as fraud, misallocation of funds and
other customary exclusions which in many cases have been guaranteed). We recently disclosed that
the cash flow from the Continental Towers Complex, owned by two of our subsidiaries, is not
sufficient to service its first mortgage debt and that we are in discussions with the lender
regarding the Complex. Should the cash flow from any of these properties cease to be sufficient to
fund debt service, operating expenses and capital requirements relating to the property, or should
we be unable to refinance a propertys debt upon the maturity of such debt, we may face foreclosure
by our lenders on that property or we may decide to voluntarily convey the property to the relevant
lenders in lieu of foreclosure. We may or may not decide to fund cash flow shortfalls at a
property in such a circumstance. As a result of any loan defaults, our portfolio of properties may
be reduced (resulting in a higher allocation of overhead to each of our remaining properties), our
existing and potential future lenders and tenants may be less willing to consummate transactions
with us based on such loan default by us, our shareholders will not be able to realize any value
from any such properties and we may incur losses on our financial statements regarding any such
properties. In addition, although we are currently not aware of any events which would give rise
to liability under a non-recourse carve-out provision in our loan documents, if any lender
attempted to claim such liability exists, such lender may attempt to recover any losses from and/or
assert that a loan is completely recourse to, our Operating Partnership. In such a case, were the
lender successful, the liability could be very significant.
14
Our Operating Losses for the last several years have been significant and we project them to
continue for the foreseeable future, which has and will in the future significantly adversely
impact our ability to continue operating our business.
We have over the last several years experienced significant operating losses and we project
that our results of operations will continue to reflect operating losses in the foreseeable future.
For example, our loss from continuing operations was $(88.3) million in calendar year 2009,
$(58.3) million in calendar year 2008 and $(94.9) million in calendar year 2007. These continuing
operating losses have and will in the future, significantly adversely impact our ability to
continue operating our business, resume the payment of dividends to holders of our Series B Shares
and our common shareholder and pay a significant portion of the amount due holders of the Series B
Shares upon redemption of such shares. Among other things, continuing operating losses may result
in us having insufficient funds to pay for required tenant improvement costs to attract new tenants
and retain existing tenants, meet required principal and interest payments on our debt, and
otherwise operate our business. Continuing operating losses have in the past and may in the future
require that we dispose of one or more of our properties, possibly on disadvantageous terms.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire.
As of December 31, 2009, leases representing 29.1% of the annual rental revenue we receive for
the properties in our portfolio, excluding the joint venture property, will expire in 2010. In
addition, Jenner & Block at our 330 N. Wabash Avenue property, a tenant that represented
approximately 16.3% of our annual total revenues, and Aon Corporation at our Continental Towers
property, a tenant that represented approximately 3.6% of our annual total revenues, have not
renewed their leases and have vacated their space. Above market rental rates at some of our
properties have forced us and may continue to force us to renew or re-lease some expiring leases at
lower rates. There can be no assurance that leases will be renewed or that our properties will be
re-leased at net effective rental rates equal to or above their current net effective rental rates.
If the rental rates for our properties remain lower then for some existing leases, our existing
tenants do not renew their leases or we do not re-lease a significant portion of our available
space and space for which leases will expire, our financial condition, results of operations, cash
flow and our ability to satisfy our debt service obligations, resume the payment of dividends to
holders of Series B Shares and our common shareholder and pay a significant portion of the amount
due holders of the Series B Shares upon redemption of such shares will continue to be adversely
affected.
Our performance and value are subject to risks associated with real estate assets and with the
real estate industry.
Our financial condition, results of operations, cash flow and our ability to satisfy our debt
service obligations, resume the payment of dividends to holders of Series B Shares and our common
shareholder and pay a significant portion of the amount due holders of the Series B Shares upon
redemption of such shares depends on our ability to generate revenues in excess of (i) expenses,
(ii) scheduled principal payments on debt and (iii) capital expenditure requirements. It also
depends on our ability to obtain adequate financing and refinancing of our properties and to
consummate certain capital transactions as necessary to generate any needed liquidity. Events and
conditions generally applicable to owners and operators of real property in the United States
generally, and Chicago particularly, that are beyond our control have in the past and may in the
future continue to decrease cash available for distribution and the value of our properties. These
events include:
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poor economic conditions in general, including high unemployment resulting in a
need by tenants of less office space; |
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local oversupply, increased competition or reduction in demand for office
space; |
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inability to collect rent from tenants; |
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vacancies or our inability to rent space on favorable terms; |
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increased operating costs, including insurance premiums, utilities and real
estate taxes, due to inflation and other factors which may not necessarily be
offset by increased rents; |
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costs of complying with changes in governmental regulations; |
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the relative illiquidity of real estate investments; and |
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changing submarket demographics. |
In addition, periods of economic slowdown or recession, rising interest rates or declining
demand for real estate, or the public perception that any of these events may occur, have in the
past and may in the future result in a general decline in rents or an increased incidence of
defaults under existing leases, which has in the past and could in the future continue to adversely
affect our financial condition, results of operations, cash flow and ability to satisfy our debt
service obligations, resume the payment of dividends to holders of Series B Shares and our common
shareholder and pay a significant portion of the amount due holders of the Series B Shares upon
redemption of such shares.
The current economic recession and weakness in the debt and capital markets may adversely
affect our tenants ability to pay rent, our ability to lease space and our ability to obtain
capital and refinance our existing debt as it becomes due.
The current economic recession and weakness in the debt and capital markets is adversely
affecting many of our tenants and other parties we do business with, and has in the past could in
the future result in the inability of some of our tenants to pay their rent in a timely manner and
other parties we do business with to perform certain obligations they may have to us. In addition,
the well-publicized slowdown in the debt and capital markets could make it difficult for us to
obtain needed capital and financing, including refinancing our existing debt as it matures.
We face significant competition, which may decrease or prevent increases of the occupancy and
rental rates of our properties.
There are a number of office real estate companies that compete with us in seeking prospective
tenants. All of our properties are located in developed areas where there are generally other
properties of the same type and quality. Competition from other office properties affects our
ability to attract and retain tenants and maintain or increase rental rates, particularly in light
of the higher vacancy rates of many competing properties, which may result in lower-priced space
being available in such properties. If our competitors offer space at rental rates below current
market rates, or below the rental rates we currently charge our tenants, some of which are
significantly above current market rates, we may lose potential tenants and we may be pressured to
reduce our rental rates below those we currently charge in order to retain tenants when their
leases expire. As a result, our financial condition, results of operations, cash flow and ability
to satisfy our debt service obligations, resume the payment of dividends to holders of
Series B Shares and our common shareholder and pay a significant portion of the amount due holders
of the Series B Shares upon redemption of such shares could be adversely affected.
16
Covenants in our debt instruments could adversely affect our financial condition and restrict
our range of operating activities.
The loan documents evidencing our loans contain certain covenants with our lenders, which
include minimum ratios for debt service coverage and other financial covenants affecting us and
certain of our properties. These covenants could limit our flexibility in conducting our
operations and create the risk of a default on our indebtedness if we cannot continue to satisfy
them. In addition, these covenants could limit our ability, without the prior consent of the
appropriate lender, to further mortgage our properties. If we fail to comply with any of these
covenants and are not able to get a waiver from the relevant lender, we will be in default under
the relevant loan and any other loans, which may be cross-defaulted with such loan. If this
occurs, the relevant lenders may foreclose on our properties that secure the loans, pursue us or
our affiliates for any portion of the debt which is recourse and could adversely impact our
financial condition, results of operations, cash flow and our ability to satisfy our debt service
obligations, resume the payment of dividends to holders of Series B Shares and our common
shareholder and pay a significant portion of the amount due holders of the Series B Shares upon
redemption of such shares.
There can be no assurance that we will be able to resume the payment of cash dividends to
holders of Series B Shares or our common shareholder or pay a significant portion of the amount due
holders of the Series B Shares upon redemption of such shares.
We have not paid quarterly dividends on our Series B Shares during calendar year 2009 and for
the first quarter of 2010, and we currently do not pay regularly scheduled dividends on our common
shares. In addition, there can be no assurances that we will be able to pay these accrued and
unpaid Series B Share dividends or that we will be current in the future with dividends on our
Series B Shares. In addition to this current suspension of dividends, we have several times in the
past suspended the declaration and payment of dividends on both our preferred shares and our common
shares. For example, on June 14, 2006, our Board suspended the payment of dividends on our Series
B Shares. Dividends on the Series B Shares were not declared again until September 2006 when the
Board declared one quarterly dividend and were not brought current until the Board declared two
quarterly dividends in December 2006. In addition, in January 2002 our Board suspended dividends
on our common shares and in April 2002 dividends on the Series B Shares were suspended. This
suspension of preferred dividends was not lifted and dividends on our Series B Shares were not
brought current until the closing of our Acquisition by Lightstone in July 2005. Regular dividends
on our common shares were never resumed, although several common dividends have been declared since
the Acquisition. However, there can be no assurances that the current suspension of Series B Share
dividends will be lifted and that such dividends will be brought current, or that we will be able
to pay a significant portion of the amount due holders of the Series B Shares upon redemption of
such shares.
Our management and Board review our cash position, debt levels, requirements for cash reserves
and market conditions each quarter prior to making any decision with respect to paying
distributions/dividends. Any future dividends on our common shares and/or preferred shares will be
made at the discretion of our Board and there can be no assurances that future dividends will be
declared and paid. The declaration and payment of dividends will depend on the actual cash
available for distribution, our financial condition, capital requirements, the completion of
capital events, including refinancings and asset sales, the annual distribution requirements under
the REIT provisions of the Code and such other factors as our Board deems relevant.
Dividends/distributions on our common shares and common units in the Operating Partnership are not
permitted unless all current and any accumulated dividends on our Series B Shares and the related
preferred units in the Operating Partnership have been paid in full or declared and set aside for
payment.
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Only our Series B Shares are currently listed on the NYSE and, therefore, we are entitled to
rely on exemptions from certain corporate governance requirements.
Only our Series B Shares are currently listed on the NYSE. Under the NYSE rules, a company
which only lists preferred shares or debt is not required to comply with certain of the NYSE
corporate governance requirements, including (1) the requirement that a majority of the board of
directors of a listed company consist of independent directors, (2) the requirement that a listed
company have a nominating/corporate governance committee that is composed entirely of independent
directors with a written charter addressing the committees purpose and responsibilities and (3)
the requirement that a listed company have a compensation committee that is composed entirely of
independent directors with a written charter addressing the committees purpose and
responsibilities. We are currently utilizing these exemptions as they relate to our Board. As a
result, we do not have a majority of independent trustees, nor do we have nominating and corporate
governance and compensation committees. Accordingly, the holders of Series B Shares and our common
shareholder may not have the same protections afforded to shareholders of companies that are
subject to all of the NYSE corporate governance requirements.
The average daily trading volume of our Series B Shares is relatively small, thus making it
difficult to buy or sell significant numbers of shares without affecting the market price.
Our common shares are not publicly traded, and our Series B Shares are currently traded on the
NYSE. However, based on the recent historical average daily trading volume of our Series B Shares,
the acquisition or sale of a significant number of our Series B Shares on the NYSE will in most
cases affect the market price of the Series B Shares, thus making it difficult or impossible to buy
or sell large numbers of shares at or near the market price in effect immediately prior to any such
purchase or sale. In addition, because the purchase or sale of relatively small numbers of shares
may significantly impact the price of the Series B Shares, significant fluctuations in trading
volume and price variations may occur, which may be unrelated to our operating performance.
Our filing of financial statements and other reports with the SEC are scheduled to cease and
our Series B Shares are in the process of being delisted from the New York Stock Exchange.
The Agreement and Plan of Merger we entered into in connection with our July 2005 acquisition
by Lightstone contained a covenant that we would continue to file our quarterly and annual
financial statements on Form 10-Q and Form 10-K and current reports on Form 8-K with the SEC for
five years after the closing of the Acquisition. This five year period expires on June 30, 2010.
Even after the expiration of the five year period, we would continue to be obligated to file the
financial statements and reports with the SEC so long as any of our securities remain registered
under the Securities Exchange Act of 1934, as amended (the 1934 Act). On January 11, 2010, we
announced our intention to delist our Series B Shares from trading on the New York Stock Exchange,
and to remove our Series B Shares from registration under the 1934 Act. Delisting and
deregistering our Series B Shares may have an adverse effect on the marketability of our Series B
Shares and, as a result, the market price for our Series B Shares might decrease and/or become more
volatile. We currently intend to move the reporting of the trading of our Series B Shares to the
Pink Sheets with Pink OTC Markets Inc.
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Lightstone controls us, and will continue to control us, so long as one or more of its
affiliates own a majority of our common shares.
Lightstone, through its subsidiary, Prime Office, beneficially owns all of our outstanding
common shares. Our Board currently consists of seven trustees, of which three qualify as
independent under NYSE rules. As long as Lightstone beneficially owns a majority of our
outstanding common shares, Lightstone will continue to be able to elect the members of our Board,
subject to the rights of our Series B preferred shareholders to elect two Trustees when dividends
on the Series B Shares become six quarters in arrears. As a result, Lightstone will control all
matters affecting us, including (i) the composition of a majority of our Board and, through it, any
determination with respect to our business direction and policies, including the appointment and
removal of officers, (ii) any determinations with respect to mergers or other business
combinations, (iii) our acquisition or disposition of assets, (iv) our corporate finance activities
and (v) the payment of dividends and other amounts on our common shares and Series B Shares.
Lightstone and its designees on our Board may have interests that conflict with our interests.
Lightstone and its designees on our Board may have interests that conflict with, or are
different from, our own and/or holders of our Series B Shares. Conflicts of interest between
Lightstone and us and/or holders of our Series B Shares may arise, and such conflicts of interest
may not be resolved in a manner favorable to us and/or holders of Series B Shares, including
potential competitive business activities, corporate opportunities, indemnity arrangements,
registration rights, dividends on our common shares and Series B Shares and the exercise by
Lightstone of its ability to control our management and affairs. Our organizational documents do
not contain any provisions designed to facilitate resolution of actual or potential conflicts of
interests, or to ensure that potential business opportunities that may become available to both
Lightstone and us will be reserved for or made available to us. Pertinent provisions of law will
govern any such matters if they arise.
We may sell or acquire additional assets which could adversely affect our operations and
financial results.
We may sell or acquire real estate or acquire other real estate related companies when we
believe a sale or acquisition is consistent with our business strategies. In addition, we may be
required to sell one or more of our properties to obtain necessary cash proceeds for our own
liquidity needs. However, we may not be successful in completing a desired sale or acquisition in
a timely manner or pursuant to terms that are favorable to us, especially considering the current
extremely unfavorable market conditions in the United States generally and Chicago particularly.
Real estate investments may be, depending on market conditions, relatively difficult to buy and
sell quickly. Consequently, we may have limited ability to vary our portfolio in response to
changes in economic or other conditions. If we do complete an acquisition, we may not succeed in
leasing any newly acquired properties at rental rates or upon other terms sufficient to cover the
costs of acquisition and operations. Difficulties in integrating acquisitions may prove costly or
time-consuming and could divert managements attention from other important matters. We may also
abandon acquisition or sale opportunities prior to completion and consequently fail to recover
expenses already incurred and have thus devoted significant amounts of management time to a matter
not consummated. Furthermore, future acquisitions may expose us to significant additional
liabilities, some of which we may not be aware of at the time of acquisition. If and when we do
complete a sale, (i) we may not succeed in selling it for a price or on other terms favorable to
us, and (ii) we will forego any future income from such sold property.
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The redevelopment of certain of our existing properties that we may undertake could be costly
and involve substantial risk.
As part of our operating strategy we may redevelop certain of our existing properties to
upgrade the quality of an asset and/or change its use. Redeveloping real estate contains numerous
risks, which may adversely affect our ability to make dividends to holders of Series B Shares and
our common shareholder. These risks include the risks that (i) financing and/or equity for
redevelopment projects may not be available on favorable terms, (ii) long-term financing to
refinance any short-term construction financing may not be available upon the completion of a
project, (iii) the failure to complete construction of a project on schedule or within budget may
increase debt service expenses and construction costs, and (iv) we may be unable to find interested
users to lease space in a project after its completion, thus making it difficult or impossible for
us to recoup our investment or refinance our indebtedness on the project. We may also abandon
redevelopment projects prior to the commencement or completion or construction and (a) consequently
fail to recover expenses already incurred and (b) have thus devoted significant amounts of
management time to a project which was not completed.
We depend on significant tenants.
For the year ended December 31, 2009, the five largest tenants in our portfolio represented
approximately 34.2% of the total revenue generated by our properties, of which one tenant, Jenner &
Block, represented approximately 16.3% of our total revenues and will not renew their lease when it
expires in 2010. Our tenants may experience a downturn in their businesses, which may weaken their
financial condition, result in their failure to make timely rental payments or result in their
default under their leases. In the event of any tenant default, we may experience delays in
enforcing our rights as landlord and may incur substantial costs attempting to protect our
investment.
The bankruptcy or insolvency of a major tenant also may adversely affect the income produced
by our properties. If any tenant becomes a debtor in a case under the United States Bankruptcy
Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy
court might authorize the tenant to reject and terminate its lease with us. Our claim against the
tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less
than the remaining rent actually owned under the lease. Our claim for unpaid rent would likely not
be paid in full.
Our financial condition, results of operations, cash flow and our ability to satisfy our debt
service obligations, resume payment of dividends to holders of Series B Shares and our common
shareholder and pay a significant portion of the amount due holders of the Series B Shares upon
redemption of such shares have been in the past and could be in the future materially adversely
affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a
downturn in their business, or fail to renew their leases at all or renew on terms less favorable
to us than their current terms. For example, Jenner & Block and Aon Corporation, the tenants
referenced above, have not renewed their leases expiring April 30, 2010 and December 31, 2009,
respectively, and have vacated their space.
Failure to qualify as a REIT would have significant adverse consequences to us.
We currently operate our business so as to qualify as a REIT under the Code. Although our
management believes that we are organized and operate in such a manner, no assurance can be given
that we will continue to be able to operate in a manner so as to qualify or remain so qualified. We
have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and
the statements in this report are not binding on the IRS or any court. If we lose our REIT status,
we will face serious tax and other significant consequences that would substantially reduce or
eliminate the funds available for operations, capital improvements, debt service and
dividends and other distributions to holders of Series B Shares and our common shareholder for
each of the years involved because:
|
|
|
we would not be allowed a deduction for dividends to shareholders in computing
our taxable income and would be subject to federal income tax at regular corporate
rates; |
20
|
|
|
we also could be subject to the federal alternative minimum tax and possibly
increased state and local taxes; and |
|
|
|
unless we are entitled to relief under applicable statutory provisions, we
could not elect to be taxed as a REIT for four taxable years following the year
during which we were disqualified. |
In addition, if we fail to qualify as a REIT, we will not be required to make dividends to
holders of Series B Shares and our common shareholder, and all dividends to such shareholders will
be subject to tax as regular corporate dividends to the extent of our current and accumulated
earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could
impair our ability to raise capital, and would adversely affect the value of our common and
preferred shares.
Qualification as a REIT involves the satisfaction of numerous requirements established under
highly technical and complex Code provisions for which there are only limited judicial and
administrative interpretations. The complexity of these provisions and of the applicable Treasury
regulations under the Code is greater in the case of a REIT that, like us, holds its assets through
a partnership. The determination of various factual matters and circumstances not entirely within
our control may affect our ability to qualify as a REIT. For example, in order to qualify as a
REIT, we must satisfy a number of requirements, including requirements regarding the composition of
our assets and a requirement that at least 95% of our gross income in any year must be derived from
qualifying sources, such as rents from real property. Also, we must make distributions to
shareholders aggregating annually at least 90% of our REIT taxable income, if any (determined
without regard to the dividends paid deduction and by excluding net capital gains). In addition, no
assurance can be given that new legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to our qualification as a REIT or
the federal income tax consequences of such qualification.
Even if we qualify as and maintain our status as a REIT, we may be subject to certain federal,
state and local taxes on our income and property. For example, if we were to generate net income
from a prohibited transaction, such income will be subject to a 100.0% tax.
We are required to include in our annual reports a report of our management on our internal
controls over our financial reporting under Section 404 of the Sarbanes Oxley Act of 2002. Any
adverse results from future evaluations could result in a loss of investor confidence in our
financial reports and have an adverse effect on the stock price of our Series B Shares and the
value of our common shares.
We are required to comply with the Sarbanes-Oxley Act of 2002 and related rules and
regulations of the Securities Exchange Commission, which include the requirement that our annual
report include our managements report on internal controls over financial reporting. To comply
with these requirements the management report must contain an assessment of the effectiveness of
our internal controls as of the end of each calendar year and we must disclose any material
weakness in our internal controls over financial reporting that were identified by us. Management
previously assessed the effectiveness of our internal controls over financial reporting for
calendar years 2008 and 2007 and determined that as of December 31, 2008, and as
21
of December 31, 2007 in connection with the previously disclosed restatement of our financial
statements for calendar year 2007, that we had material weaknesses in our internal controls over
financial reporting as of these dates (see Item 9A Controls and Procedures for a more detailed
discussion of the foregoing). In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. For calendar year 2009, management has assessed the effectiveness of our
internal controls over financial reporting and determined that as of December 31, 2009, our
internal controls were effective. While our management believes that our consolidated financial
statements included in this report are fairly stated, in all material respects, in accordance with
GAAP, the fact that we have determined in the past that we had material weaknesses in our internal
controls in the past could cause investors and other third parties to be reluctant to rely on the
information contained in our financial statements. If we are unable in the future to assert that
our internal controls over financial reporting are effective, we could lose investor confidence in
our financial reports, which could have an adverse effect on the value of our Series B Shares and
common shares and our ability to continue to operate our businesses.
Other regulations could adversely affect our financial condition.
Our properties also are subject to various federal, state and local regulatory requirements,
such as state and local fire and safety requirements. Failure to comply with these requirements
could result in the imposition of fines by governmental authorities or awards of damages to private
litigants. We believe that our properties are currently in material compliance with all such
regulatory requirements. There can be no assurance, however, that these requirements will not be
changed or that new requirements will not be imposed which would require significant unanticipated
expenditures and could have an adverse effect on our financial condition, results of operations,
cash flow and our ability to satisfy our debt service obligations, resume the payment of dividends
to holders of Series B Shares and our common shareholder and pay a significant portion of the
amount due holders of the Series B Shares upon redemption of such shares.
Failure to hedge effectively against interest rate changes may adversely affect our results of
operations.
We have in the past, and may in the future, attempt to manage our exposure to interest rate
volatility by using interest rate hedging arrangements that involve risk, such as the risk that
counterparties may fail to honor their obligations under these arrangements, and that such
arrangements may not be effective in reducing our exposure to interest rate changes. Failure to
hedge effectively against interest rate changes may adversely affect our financial condition,
results of operations, cash flow and our ability to satisfy our debt service obligations, resume
the payment of dividends to holders of Series B Shares and our common shareholder and pay a
significant portion of the amount due holders of the Series B Shares upon redemption of such
shares.
Potential losses may not be covered by insurance.
Our properties are covered by comprehensive liability, fire, flood, extended coverage, rental
loss and all-risk insurance provided by various companies and with deductibles, limits and policy
specifications customarily covered for similar properties. Certain types of losses, however, may be
either uninsurable or not economically insurable, such as losses due to floods, riots or acts of
war, or may be insured subject to specified limitations, such as large deductibles or co-payments.
See Item 1 Business Insurance in this report for further discussion. Should an uninsured loss
or a loss in excess of insured limits occur, we could lose our investment in and the anticipated
future cash flow from the affected property and may be obligated on any mortgage indebtedness, to
the extent it is recourse indebtedness, or other obligations related to such property.
22
The completion of new developments adjacent to or near certain of our existing properties has
and will in the future adversely affect the leasing, operation and value of those properties.
New projects recently completed may adversely affect our leasing efforts and the value of our
properties, by among other things, blocking certain views from our properties and creating
increased traffic and congestion. In addition, two large new office developments were recently
completed in the vicinity of our 180 N. LaSalle and 330 N. Wabash Avenue properties. These
projects directly compete with our properties referred to above and could materially adversely
affect (i) our ability to retain our existing tenants, and attract new tenants, and (ii) for those
existing tenants that we are able to retain and new tenants that we are able to attract, the
business terms on which such deals are completed. This has and could in the future result in us
leasing less space at lower rents and with higher costs at our properties than we could have
otherwise, which has and will in the future materially adversely affect our financial condition,
results of operations, cash flow and our ability to satisfy our debt service obligations, resume
the payment of dividends to holders of Series B Shares and our common shareholder and pay a
significant portion of the amount due holders of the Series B Shares upon redemption of such
shares. For example, one of our largest tenants, Jenner & Block recently moved into space in a new
development in the vicinity of our 330 N. Wabash Avenue property.
Book losses that have been recognized and that may be recognized in the future have eroded,
and may in the future erode, our book value.
During 2008, we recognized aggregate losses of $66.0 million (including $5.6 million provision
for asset impairment) related to our investment in Extended Stay, Inc. (ESH). Although these
losses are non-cash GAAP losses, they have contributed to the erosion of the book value of our ESH
investment to zero as of December 31, 2008, compared to $40.3 million at December 31, 2007.
Consistent with our past practices and to the extent required by the accounting standards that
apply to us, we may in the future take charges relating to other investments and assets which may
also further reduce our book value. Although book value is reduced by non-cash charges such as
depreciation and losses flowing through from ESH, reporting a low or negative book value could have
adverse effects on us even if book value is not indicative of our actual value. These adverse
effects may include our inability or a reduction in our ability (i) to finance or refinance our
properties, (ii) lease space to tenants, (iii) consummate appropriate capital transactions, and
(iv) continue to operate our business in the manner that we have in the past, and also may include
a reduction in the market price of our Series B Shares. Our Board bases its decisions regarding
dividends and other similar matters on the Companys actual fair market net value and the solvency
of the Company, among other things, which has significantly declined in part due to the current
economic downturn and adverse financing conditions in the Chicago market and throughout the United
States, and not on the book value of the Company.
We may incur significant costs of complying with the Americans with Disabilities Act and
similar laws.
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations and
commercial facilities are required to meet certain federal requirements related to access and use
by disabled persons. Compliance with the ADA requirements could require removal of access barriers,
and non-compliance could result in imposition of fines by the federal government or an award of
damages to private litigants. Although we believe that our properties are substantially in
compliance with these requirements, we may incur additional costs to comply with the ADA,
especially in connection with the redevelopment of any of our properties. In addition, we are
required to operate our properties in compliance with fire and safety regulations, building codes
and other land use regulations, as they may be adopted by governmental agencies and bodies and
become applicable to our properties. If we incur substantial costs to comply with the ADA and any
other legislation, our financial condition, results of operations, cash flow and our ability to
satisfy our debt service obligations, resume the payment of dividends to holders of Series B Shares
and our common shareholder and pay a significant portion of the amount due holders of the Series B
Shares upon redemption of such shares could be adversely affected.
23
Liabilities for environmental matters could adversely affect our financial condition.
Under various federal, state and local laws, ordinances and regulations relating to the
protection of the environment, an owner or operator of real property may be held liable for the
costs of removal or remediation of certain hazardous or toxic substances located on or in such
property. These laws often impose liability without regard to whether the owner or operator was
responsible for, or even knew of, the presence of such hazardous or toxic substances. The costs of
investigation, removal or remediation of such substances may be substantial, and the presence of
such substances may adversely affect the owners or operators ability to rent or sell such
property or to borrow funds using such property as collateral and may expose such owner or operator
to liability resulting from any release of or exposure to such substances. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at another location also may be liable
for the costs of removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. Certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third parties may also
seek recovery from owners or operators of real properties for personal injury associated with
asbestos-containing materials and other hazardous or toxic substances. In connection with the
ownership (direct or indirect), operation, management and development of real properties, we may be
considered an owner or operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and therefore potentially liable for removal or
remediation costs, as well as certain other related costs, including governmental penalties and
injuries to persons and property. See Item 1 Business Government Regulations Environmental
Matters of this report for a more detailed discussion of environmental matters affecting us.
Future terrorist attacks in the United States could harm the demand for, and the values of,
our properties.
Future terrorist attacks in the United States, such as the attacks that occurred on
September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of
our properties. Terrorist attacks also could directly impact the value of our properties through
damage, destruction, loss or increased security costs, and thereafter the availability of insurance
for such acts may be limited or may cost more. To the extent that our tenants are impacted by any
future attacks, their ability to continue to honor obligations under their existing leases with us
could be adversely affected. In addition, certain tenants have termination rights in respect of
certain casualties. If we receive casualty proceeds, we may not be able to reinvest such proceeds
profitably or at all, and we may be forced to recognize taxable gain on the affected property.
Our current and future joint venture investments could be adversely affected by our lack of
sole decision-making authority, our reliance on our joint venture partners financial condition and
any disputes that may arise between us and our joint venture partners.
As of December 31, 2009, we owned one joint venture interest. In the future we may co-invest
with, or sell interests in our existing properties to third parties through joint ventures. We may
not be in a position to exercise sole decision-making authority regarding the properties owned
through joint ventures. Investments in joint ventures may, under certain circumstances, involve
risks not present when a third party is not involved, including the possibility that joint venture
partners might become bankrupt or fail to fund their share of
required capital contributions. Joint venture partners may have business interests or goals that are
24
inconsistent with our business interests or goals and may be in a position to take actions contrary
to our policies or objectives. Such investments also may have the potential risk of impasses on
decisions, such as those relating to a sale, refinancing or lease, because neither we nor the joint
venture partner would have full control over the joint venture. Any disputes that may arise between
us and the joint venture partners may result in litigation or arbitration that would increase our
expenses and prevent our officers and/or trustees from focusing their time and effort principally
on our business. Consequently, actions by or disputes with joint venture partners might result in
subjecting properties owned by the joint venture to incur additional risk. In addition, we may in
certain circumstances be liable for the actions of our third-party joint venture partners.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
General
As of December 31, 2009, our portfolio of properties consisted of 8 office properties,
containing an aggregate of 3.3 million net rentable square feet located in metropolitan Chicago. We
also owned a 23.1% common interest in a joint venture, which owns a 101,006 square foot office
building located in Phoenix, Arizona.
Our management team has developed or redeveloped a significant number of office properties,
including the redevelopment of the 180 North LaSalle Street building, all located in downtown
Chicago, as well as the redevelopment of our Continental Towers property in
Rolling Meadows, Illinois. In the course of such activities, we have acquired experience across a
broad range of sophisticated development and redevelopment projects.
We do not currently anticipate commencing any new development projects in the near future.
However, we do anticipate continuing with the ongoing redevelopment of our 330 N. Wabash Avenue
property in Chicago, and we may undertake other redevelopments of all or portions of our properties
that we determine are necessary or desirable to attract new tenants and/or retain current tenants,
subject to the availability of sufficient funds to pay for any such redevelopment.
Our office properties are leased to tenants either (i) on a net basis with tenants obligated
to pay their proportionate share of real estate taxes, insurance, utilities and operating expenses
(ii) on a gross basis with the landlord responsible for the payment of all such expenses, or
(iii) on a gross basis, with the landlord responsible for the payment of these expenses up to the
amount incurred during the tenants first year of occupancy (Base Year), or a negotiated amount
approximating the tenants pro rata share of these expenses (Expense Stop). In the latter cases,
the tenants pay their pro rata share of increases in expenses above the Base Year or Expense Stop.
25
Properties
The following table sets forth certain information relating to each of our properties. Through
the Operating Partnership and other subsidiaries, we own 100.0% fee-simple title in all of the
office properties, except for the unconsolidated joint venture property identified below. Certain
properties are encumbered by mortgages which can be found on Schedule III Real Estate and
Accumulated Depreciation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Percentage |
|
|
|
|
|
Year Built/ |
|
Rentable |
|
|
Occupied as |
|
|
|
Location |
|
Renovated |
|
Square Feet |
|
|
of 12/31/09 |
|
Wholly-Owned Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
330 N. Wabash Avenue (1) |
|
Chicago, IL |
|
1971 |
|
|
1,141,760 |
|
|
|
83.4 |
% |
Continental Towers |
|
Rolling Meadows, IL |
|
1977 thru |
|
|
910,796 |
|
|
|
72.3 |
% |
|
|
|
|
1981/2001 |
|
|
|
|
|
|
|
|
180 North LaSalle Street |
|
Chicago, IL |
|
1982/1999 |
|
|
770,191 |
|
|
|
78.8 |
% |
4343 Commerce Court
(Olympian Office Center) |
|
Lisle, IL |
|
1989 |
|
|
167,756 |
|
|
|
72.3 |
% |
Brush Hill Office Court |
|
Westmont, IL |
|
1986 |
|
|
110,299 |
|
|
|
90.0 |
% |
280 Shuman Blvd.
(Atrium Building) |
|
Naperville, IL |
|
1979 |
|
|
69,077 |
|
|
|
88.2 |
% |
Enterprise Center II |
|
Westchester, IL |
|
1999 |
|
|
62,580 |
|
|
|
100.0 |
% |
7100 Madison Avenue |
|
Willowbrook, IL |
|
1999 |
|
|
50,157 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Portfolio total |
|
|
|
|
|
|
3,282,616 |
|
|
|
79.6 |
% |
|
Unconsolidated Joint Venture
Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Thistle Landing (2) |
|
Phoenix, AZ |
|
1999 |
|
|
101,006 |
|
|
|
54.7 |
% |
|
|
|
(1) |
|
The land underlying a portion of this property, related to the parking garage, is leased
for a term expiring on April 30, 2019 with options to extend the term for an additional
forty years. On March 18, 2008, we sold floors 2 through 13 of this office property to a
third party that intends to construct a luxury hotel on these floors. |
|
(2) |
|
We own a 23.1% common ownership interest in a joint venture that owns this office
property. |
26
ITEM 3. LEGAL PROCEEDINGS
Except as described below, neither we nor any of our properties are presently subject to any
material litigation or legal proceeding, nor, to our knowledge, is any material litigation or legal
proceeding threatened against us, other than routine litigation arising in the ordinary course of
business, some of which is expected to be covered by liability insurance and all of which
collectively is not expected to have a material adverse effect on our consolidated financial
statements.
On October 26, 2005, Prime/Mansur exercised its option to acquire our membership interest in
the Plumcor/Thistle JV, and the parties subsequently executed the purchase and sale agreement for
the sale. On December 22, 2005, we terminated the purchase and sale agreement relating to the
Plumcor/Thistle JV because Prime/Mansur had failed to obtain our joint venture partners consent to
the transaction by the December 15, 2005 deadline contained in the agreement. Prime/Mansur
subsequently sent us a letter disputing our right to terminate the agreement, to which we replied
with a letter reaffirming our right to terminate the agreement. On January 31, 2006, Prime/Mansur
filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the
purchase and sale agreement was not justified. Prime/Mansur requested the court to grant it either
specific performance and order us to convey our joint venture interest in Plumcor Thistle to
Prime/Mansur or damages in the amount of $5.0 million. On September 21, 2009, the judge in the case
granted our motion for summary judgment and ruled that Prime/Mansur case had no merit.
Prime/Mansur has appealed the decision and we intend to vigorously defend the
judges decision. We believe the judges decision will not
be reversed on appeal and the ultimate outcome will not have a material adverse affect on our
consolidated financial condition or results of operations.
During 2006, the IRS began an examination of the income tax returns for our Operating
Partnership for the years ended 2003 and 2004 and 180 N. LaSalle, L.L.C. for the year ended 2004.
The IRS concluded its 2003 examination and we have been notified that no adjustments were proposed
for the Operating Partnership for that tax year. As a result of its examination of the income tax
return for 180 N. LaSalle, L.L.C. for the year ended 2004, the IRS has issued a Notice of Proposed
Adjustment. The proposed adjustment would not have a cash effect on us but would decrease the
amount of capital loss reported and carried forward on the tax return from the sale of its residual
interest it held in a REMIC. We have appealed the adjustment and believe that we have legitimate
defenses that the basis in the REMIC, as reported on the tax return, was correct. The IRS
examination of the 2004 Operating Partnership income tax return will remain open until the final
IRS ruling on the 2004 180 N. LaSalle, L.L.C. income tax return has been resolved.
In May 2007, we terminated the employment of Nancy Fendley, our former Executive Vice
President of Leasing. Ms. Fendley has disputed such termination and, on May 29, 2007, filed a
lawsuit against us in the Circuit Court of Cook County, Illinois alleging a breach of her
employment agreement and seeking approximately $9.0 million in damages. We believe we have valid
defenses to her claims and intend to vigorously contest the lawsuit. Although there can be no
assurances about the eventual outcome, we believe the ultimate outcome will not have a material
adverse affect on our consolidated financial condition or results of operations.
In connection with the purchase and sale agreement for the proposed sale of our 180 N. LaSalle
Street property that our subsidiary, 180 LLC, entered into in August 2008 and later terminated
because of the failure of the Purchaser to timely close, one of the purchasers under the agreement
(YPI LaSalle Owner, LLC, a subsidiary of the original Purchaser) filed a lawsuit on February 13,
2009 against 180 LLC in the Circuit Court of Cook County, Illinois, Chancery Division. In the
lawsuit, the Purchaser claims that the purchase agreement should be rescinded due to the doctrine
of impossibility and impracticability and that 180 LLC should return
the $6.0 million earnest money to Purchaser because it was impossible for Purchaser to obtain
financing and that therefore it should be excused from closing, even though the purchase agreement
contained no financing contingency. On July 7, 2009, the judge dismissed the Purchasers lawsuit
with prejudice. The Purchaser filed an appeal of this decision on July 10, 2009. In our opinion,
after consultation with legal counsel, we believe that this appeal is without merit and that we
will prevail in it. Although there can be no assurances about the eventual outcome, we believe the
ultimate outcome will not have a material adverse affect on our consolidated financial condition or
results of operations.
27
On October 20, 2009, Mr. Dean Konstand filed a shareholder derivative complaint in the Circuit
Court of Cook County, Illinois, Chancery Division, against us, Lightstone, Prime Office and the
members of our Board in place immediately after the closing of our acquisition by Lightstone,
consisting of David Lichtenstein, Jeffrey A. Patterson, John M. Sabin, Michael M. Schurer, Shawn R.
Tominus, Bruno De Vinck and George R. Whittemore. In this case, the plaintiff is alleging that the
common dividends declared by the Board in July 2005 and February 2006 constituted a breach of the
Boards duty of loyalty and care, and good faith and fair dealing, to the Company and the holders
of the Series B Shares, and that this breach was directed by Lightstone and Prime Office. The
plaintiff requests for the benefit of the Company that the court grant a judgment in favor of the
Company against all of the other defendants in the amount of $106 million, the amount of the
dividends that were declared on the foregoing dates. We are incurring the costs of defense of this
action as it relates to the members of our Board under our indemnification obligations with our
Board members. The Defendants have filed a Motion to Dismiss this action and briefs are being
filed by the parties. The costs of defense of the Board members may be covered in whole or in part
by our directors and officers liability insurance, subject to coverage limits and applicable
deductibles. Although there can be no assurances about the eventual outcome, we believe the
ultimate outcome will not have a material adverse affect on our consolidated financial condition or
results of operations.
Effective September 24, 2009, the current owner of Citadel Center (131 LLC), terminated the
management agreement pursuant to which a subsidiary of our Operating Partnership managed the
Citadel Center property. We believe that this termination was wrongful and was in violation of the
terms of our management agreement with 131 LLC. We also believe that under Illinois law, by
wrongfully terminating the management agreement, 131 LLC has released us from liability for the
Citadel Reimbursement Obligation, because the indemnification agreement which provides for such
liability was entered into simultaneously with, and as part of the same transaction as, the
management agreement. On October 13, 2009, we filed suit in the Circuit Court of Cook County,
Illinois against 131 LLC for damages and a declaratory judgment that we no longer have any
obligations under the management agreement, the indemnification agreement, and two related escrow
agreements, and that the amounts held pursuant to such escrow agreements should be paid to us by
131 LLC immediately. We currently intend at this time to continue satisfying the Citadel
Reimbursement Obligation while the case is pending and until we receive a ruling that we no longer
have any liability for such obligations, although this intention could change in the future.
We are a defendant in various other legal actions arising in the normal course of business.
We record a provision for a liability when it is both probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Although the outcome of any litigation is
uncertain, we believe that such legal actions will not have a material adverse affect on our
consolidated financial condition or results of operations.
ITEM 4. REMOVED AND RESERVED
28
PART II
|
|
ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common shares traded on the NYSE under the symbol PGE from November 12, 1997 through
July 1, 2005, the effective date of the Acquisition. We are the sole general partner of the
Operating Partnership and own all of the preferred units. We own 0.9%, or 236,483, of the
outstanding common units and all of the 4.0 million outstanding preferred units in the Operating
Partnership. Each preferred unit and common unit entitled us to receive distributions from our
Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares
are based upon the distributions we receive with respect to our common units and preferred units.
Our Series B Shares remain outstanding after the completion of the Acquisition and at the present
time continue to be publicly traded on the NYSE.
Prime Office currently owns 99.1% of the outstanding common units in the Operating Partnership
and PGRT currently owns 0.9% of the outstanding common units in the Operating Partnership.
The following table sets forth the common share dividends we paid for the years ended
December 31, 2008 and 2009:
|
|
|
|
|
|
|
Cash |
|
|
|
Dividends |
|
|
|
Paid (per share) |
|
|
|
|
|
|
Year 2008 |
|
|
|
|
First quarter |
|
|
0.112255 |
|
Second quarter |
|
|
0.561275 |
|
Third quarter |
|
|
|
|
Fourth quarter |
|
|
|
|
|
|
|
|
|
Year 2009 |
|
|
|
|
First quarter |
|
|
|
|
Second quarter |
|
|
|
|
Third quarter |
|
|
|
|
Fourth quarter |
|
|
|
|
On February 12, 2008 our Board declared a distribution to the holders of the 26,488,389 common
limited partnership interests in the Companys operating partnership and the 236,483 common shares
of the Company, in an amount of $0.112255 per unit/share and having a record date of
February 12, 2008 and a payment date of February 13, 2008. On May 2, 2008 our Board declared a
distribution to the holders of the 26,488,389 common limited partnership interests in the Companys
operating partnership and the 236,483 common shares of the Company, in an amount of $0.561275 per
unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008.
We announced that our Board determined not to declare a quarterly distribution on our Series B
Shares for any of the four quarters of 2009 and the first quarter of 2010, and that the Board was
unable to determine when we will recommence distributions on our Series B Shares. The total
arrearage in payment of dividends on the Series B Shares is five quarters of dividends or
$11.25 million. The Board is also in the process of considering various financing, capitalization,
asset sales and other alternatives for the Company.
29
Dividends paid in the amount of $0.5625 per share in 2009 (which were applicable to the fourth
quarter of 2008) on our Series B Shares have been determined to be a return of capital. There can
be no assurances as to the timing and amounts of any future dividends on our Series B Shares.
Our management and Board review our cash position, the status of potential capital events,
debt levels and requirements for cash reserves each quarter prior to making any decision with
respect to paying distributions/dividends. Any future dividends on our common shares and dividends
on our Series B Shares will be made at the discretion of our Board. These dividends will depend on
the actual cash available for distribution, our financial condition, capital requirements, the
completion of capital events, including refinancings and asset sales, the annual distribution
requirements under the REIT provisions of the Code and such other factors as our Board deems
relevant. Dividends/distributions on our common shares and common units are not permitted unless
all current and any accumulated dividends on our Series B Shares and the related preferred units in
the Operating Partnership have been paid in full or declared and set aside for payment.
Equity Compensation Plans. For a discussion of our equity compensation plans see the
information contained in Item 12 Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information of this report.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
30
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our selected consolidated financial data and should be read in
conjunction with our consolidated financial statements included elsewhere in this Form 10-K. All
amounts have also been restated in accordance with the discontinued operations provision under U.S.
GAAP and reflects adoption of accounting guidance on noncontrolling interest in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(dollars in thousands) |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate assets before
accumulated depreciation |
|
$ |
379,561 |
|
|
$ |
475,103 |
|
|
$ |
499,050 |
|
|
$ |
482,447 |
|
|
$ |
471,892 |
|
Total assets |
|
|
393,184 |
|
|
|
521,658 |
|
|
|
671,916 |
|
|
|
649,928 |
|
|
|
771,921 |
|
Mortgage notes and notes payable |
|
|
341,750 |
|
|
|
447,871 |
|
|
|
567,910 |
|
|
|
453,695 |
|
|
|
452,965 |
|
Total liabilities |
|
|
389,454 |
|
|
|
515,690 |
|
|
|
635,559 |
|
|
|
524,868 |
|
|
|
530,668 |
|
Noncontrolling interest |
|
|
(82,109 |
) |
|
|
|
|
|
|
|
|
|
|
20,770 |
|
|
|
135,853 |
|
Total equity Prime Group
Realty Trust |
|
|
3,730 |
|
|
|
5,968 |
|
|
|
36,357 |
|
|
|
104,375 |
|
|
|
105,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Acquisition |
|
|
Pre-Acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months |
|
|
Six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
ended |
|
|
|
For the years ended December 31, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
thousands, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
except per |
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
|
|
|
|
|
|
share amounts) |
|
Operation Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
77,915 |
|
|
$ |
82,743 |
|
|
$ |
86,874 |
|
|
$ |
92,693 |
|
|
$ |
45,420 |
|
|
$ |
44,718 |
|
Operating (loss) income |
|
|
(63,314 |
) |
|
|
7,506 |
|
|
|
2,401 |
|
|
|
122 |
|
|
|
(1,544 |
) |
|
|
(5,174 |
) |
Loss from continuing operations |
|
|
(88,316 |
) |
|
|
(58,295 |
) |
|
|
(94,915 |
) |
|
|
(50,158 |
) |
|
|
(18,875 |
) |
|
|
(12,947 |
) |
Net loss |
|
|
(88,280 |
) |
|
|
(61,567 |
) |
|
|
(93,920 |
) |
|
|
(50,391 |
) |
|
|
(15,814 |
) |
|
|
(23,878 |
) |
Net loss available to common
shareholders |
|
|
(8,481 |
) |
|
|
(82,336 |
) |
|
|
(68,018 |
) |
|
|
(353 |
) |
|
|
(181 |
) |
|
|
(24,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss
attributable to common
shareholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(35.86 |
) |
|
$ |
(348.05 |
) |
|
$ |
(287.66 |
) |
|
$ |
(1.48 |
) |
|
$ |
(0.88 |
) |
|
$ |
(0.61 |
) |
Net loss attributable to common
shareholders per common share
basic and diluted |
|
|
(35.86 |
) |
|
|
(348.17 |
) |
|
|
(287.62 |
) |
|
|
(1.49 |
) |
|
|
(0.76 |
) |
|
|
(1.02 |
) |
Weighted average common shares
outstanding basic and diluted |
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
23,658,579 |
|
Dividends paid per common share |
|
|
|
|
|
|
0.67353 |
|
|
|
|
|
|
|
2.8438 |
|
|
|
1.1225 |
|
|
|
|
|
Dividends paid per preferred share |
|
|
0.5625 |
|
|
|
2.25 |
|
|
|
2.8125 |
|
|
|
1.6875 |
|
|
|
4.50 |
|
|
|
1.125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow and Operating Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
3,906 |
|
|
$ |
1,763 |
|
|
$ |
7,301 |
|
|
$ |
638 |
|
|
$ |
1,236 |
|
|
$ |
(6,659 |
) |
Investing activities |
|
|
(8,008 |
) |
|
|
79,341 |
|
|
|
(135,867 |
) |
|
|
70,603 |
|
|
|
(60,044 |
) |
|
|
2,258 |
|
Financing activities |
|
|
559 |
|
|
|
(103,578 |
) |
|
|
106,348 |
|
|
|
(28,739 |
) |
|
|
6,773 |
|
|
|
2,314 |
|
Office Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square footage |
|
|
3,282,616 |
|
|
|
3,476,304 |
|
|
|
3,800,567 |
|
|
|
3,865,828 |
|
|
|
3,772,482 |
|
|
|
4,636,918 |
|
Occupancy (%) |
|
|
79.6 |
|
|
|
78.1 |
|
|
|
74.1 |
|
|
|
79.0 |
|
|
|
83.7 |
|
|
|
82.8 |
|
Industrial Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square footage |
|
|
|
|
|
|
|
|
|
|
120,004 |
|
|
|
120,004 |
|
|
|
120,004 |
|
|
|
120,004 |
|
Occupancy (%) |
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Unconsolidated Joint Venture
Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square footage |
|
|
101,066 |
|
|
|
101,066 |
|
|
|
1,060,264 |
|
|
|
1,060,725 |
|
|
|
2,554,866 |
|
|
|
2,833,068 |
|
Occupancy (%) |
|
|
54.7 |
|
|
|
54.7 |
|
|
|
83.7 |
|
|
|
76.4 |
|
|
|
77.6 |
|
|
|
80.9 |
|
31
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Overview
The following discussion should be read in conjunction with our historical consolidated
financial statements and related notes thereto included elsewhere in this Form 10-K.
We are a fully-integrated, self-administered and self-managed REIT which owns, manages,
leases, develops and redevelops office real estate, primarily in metropolitan Chicago. As of
December 31, 2009, our portfolio of properties consists of 8 office properties, containing an
aggregate of 3.3 million net rentable square feet. In addition, we have a joint venture interest in
an office property containing an aggregate of 101,000 net rentable square feet. We lease and manage
3.3 million square feet comprising all of our wholly-owned properties. We are also the asset and
development manager for an approximately 1.1 million square foot office building located at 1407
Broadway Avenue in New York, New York, which is owned by affiliates of Lightstone, although we are
currently scheduled to cease performing these services effective April 4, 2010.
All of our properties, except our joint venture property located in Phoenix, Arizona, are
located in the Chicago metropolitan area in prime business locations within established business
communities and account for all of our rental revenue and tenant reimbursements revenue.
Our joint venture interest is accounted for as an investment in unconsolidated joint venture
under the equity method of accounting, which consisted of a 23.1% common interest in a joint
venture which owns an office building located in Phoenix, Arizona.
Our results reflect the general weakness in the office leasing market in the Chicago
metropolitan area over the past several years. Due to weakness in the leasing market, we have been
challenged to retain existing tenants and locate new tenants for our vacant and non-renewing space
at acceptable economic rental rates. In addition, the supply of downtown Chicago office space
continues to grow, principally as a result of the construction of new office buildings. As these
buildings continue to come on line in the next year, the additional supply may add to the
challenge.
Our management is addressing this challenge by increasing our marketing efforts both through
working with the office brokerage community and in direct marketing campaigns to prospective users
of office space in our market, as well as investing in targeted capital expenditures to improve our
properties in order to enhance our position in our market. In addition, our Board is also in the
process of considering various financing, capitalization, asset sales and other alternatives for
the Company.
Our income and cash flow is derived primarily from rental revenue (including tenant
reimbursements) from our properties. The following summarizes our portfolio occupancy at the end of
each quarter of 2009 and the end of 2008, excluding properties sold in subsequent periods and our
previous membership interest in the entity that owns extended-stay hotel properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Occupancy |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Total |
|
|
79.6 |
% |
|
|
81.2 |
% |
|
|
79.8 |
% |
|
|
78.5 |
% |
|
|
78.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
Joint Venture
Property |
|
|
54.7 |
% |
|
|
54.7 |
% |
|
|
54.7 |
% |
|
|
54.7 |
% |
|
|
54.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Key Performance Indicators
We evaluate the performance of our operations based on the occupancy percentages and operating
profit of each of our properties, including their rental revenue, tenant reimbursement revenue,
property operations expense and administrative expenses, as well as tenant retention and the
results of tenant satisfaction surveys. We also use other metrics such as gross rent, occupancy,
percent of property operating expenses recovered and net effective rent in analyzing individual
tenant lease agreements.
We used the purchase method of accounting to record the assets and liabilities in connection
with the Acquisition. Accordingly, the financial statements as of and for the period ended
subsequent to the Acquisition are not comparable in all material respects to our financial
statements as of and for periods ended prior to the Acquisition.
33
Results of Operations
Comparison of the year ended December 31, 2009 to the year ended December 31, 2008
The table below represents selected operating information for our portfolio. Property revenues
include rental revenues, tenant reimbursements and other property operating revenues. Property
operating expenses include real estate taxes, utilities and other property operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property revenues |
|
$ |
76,934 |
|
|
$ |
81,580 |
|
|
$ |
(4,646 |
) |
Services Company revenues |
|
|
981 |
|
|
|
1,163 |
|
|
|
(182 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
77,915 |
|
|
|
82,743 |
|
|
|
(4,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
41,524 |
|
|
|
42,982 |
|
|
|
(1,458 |
) |
Depreciation and amortization |
|
|
27,619 |
|
|
|
23,898 |
|
|
|
3,721 |
|
General and administrative |
|
|
6,211 |
|
|
|
6,873 |
|
|
|
(662 |
) |
Services Company operations |
|
|
1,063 |
|
|
|
1,484 |
|
|
|
(421 |
) |
Provision for asset impairment |
|
|
63,013 |
|
|
|
|
|
|
|
63,013 |
|
Loss on tax indemnification |
|
|
1,799 |
|
|
|
|
|
|
|
1,799 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
141,229 |
|
|
|
75,237 |
|
|
|
65,992 |
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(63,314 |
) |
|
|
7,506 |
|
|
|
(70,820 |
) |
Interest and other income |
|
|
4,948 |
|
|
|
1,394 |
|
|
|
3,554 |
|
Income (loss) from investments in unconsolidated joint
ventures |
|
|
84 |
|
|
|
(60,343 |
) |
|
|
60,427 |
|
Provision for asset impairment from unconsolidated joint
ventures |
|
|
|
|
|
|
(5,633 |
) |
|
|
5,633 |
|
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
(25,790 |
) |
|
|
(32,098 |
) |
|
|
6,308 |
|
Amortization of deferred financing costs |
|
|
(4,244 |
) |
|
|
(2,244 |
) |
|
|
(2,000 |
) |
Recovery of distributions and losses to noncontrolling
interest in excess of basis |
|
|
|
|
|
|
14,222 |
|
|
|
(14,222 |
) |
Distributions and losses to noncontrolling interest in
excess of basis |
|
|
|
|
|
|
(20,293 |
) |
|
|
20,293 |
|
Gain on sales of real estate and joint venture interest |
|
|
|
|
|
|
39,194 |
|
|
|
(39,194 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(88,316 |
) |
|
|
(58,295 |
) |
|
|
(30,021 |
) |
Discontinued operations |
|
|
36 |
|
|
|
(3,272 |
) |
|
|
3,308 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(88,280 |
) |
|
$ |
(61,567 |
) |
|
$ |
(26,713 |
) |
|
|
|
|
|
|
|
|
|
|
Property Revenues. The decrease of $4.6 million in property revenues was primarily due to
decreased recovery revenues resulting from reduced property operating expenses ($0.7 million),
decreased occupancy at some of our properties ($1.7 million), early termination fee income in 2008
at our 180 N. LaSalle Street property ($0.8 million), decreased management fee income due to
termination of management contracts ($0.8 million) and decreased parking garage revenues at our 330
N. Wabash Avenue property ($0.9 million).
Property Operating Expenses. The decrease of $1.5 million in property operating expenses was
primarily due to decreased utility expenses as a result of favorable weather conditions, lower
occupancy at some of our properties, and adjustments to the estimated real estate taxes for
our properties.
34
Depreciation and Amortization. The increase of $3.7 million in depreciation and amortization
was primarily due to the reinstatement of the depreciation and amortization in 2009 associated with
our 180 North LaSalle Street property related to the period that it was classified as property held
for sale in 2008. In accordance with U.S. GAAP, depreciation and amortization ceases when a
property is classified as held for sale.
General and Administrative. The decrease of $0.7 million in general and administrative
expense is primarily due to decreased employee bonuses and reduced rent expense due to relocation
of corporate office, partially offset by increased strategic alternative costs and increased
employee severance costs due to personnel reductions in 2009.
Provision for Asset Impairment. The increase of $63.0 million in provisions for asset
impairment was to reduce net book value to its estimated fair value on five properties in the
fourth quarter of 2009. One property, 7100 Madison Avenue, was impaired $0.5 million and was sold
on February 1, 2010.
In 2009, our Continental Towers property was considered impaired based on the property
generating negative cash flows, a decline in occupancy and forecasted future losses. The Company
recorded an asset impairment of $59.9 million which represents the difference between the carrying
value and estimated fair value of this property. The carrying value of this property is
approximately $65.3 million, which is less than the debt balance of $115.0 million at December 31,
2009. The Company is currently in discussions with the Lender on a potential deed in lieu of
foreclosure transaction with the lender (see Note 17 Subsequent Events in the Notes to
Consolidated Financial Statements). If this transaction materializes, the difference between the
loan balance and carrying value of the property would be recognized as a gain on extinguishment of
debt in the period the transaction closes.
The other properties that were impaired included Brush Hill Office Court ($1.8 million),
Enterprise Center II ($0.1 million) and Atrium Building ($0.7 million).
Loss on Tax Imdemnification. The increase of $1.8 million in loss on tax imdenification
reflects a payment to terminate a tax indemification agreement on our Continental Towers property.
Interest and Other Income. The increase of $3.6 million in interest and other income was
primarily due to an earnest money deposit recorded as income due to the termination of a sale
agreement relating to our 180 N. LaSalle Street property. This increase was partially offset by
decreases in interest income due to a decrease in both the investment rates and investment account
balances.
Income (loss) from Investments in Unconsolidated Joint Ventures. The decrease of
$60.4 million in loss from investments in unconsolidated joint ventures was primarily due to the
non-cash allocation of losses in 2008 from our investment in BHAC Capital IV, L.L.C. (BHAC), an
entity that owns 100% of ESH.
Provision for Asset Impairment from Unconsolidated Joint Ventures. The $5.6 million provision
for asset impairment in 2008 represents the write-down of the investment balance in ESH as the
impairment was deemed to be other than temporary due to past and expected inability to sustain
earnings at a level which would justify the carrying value.
35
Interest Expense. The decrease of $6.3 million in interest expense was primarily due to the
assignment of our membership interest in BHAC and transfer of the related non-recourse loan
(Citicorp Loan) from Citicorp USA, associated with our investment in ESH, in the third quarter of
2009 and a reduction in interest expense on our 330 N. Wabash Avenue property due to the March 2008
sale of a portion of the property and partial repayment and simultaneous refinancing of the debt.
Amortization of Deferred Financing Costs. The increase of $2.0 million in amortization of
deferred financing costs was primarily due to an increase in non-cash accrued finance charges
related to the exit and restructuring fees on the Citicorp Loan associated with our investment in
ESH. We assigned our membership interest in BHAC and transferred the related Citicorp Loan in the
third quarter of 2009.
Recovery of Distributions and Losses to Noncontrolling Interest in Excess of Basis. The
decrease of approximately $14.2 million in recovery of distributions and losses to noncontrolling
interest in excess of basis relates to the recovery in 2008 of losses previously recognized in
2007.
Distributions and Losses to Noncontrolling Interest in Excess of Basis. The decrease of $20.3
million in distributions and losses to noncontrolling interest in excess of basis represents 2008
losses resulting in a deficit position in the noncontrolling interest balance. Losses in excess of
the noncontrolling interest basis were charged to operations under U.S. GAAP in 2008, as a result
of the noncontrolling interest holder having no contractual obligation to return such amounts, to
fund operations or restore any capital deficits. Under U.S. GAAP in 2009, distributions and losses
to noncontrolling interest in excess of basis will no longer be allocated to PGRT.
Gain on Sales of Real Estate and Joint Venture Interests. The decrease of $39.2 million in
gain on sales of real estate and joint venture interests was primarily due to both the sale of our
50% joint venture interest in The United Building ($29.4 million) and the sale of Floors 2 through
13 of our 330 N. Wabash Avenue property ($9.8 million) during the first quarter of 2008.
Discontinued Operations. Discontinued operations include the results of operations of our
800-810 Jorie Boulevard property; which was conveyed to the lender in exchange for a release of the
related loan in July 2009; 1051 North Kirk Road property, which was sold in May 2008; and the
residual effects related to properties sold in prior years.
36
Results of Operations
Comparison of the year ended December 31, 2008 to the year ended December 31, 2007
The table below represents selected operating information for our portfolio. Property revenues
include rental revenues, tenant reimbursements and other property operating revenues. Property
operating expenses include real estate taxes, utilities and other property operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property revenues |
|
$ |
81,580 |
|
|
$ |
83,515 |
|
|
$ |
(1,935 |
) |
Services Company revenues |
|
|
1,163 |
|
|
|
3,359 |
|
|
|
(2,196 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
82,743 |
|
|
|
86,874 |
|
|
|
(4,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
42,982 |
|
|
|
45,225 |
|
|
|
(2,243 |
) |
Depreciation and amortization |
|
|
23,898 |
|
|
|
30,203 |
|
|
|
(6,305 |
) |
General and administrative |
|
|
6,873 |
|
|
|
6,210 |
|
|
|
663 |
|
Services Company operations |
|
|
1,484 |
|
|
|
2,835 |
|
|
|
(1,351 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
75,237 |
|
|
|
84,473 |
|
|
|
(9,236 |
) |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
7,506 |
|
|
|
2,401 |
|
|
|
5,105 |
|
Interest and other income |
|
|
1,394 |
|
|
|
2,928 |
|
|
|
(1,534 |
) |
Loss from investments in unconsolidated joint ventures |
|
|
(60,343 |
) |
|
|
(49,687 |
) |
|
|
(10,656 |
) |
Provision for asset impairment from unconsolidated joint
ventures |
|
|
(5,633 |
) |
|
|
|
|
|
|
(5,633 |
) |
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
(32,098 |
) |
|
|
(35,425 |
) |
|
|
3,327 |
|
Amortization of deferred financing costs |
|
|
(2,244 |
) |
|
|
(910 |
) |
|
|
(1,334 |
) |
Recovery of distribution and losses to noncontrolling
interest in excess of basis |
|
|
14,222 |
|
|
|
|
|
|
|
14,222 |
|
Distributions and losses to noncontrolling interest in
excess of basis |
|
|
(20,293 |
) |
|
|
(14,222 |
) |
|
|
(6,071 |
) |
Gain on sales of real estate and joint venture interests |
|
|
39,194 |
|
|
|
|
|
|
|
39,194 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(58,295 |
) |
|
|
(94,915 |
) |
|
|
36,620 |
|
Discontinued operations |
|
|
(3,272 |
) |
|
|
995 |
|
|
|
(4,267 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(61,567 |
) |
|
$ |
(93,920 |
) |
|
$ |
32,353 |
|
|
|
|
|
|
|
|
|
|
|
Property Revenues. The decrease of $1.9 million in property revenues was primarily due to
decreased occupancy at our Continental Towers ($1.7 million) and 330 N. Wabash Avenue
($1.0 million) properties as a result of tenant leases expiring, and the recognition of additional
rental revenue in 2007. These decreases were partially offset by a lease termination fee in 2008
at our 180 North LaSalle Street property.
Services Company Revenues. The decrease of $2.2 million in our Services Company revenues
during 2008 was primarily due to leasing commission income in 2007 as a result of leasing activity
at The United Building that did not occur in 2008.
37
Property Operating Expenses. The decrease of $2.2 million in property operating expenses was
primarily due to adjustments for real estate taxes being less than previously projected
($1.6 million), the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March
2008, which transferred those operating expenses to the purchaser ($1.4 million), and lower
professional fees at our 300 N. Wabash Avenue property ($0.2 million). These decreases were
partially offset by bad debt expense associated with a tenant at our 330 N. Wabash Avenue property
($0.7 million).
Depreciation and Amortization. The decrease of $6.3 million in depreciation and amortization
was primarily due to the accelerated depreciation and amortization of tenant improvements and
in-place lease values in connection with a lease amendment executed with a tenant at our
Continental Towers property in 2007 (which resulted in an increase to depreciation and amortization
in 2007 of $3.1 million and a decrease in depreciation and amortization in 2008 of $0.7 million),
the depreciation and amortization associated with our 180 North LaSalle Street property related to
the period that it was held for sale in 2008 ($1.9 million) and the sale of Floors 2 through 13 at
our 330 N. Wabash Avenue property in March 2008, which transferred the depreciable assets to the
purchaser ($0.9 million). These decreases were partially offset by the accretion of accrued
environmental remediation liabilities at our 330 N. Wabash Avenue property ($0.4 million).
General and Administrative. The increase of $0.7 million in general and administrative
expenses was primarily due to increased employee severance costs due to personnel reductions ($0.2
million), increased audit fees due to the restatement of prior period financial statements ($0.2
million), and increased legal fees relating to ongoing litigation ($0.2 million).
Services Company Operations. The decrease of $1.4 million in Services Company operations was
primarily due to a reduction in the provision for income taxes of $0.5 million due to decreased
profitability in 2008 (see Services Company revenues discussion for further details). In addition,
expenses decreased $0.9 million due to the January 2008 sale of our 50% joint venture interest in
The United Building.
Loss From Investments in Unconsolidated Joint Ventures. The increase of $10.7 million in loss
from investments in unconsolidated joint ventures was primarily due to the non-cash allocation of
losses from our investment in a membership interest in an entity that owns extended-stay hotel
properties ($60.3 million). This was partially offset by losses of $49.6 million recognized in
2007 that did not occur in 2008 due to the sale of our joint venture interest in The United
Building in January 2008.
Provision for Asset Impairment from Unconsolidated Joint Ventures. The $5.6 million change in
provision for asset impairment represents the write-down of the remaining balance of our investment
in the membership interest in BHAC, an entity that owned 100% of ESH, as the investment was deemed
to be other than temporary due to past and expected inability to sustain earnings at a level which
would justify the carrying value.
Interest and Other Income. The decrease of $1.5 million in interest and other income was
primarily due to a decrease in interest income related to our short-term investments and restricted
escrow accounts. The decrease was a result of a reduction in average balances in these accounts,
as well as, in average interest rates from 5.0% in 2007 to 2.4% in 2008.
Interest Expense. The decrease of $3.3 million in interest expense was primarily due to a
$5.6 million reduction from the March 2008 refinancing of the debt associated with our
330 N. Wabash Avenue property and a $1.7 million savings realized through the January 2008
retirement of the two Citicorp mezzanine loans. These decreases were partially offset by a
$3.5 million increased interest expense associated with the new terms of the non-recourse Citicorp
Loan associated with our investment in ESH.
38
Amortization of Deferred Financing Costs. The increase of $1.3 million in the amortization of
deferred financing costs was primarily attributable to an increase in deferred finance charges
related to the non-recourse loan associated with our investment in ESH.
Recovery of Distributions and Losses to Noncontrolling Interest in Excess of Basis. The
increase of approximately $14.2 million in recovery of distributions and losses to noncontrolling
interest in excess of basis relates to the recovery of losses previously recognized in 2007.
Distributions and Losses to Noncontrolling Interest in Excess of Basis. The increase of
$6.1 million in distributions and losses to noncontrolling interest in excess of basis represents
then current year losses resulting in a deficit position in the noncontrolling interest balance.
Losses in excess of the noncontrolling interest basis have been charged to operations as a result
of the noncontrolling interest holder having no contractual obligation to return such amounts, to
fund operations or to restore any capital deficits.
Gain on Sales of Real Estate and Joint Venture Interests. The increase of $39.2 million in
gain on sales of real estate and joint venture interests was primarily due to both the sale of our
50% joint venture interest in The United Building ($29.4 million) and the sale of Floors 2 through
13 of our 330 N. Wabash Avenue property ($9.8 million) in 2008.
Discontinued Operations. Discontinued operations include the results of operations of our
1051 North Kirk Road property (sold in 2008), our Narco River Business Center property (sold in
2007) and the residual effects related to properties sold in prior years.
39
Liquidity and Capital Resources
Recent Developments.
Dividends. On January 7, 2009, our Board declared a quarterly dividend on our Series B Shares
of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a
record date of January 19, 2009 and was paid on January 30, 2009.
We announced that our Board determined not to declare a quarterly distribution on our Series B
Shares for any of the four quarters of 2009 and first quarter of 2010 and that the Board was unable
to determine when we will recommence distributions on our Series B Shares. The total arrearage in
payment of dividends on the Series B Shares is five quarters of dividends or $11.25 million. The
Board is also in the process of considering various financing, capitalization, asset sales and
other alternatives for the Company.
The Boards decision was based on our current capital resources and liquidity needs and the
overall negative state of the economy and capital markets, including the decline in value for
office properties in the United States, including the Chicago area. The Board intends to review
the suspension of our Series B Shares distributions periodically based on the Boards ongoing
review of our financial results, capital resources and liquidity needs, and the condition of the
economy, capital markets and office property markets. We can give no assurances that distributions
on our Series B Shares will be resumed, or that any financing, capitalization, asset sales or other
alternatives will be satisfactorily concluded.
180 North LaSalle Street Sale. In September 2008, we entered into a purchase and sale
agreement (as amended, the Agreement) with Younan Properties, Inc. (Purchaser) whereby
Purchaser became obligated to purchase 180 North LaSalle Street, Chicago, Illinois (the
Property), from the subsidiary of the Company, 180 N. LaSalle II, L.L.C. (180 LLC) that owns
the Property.
Pursuant to the terms of the Agreement, the Purchaser was obligated to close the transaction
and purchase the Property from 180 LLC on February 18, 2009. The Purchaser failed to close by that
deadline. On February 19, 2009, 180 LLC sent a letter to the Purchaser stating that the Purchaser
was in default under the Agreement and that 180 LLC was terminating the Agreement. Because the
Purchaser failed to close the transaction and purchase the Property prior to the February 18, 2009
deadline, under the terms of the agreement, 180 LLC is entitled to retain as liquidated damages the
$6.0 million of earnest money that the Purchaser previously deposited with 180 LLC. As a result,
we have recorded $5.3 million, net of costs, as other income in our consolidated financial
statements. In addition, in the first quarter of 2009, we reinstated depreciation and amortization
associated with the property related to the period that it was classified as property held for sale
in 2008, which was approximately $3.0 million. In accordance with U.S. GAAP, the Company ceases
depreciation and amortization when a property is classified as held for sale.
On February 13, 2009, the Purchaser filed a lawsuit against 180 LLC seeking to rescind the
Agreement and obtain the return of the earnest money because the Purchaser claims it was impossible
for it to obtain financing for the acquisition due to economic conditions at the time. On July 7,
2009, the judge dismissed the Purchasers lawsuit with prejudice. The Purchaser filed an appeal of
this decision on July 10, 2009. In our opinion, after consultation with legal counsel, we believe
the Purchasers appeal is without merit and anticipate that we will prevail in the appeal.
Although there can be no assurances about the eventual outcome, we believe the ultimate outcome
will not have a material adverse effect on our consolidated financial condition or results of
operations.
40
7100 Madison Avenue Sale. On February 1, 2010 we completed the sale of our 7100 Madison
Avenue property for the purchase price of $4.3 million and received $0.5 million in net proceeds.
180 North LaSalle Street Sale in 2010. On February 25, 2010, the Companys entered into a
purchase and sale agreement to sell the 180 North LaSalle Street property to an entity indirectly
controlled by Mr. Michael Silberberg of Nanuet, New York which was approved by the Companys Board
of Directors. The gross purchase price for this property is $72.25 million, subject to customary
pro-rations, credits and adjustments.
The closing of the sale is conditioned upon the existing first mortgage lender consenting to
the assumption of the propertys existing debt by the purchaser, unless the purchaser notifies the
Company that the purchaser has elected not to assume the existing debt and will instead obtain new
financing for the acquisition. The purchaser has deposited $4.0 million in escrow to secure its
obligation to purchase this property, which is nonrefundable except upon (i) the failure of the
first mortgage lender to consent to the assumption of the existing debt by the purchaser or (ii)
the occurrence of certain other customary events, such as a default by the Company or the failure
of the Company to deliver certain satisfactory tenant estoppel certificates. The Company currently
estimates that after closing adjustments and costs, that it will receive net proceeds of
approximately $12.8 million.
It is currently contemplated that the closing will occur in May or June 2010. In the event
that the purchaser defaults on its obligation to purchase this property, the Companys sole remedy
is to receive the $4.0 million deposited in escrow.
Continental Towers Loan Default. A subsidiary of the Company, Continental Towers, L.L.C. (CT
LLC), is the owner of Tower I, Tower III and the Commercium at the Continental Towers Complex in
Rolling Meadows, Illinois (the CT Property). The CT Property is currently encumbered by a first
mortgage loan from CWCapital LLC (Lender) in the principal amount of $73.6 million (the CT
Loan). A separate subsidiary of the Company, Continental Towers Associates III, LLC (CTA III),
is the owner of Tower II at the Continental Towers Complex (the CTA III Property). The CTA III
Property is currently encumbered by a first mortgage loan from Lender in the principal amount of
$41.4 million (the CTA III Loan).
On February 26, 2010, CTA III informed the Lender that it is in default under the CTA III Loan
because the cash flow from the CTA III Property is not sufficient to pay the required escrows and
debt service payments on the CTA III Loan. On the same day, CT LLC acknowledged to the Lender that
the CT Loan is in default because it is cross-defaulted with the CTA III Loan. On March 5, 2010,
these two subsidiaries and the Operating Partnership received notices from the Lender that the
Lender was accelerating the maturity dates of the loans and demanding payment of all amounts due
under the loans.
CTA III and CT LLC are currently in discussions with the Lender regarding the foregoing.
Pursuant to the terms of each loan, upon the occurrence of a default the Lender may accelerate
both loans and declare the obligations immediately due and payable. However, the CT Loan and the
CTA III Loan are non-recourse to their respective borrowers, subject to customary non-recourse
carve-outs, including but not limited to, certain environmental matters, fraud, waste,
misapplication of funds, various special purpose entity covenants, the filing of a voluntary
bankruptcy and other similar matters, which non-recourse carve-outs have been guaranteed by the
Companys operating partnership, Prime Group Realty, L.P. The Company is currently not aware of
the occurrence of any event that would constitute a non-recourse carve-out on either loan.
41
Liquidity. We require cash to pay our operating expenses, make capital expenditures, fund
tenant improvements and leasing costs, pay distributions/dividends and service our debt and other
short-term and long-term liabilities. Cash on hand and net cash provided from asset sales, such as
the pending sale of our 180 North LaSalle Street property, represent our primary sources of
liquidity to fund these expenditures. In assessing our liquidity, key components include our net
income adjusted for non-cash and non-operating items, and current assets and liabilities, in
particular accounts receivable, accounts payable and accrued expenses. For the longer term, our
debt and long-term liabilities are also considered key to assessing our liquidity.
In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our
taxable income (excluding capital gains) annually. As of the first quarter of 2010, we are not
current on the payment of dividends on our Series B Shares with a total arrearage in payment of
$11.25 million. Our management and Board review our cash position, the status of potential capital
events, debt levels and requirements for cash reserves and market conditions each quarter prior to
making any decision with respect to paying distributions/dividends. Dividends on our common shares
may not be made until all accrued dividends on our Series B Shares are declared and paid or set
apart for payment. Future distributions/dividends, including distributions to be paid to the
holders of the Series B Shares upon the redemption of such shares, will depend on the actual cash
available for distribution, our financial condition, current and future capital requirements, the
completion or status of any capital transactions, including refinancings and asset sales, the
annual distribution requirements under the REIT provisions of the Code and such other factors as
our Board deems relevant.
Our anticipated cash flows from operations combined with cash on hand (including restricted
cash escrows) are expected to be sufficient to fund our anticipated short-term capital needs over
the next twelve months. In 2010, we anticipate the need to fund significant capital expenditures to
retenant and/or redevelop space that has been previously vacated, or is anticipated to be vacated,
such as Jenner & Block and Aon Consulting, which together accounted for 19.9% of our 2009 total
revenue, or renew leases which are expiring during the year. In order to fund these and our other
short-term and long-term capital needs, we expect to utilize available funds from cash on hand,
cash generated from our operations and existing or future escrows with lenders and cash generated
from capital events, including asset sales. In addition, we may enter into additional capital
transactions, which could include additional asset sales, refinancings and modifications or
extensions of existing loans. There can be no assurances that any capital transactions will occur
or, if they do occur, that they will yield adequate proceeds to fund our long-term capital needs or
will be on terms favorable to us. In addition, in the event that any of our properties generate
insufficient cash flow to fund such propertys debt service and operating expenses, we may not fund
any such shortfalls and may instead convey the property to the relevant property lender pursuant to
a deed in lieu of foreclosure transaction or allow the property to be foreclosed on by the lender.
The financial covenants contained in some of our loan agreements and guarantee agreements with
our lenders include minimum ratios for debt service coverage and other financial covenants. As of
December 31, 2009, we are in compliance with the requirements of all of our financial covenants.
As a requirement of our lenders, we maintain escrow accounts and restricted cash balances for
particular uses. At December 31, 2009, these accounts totaled $29.8 million. These escrows relate
to $5.0 million in escrow for capital and tenant improvements, $7.5 million in escrow for real
estate taxes and insurance, $4.3 million in escrow representing lease obligations, $8.5 million in
escrow for depository accounts, $0.2 million in escrow related to environmental remediation and the
remaining $4.3 million in escrow for various other purposes.
42
We believe that the operating plan we have developed for the future year will, if executed
successfully, provide sufficient liquidity to finance the Companys anticipated working capital,
escrow and capital expenditure requirements for the next 12 months and maintain compliance with our
debt covenants, other than the matters referenced above, for the next twelve months. In addition,
we intend to continue our ongoing efforts to improve the Companys cash flows and improve the
Companys working capital position by re-examining all aspects of the Companys business for areas
of improvement and focusing on minimizing the Companys property operating expenses so that our
operations are responsive to market conditions and we can remain competitive in the leasing of our
properties. Our assumptions underlying our operating plan anticipate stabilized net operating
income estimated on a consistent basis from the prior year and does not anticipate any catastrophic
events such as major tenant defaulting on their leases with us or any material negative resolutions
with regard to the contingencies we have disclosed in our financial statements. Should such events
occur, we may not have sufficient cash on hand to satisfy such obligations or find replacement
tenants in a time period sufficient to fund operations and we may need to sell one or more assets.
Additionally, any inability on our part to comply with our
financial covenants, obtain waivers for non-compliance or obtain alternative financing to replace
the current agreements could have a material adverse effect on our financial position, results of
operations and cash flows.
Given our current level of debt, limited availability of unencumbered collateral and our
current financing arrangements, we may not be able to obtain additional debt financing, refinance
or extend our existing financings or, if we are able to do the foregoing, negotiate terms that are
fair and reasonable.
The following tables disclose our contractual obligations and commercial commitments as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
2011/ |
|
|
2013/ |
|
|
2015 and |
|
Contractual Obligations (A) |
|
Total |
|
|
2010 |
|
|
2012 |
|
|
2014 |
|
|
Thereafter |
|
Mortgage notes payable (B) |
|
$ |
341,673 |
|
|
$ |
127,725 |
|
|
$ |
154,223 |
|
|
$ |
59,725 |
|
|
$ |
|
|
Interest expense on mortgage notes
payable |
|
|
73,074 |
|
|
|
20,611 |
|
|
|
24,458 |
|
|
|
14,883 |
|
|
|
13,122 |
|
Operating lease obligations |
|
|
2,092 |
|
|
|
245 |
|
|
|
450 |
|
|
|
441 |
|
|
|
956 |
|
Tenant improvement
allowances (C) |
|
|
744 |
|
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for leases
assumed and
lease reimbursement
obligations (D) |
|
|
25,795 |
|
|
|
10,921 |
|
|
|
14,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
443,378 |
|
|
$ |
160,246 |
|
|
$ |
194,005 |
|
|
$ |
75,049 |
|
|
$ |
14,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
We anticipate funding these obligations from operations, cash on hand, escrowed funds,
proceeds of equity, and debt or asset sale(s) transaction(s). |
|
(B) |
|
These totals represent the face value of our mortgage notes payable. The 2010 obligations
include $115.0 million due on two loans relating to our Continental Towers property which
loans were in default subsequent to December 31, 2009. The Lender accelerated the debt
maturity to be due immediately on March 5, 2010. The 2011/2012 obligations include: $88.0
million due on our 330 N. Wabash Avenue property in 2011, for which we have two one-year
extension options, and $60.0 million due on our 180 N. LaSalle Street property. |
|
|
|
On January 14, 2010, we received a notice of maturity date default from the special
servicer of the non-recourse mortgage note on our Brush Hill property. The loan matured on
January 1, 2010 and was not paid off. This loan is non-recourse,
subject to customary non-recourse carve-outs. We are currently in the process of renegotiating the
terms of a
loan extension with the special servicer and the lender. Since the Brush Hill loan extension
has not been finalized the principal amount of this mortgage note payable, approximately $7.47
million, is included as a 2010 obligation. |
43
|
|
|
(C) |
|
We have escrows of $0.5 million that may be utilized to fund these obligations. |
|
(D) |
|
These obligations would be offset by any receipts from subleasing of the related space. We
currently have executed subleases that we estimate will provide subleasing receipts of
$22.9 million consisting of base rent and the pro-rata share of operating expenses and real
estate taxes. In addition, we have escrowed reserves totaling $4.3 million to fund a portion
of this contractual amount at December 31, 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
(dollars in thousands) |
|
Other Commercial |
|
Total |
|
|
|
|
|
|
2011/ |
|
|
2013/ |
|
|
2015 and |
|
Commitments |
|
Committed |
|
|
2010 |
|
|
2012 |
|
|
2014 |
|
|
Thereafter |
|
Environmental
remediation (A) |
|
$ |
9,676 |
|
|
$ |
9,205 |
|
|
$ |
174 |
|
|
$ |
31 |
|
|
$ |
266 |
|
Series B Shares (B) |
|
|
9,000 |
|
|
|
(B |
) |
|
|
(B |
) |
|
|
(B |
) |
|
|
(B |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
commitments |
|
$ |
18,676 |
|
|
$ |
9,205 |
|
|
$ |
174 |
|
|
$ |
31 |
|
|
$ |
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This represents a liability for asbestos abatement at our 330 N. Wabash Avenue property. See
Note 14 Commitments and Contingencies Environmental to our consolidated financial
statements included in this report for further information. |
|
(B) |
|
Dividends are cumulative and payable at a 9.0% annual rate each quarter that our
Series B Shares remain outstanding. On January 7, 2009, our Board declared and set apart for
payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth
quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009
and was paid on January 30, 2009. Our Board decided not to declare any quarterly dividends
for 2009. The total arrearage in payment of dividends on the Series B Shares is $9.0 million
for the period through December 31, 2009, and has subsequently increased to $11.25 million
through March 31, 2010. |
|
|
|
With respect to the payment of the dividends referred to above, there can be no assurance as
to the timing and amounts of any future dividends. Management and our Board review the
Companys cash position, the status of potential capital events, market conditions, debt
levels and the Companys requirements for cash reserves each quarter prior to making any
decision with respect to paying dividends. |
|
|
|
The holders of our Series B Shares have the right to elect two additional members to our
Board if six consecutive quarterly dividends on our Series B Shares are not made. The term
of any trustees elected by the Series B shareholders will expire whenever all dividends in
arrears on the Series B Shares have been paid and current dividends declared and set apart
for payment. |
44
Tenant Concentration. The following represents our five largest tenants in 2009 based on gross
revenue recognized during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
Tenant |
|
|
% Of Our Total |
|
|
Lease |
Tenant |
|
Revenue |
|
|
Revenue |
|
|
Expiration |
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
Jenner & Block (1) |
|
$ |
12,739 |
|
|
|
16.3 |
% |
|
April 2010 |
Accenture |
|
|
5,337 |
|
|
|
6.9 |
|
|
July 2015 |
Fifth Third Holdings, LLC |
|
|
3,124 |
|
|
|
4.0 |
|
|
March 2012 |
Aon Consulting, Inc. (2) |
|
|
2,833 |
|
|
|
3.6 |
|
|
December 2009 |
Komatsu America Corp. |
|
|
2,584 |
|
|
|
3.4 |
|
|
July 2021 |
|
|
|
|
|
|
|
|
|
|
|
$ |
26,617 |
|
|
|
34.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have been informed that this tenant will not be renewing their lease upon expiration
and has vacated their space. |
|
(2) |
|
This tenant vacated its premises upon lease expiration. |
If one or more of the tenants listed above at properties we still own were to experience
financial difficulties and cease paying rent or fail to renew their lease at the expiration of its
term, our cash flow and earnings would likely be negatively impacted in the near term and possibly
the long term. The extent and length of this would be impacted by several factors, including:
|
|
|
the nature of the financial difficulties; |
|
|
|
our ability to obtain control of the space for re-leasing; |
|
|
|
the length of time it would require for us to re-lease the tenants space; and |
|
|
|
whether the tenants rent was above or below market. |
Property Dispositions. On July 28, 2009, we conveyed the 800-810 Jorie Boulevard property to
the lender in exchange for a release of the loan. The Company recorded an asset impairment charge
of $6.9 million in the second quarter to reduce the net book value of the property to its estimated
fair value and a gain on extinguishment of $8.3 million in the third quarter representing the
difference between the extinguished loan balance and accrued interest and the carrying value of the
property.
On February 1, 2010 we completed the sale of our 7100 Madison Avenue property for the purchase
price of $4.3 million and received net proceeds of $0.5 million.
Preferred Shares. Our Series B Shares rank senior to our common shares as to the payment of
dividends and to the extent of their $25.00 per share liquidation preference. Our Series B Shares
may be redeemed at our option at a redemption price of $25.00 per share plus accrued and unpaid
dividends. The redemption price is payable solely out of the proceeds from our sale of other
capital shares of beneficial interest.
On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our
Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly
dividend had a record date of January 19, 2009 and a payment date of January 30, 2009.
We announced that our Board determined not to declare a quarterly distribution on our Series B
Shares for any of the four quarters of 2009 and first quarter of 2010, and that the Board was
unable to determine when and if we will recommence distributions on our Series B Shares. The total
arrearage in payment of dividends on the Series B Shares is $11.25 million. The Board is also in
the process of considering various financing, capitalization, asset sales and other alternatives
for the Company.
45
Dividends paid in the amount of $0.5625 per share in 2009 on our Series B Shares have been
determined to be a return of capital. There can be no assurances as to the timing and amounts of
any future dividends on our Series B Shares. The holders of Series B Shares have the right to elect
two additional members to our Board if six consecutive quarterly dividends on our Series B Shares
are outstanding. The term of any trustees elected by the holders of the Series B Shares will expire
whenever the total dividend arrearage on our Series B Shares has been paid and current dividends
have been declared and set apart for payment.
Indebtedness. Our aggregate indebtedness had a carrying value of $341.8 million and a face
value of $341.7 million at December 31, 2009. This indebtedness had a weighted average maturity of
3.5 years and bore interest at a weighted average interest rate of 6.26% per annum. At December 31,
2009, $330.8 million, or 96.8% of such indebtedness, bore interest at fixed rates, and $11.0
million, or 3.2% of such indebtedness, bore interest at variable rates. None of our variable rate
debt is subject to interest rate cap agreements.
Debt Activity. We paid $1.8 million of principal payments during 2009. This amount is
exclusive of $1.5 million of principal payments made on behalf of the Company by Lightstone on the
PGRT ESH, Inc. (PGRT ESH) loan through a capital contribution by Prime Office to the Company and,
in turn, to PGRT ESH.
On September 18, 2009, with a transaction effective date of July 16, 2009, PGRT ESH assigned
its membership interest in BHAC to LSG-ESH LLC (LSG-ESH), an affiliate of the Companys Chairman
of the Board and our parent company, Prime Office. In connection with the transaction, PGRT ESH
was released from liability for the obligations under the Citicorp Loan. Due to the related party
nature of the transfer of the BHAC interest, including the assumption of the obligations under the
Citicorp Loan, this transaction was approved unanimously by our independent trustees and we
recorded this transaction as an increase to additional paid-in capital and a reduction of mortgage
and notes payable of $80.0 million and a reduction in accrued financing fees included in accounts
payable and accrued expenses of $2.1 million.
Capital Improvements. In order to secure new and renewal leases, our properties require an
infusion of capital for tenant improvements and leasing commissions. For the years ended December
31, 2009, 2008 and 2007, our tenant improvements and leasing commissions averaged $57.91, $40.78
and $38.88, per square foot, respectively, of newly-leased office space totaling 87,030, 102,314
and 405,680 square feet, respectively, and $3.99, $14.93 and $11.58, per square foot, respectively,
of office leases renewed by existing tenants totaling 140,784, 214,756 and 236,752 square feet,
respectively. Additionally, for 2009, we incurred $2.1 million of building improvements, excluding
discontinued operations, and we expect to incur approximately $0.8 million for 2010.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited
purposes. As of December 31, 2009, we are not involved in any unconsolidated SPE transactions and
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on us.
46
Historical Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
3,906 |
|
|
$ |
1,763 |
|
|
$ |
2,143 |
|
|
|
121.6 |
% |
Net cash (used in) provided by investing
activities |
|
$ |
(8,008 |
) |
|
$ |
79,341 |
|
|
$ |
(87,349 |
) |
|
|
(110.1 |
)% |
Net cash provided by (used in) financing
activities |
|
$ |
559 |
|
|
$ |
(103,578 |
) |
|
$ |
104,137 |
|
|
|
100.5 |
% |
Cash Flows from Operating Activities. Net cash provided by operating activities was
$3.9 million for the year ended December 31, 2009, compared to $1.8 million for the year ended
December 31, 2008 an increase of $2.1 million. This change was primarily due to a $7.8 million
decrease in interest payments primarily due to the refinancing and retirement of mortgage notes
payable, a $2.2 million increase in the collection of receivables primarily due to timing, a
$1.4 million decrease to utilities expense primarily due to favorable weather conditions, a
$1.3 million reduction in rent abatements associated with tenants at our 330 N. Wabash Avenue and
Continental Towers properties, a $1.1 million decrease in real estate tax payments primarily due to
reduced property assessments, a $1.1 million decrease in operating expenses primarily resulting
from lower occupancy, and a $0.8 million reduction in employee bonuses. The increase was partially
offset by the $6.0 million gain on earnest deposit in 2009 from the cancellation of a sale
agreement on our 180 N. LaSalle Street property received in 2008 as a restricted cash deposit, a
$1.8 million payment to terminate a tax indemnification agreement related to our Continental Towers
property in 2009, the $1.0 million collection of a previously reserved receivable from a tenant at
our former 800-810 Jorie Boulevard property in 2008, a $1.0 million decrease in interest income due
to lower interest rates and cash balances, a $0.9 million reduction in other income due to the loss
of third-party management contracts and a $0.8 million reduction of parking revenues at our
330 N. Wabash Avenue property.
Cash Flows from Investing Activities. Net cash (used in) provided by investing activities was
($8.0 million) for the year ended December 31, 2009 compared to $79.3 million for the year ended
December 31, 2008 a decrease of $87.3 million. In 2008, we received $101.1 million in proceeds
from the sale of the real estate and joint venture interests ($51.1 million received from the sale
of our joint venture interest in The United Building, $45.9 million for the partial sale of our 330
N. Wabash Avenue property and $4.1 million from the sale of our former 1051 N. Kirk Road property).
We had a decrease in capital expenditures of $12.9 million and a decrease in leasing costs of $1.1
million in 2009 compared to 2008.
Cash Flows from Financing Activities. Net cash provided by (used in) financing activities was
$0.6 million for the year ended December 31, 2009 compared to ($103.6 million) for the year ended
December 31, 2008 an increase of $104.1 million. In 2008, (i) we refinanced the existing
$195.0 million in loans collateralized by our 330 N. Wabash Avenue property with a new
$138.0 million loan; (ii) we retired a $14.5 million outstanding first mortgage loan
cross-collateralized by two of our properties and replaced it with an $11.6 million first mortgage
on our 4343 Commerce Court property; and (iii) retired the outstanding balance of $18.8 million on
two Citicorp mezzanine loans and paid $7.5 million in financing costs related to the refinancing
transactions including $2.2 million on the PGRT ESH Citicorp Loan. An affiliate of the Companys
Chairman of the Board funded $6.1 million and $12.6 million to pay down principal, interest and
other fees on the PGRT ESH Citicorp Loan in 2009 and 2008, respectively. We paid dividends
totaling $2.3 million in 2009 compared to $27.0 million in 2008.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
1,763 |
|
|
$ |
7,301 |
|
|
$ |
(5,538 |
) |
|
|
(75.9 |
)% |
Net cash provided by (used in) investing
activities |
|
$ |
79,341 |
|
|
$ |
(135,867 |
) |
|
$ |
215,208 |
|
|
|
158.4 |
% |
Net cash (used in) provided by financing
activities |
|
$ |
(103,578 |
) |
|
$ |
106,348 |
|
|
$ |
(209,926 |
) |
|
|
(197.4 |
)% |
Cash Flows from Operating Activities. Net cash provided by operating activities was
$1.8 million for the year ended December 31, 2008, compared to $7.3 million for the year ended
December 31, 2007 a decrease of $5.5 million. This change was primarily due to: a $6.6 million
reduction of tenant receipts due to lower occupancy at our 330 N. Wabash Avenue, Continental Towers
and 800-810 Jorie Boulevard properties; a $6.2 million preferential return received in 2007 from
our investment in the unconsolidated entity that owns ESH that was suspended in 2008; a $3.1
million increase in rents received in advance in 2007; a $2.2 million decrease in Services Company
revenues; a $1.5 million decrease in interest income due to lower interest rates and cash balances;
and a $1.1 million refund of real estate taxes received in 2007 associated with a former owned
property. The decrease was partially offset by the $6.0 million earnest money received related to
the sale of our 180 N. LaSalle Street property; a $4.0 million decrease in interest payments
primarily due to the refinancing and retirement of mortgage notes payable; a $1.5 million decrease
in real estate taxes paid; a $1.4 million reduction in property operating expenses due to the sale
of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008; a $1.3 million decrease
in Services Company operations in 2008; the collection of a $1.0 million previously reserved
receivable from a former tenant at our 800-810 Jorie Boulevard property in 2008; and a $0.9 million
lease termination fee received in 2008 from a tenant at our 180 N. LaSalle Street property.
Cash Flows from Investing Activities. Net cash provided by (used in) investing activities was
$79.3 million for the year ended December 31, 2008 compared to $(135.9) million for the year ended
December 31, 2007 an increase of $215.2 million. In 2007, we invested $120.0 million in a
membership interest in the unconsolidated entity that owns ESH. In 2008, we received $101.1
million in proceeds from the sale of real estate and joint venture interests ($51.1 million
received from the sale of our joint venture interest in The United Building, $45.9 million from the
partial sale of our 330 N. Wabash Avenue property and $4.1 million from the sale of our former 1051
N. Kirk Road property). This increase was partially offset by proceeds of $4.7 million related to
the sale of our Narco River property received during 2007. Also, an additional $5.1 million was
spent on real estate and equipment in 2008 compared to 2007.
Cash Flows from Financing Activities. Net cash (used in) provided by financing activities was
$(103.6) million for the year ended December 31, 2008 compared to $106.3 million for the year ended
December 31, 2007 a decrease of $209.9 million. During 2008, (i) we retired the existing
$195.0 million in loans collateralized by our 330 N. Wabash Avenue property and refinanced the
property with a new $138.0 million loan, (ii) we retired a $14.5 million outstanding first mortgage
loan cross-collateralized by two of our properties and replaced it with an $11.6 million first
mortgage on our 4343 Commerce Court property, and (iii) retired the outstanding balance of $18.8
million on two Citicorp mezzanine loans. In June 2007, we received $120.0 million in loan proceeds
on a non-recourse loan (related to our investment in ESH) from Citicorp and retired $38.5 million
of this debt during 2008. Affiliates of Lightstone funded $49.9 million to pay down principal and
interest on the Citicorp Loan in 2008; no amounts were funded during 2007. We paid dividends and
distributions to our common share/unit holder totaling $18.0 million in 2008; no amounts were
funded during 2007. We also
paid $9.0 million in dividends to our preferred shareholders in 2008 and $11.3 million in
2007. We paid $7.5 million and $0.7 million in financing costs during 2008 and 2007, respectively.
48
Critical Accounting Policies
General. The previous discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States (U.S. GAAP). The
preparation of our financial statements requires us to make estimates and judgments about the
effects of matters or future events that are inherently uncertain, including but not limited to
assumptions regarding our ability to continue conducting our operations in substantially the same
manner as we historically have. These estimates and judgments may affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including contingencies and
litigation. We base these estimates on historical experience and on various other assumptions that
we believe to be reasonable in the circumstances. These estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
To assist in understanding our results of operations and financial position, we have
identified our critical accounting policies and discussed them below. These accounting policies are
most important to the portrayal of our results and financial position, either because of the
significance of the financial statement items to which they relate or because they require our
managements most difficult, subjective or complex judgments.
Consolidation. Our consolidated financial statements include our accounts, variable interest
entities (VIEs) in which we are the primary beneficiary and other subsidiaries over which we have
control. Our determination of the appropriate accounting method with respect to our variable
interests is in accordance with U.S. GAAP. We consolidate any VIE of which we are the primary
beneficiary and disclose significant variable interests in VIEs of which we are not the primary
beneficiary. We determine if an entity is a VIE based on several factors, including whether the
entitys total equity investment at risk upon inception is sufficient to finance the entitys
activities without additional subordinated financial support provided by any parties, including
equity holders. We make judgments regarding the sufficiency of the equity at risk based first on
qualitative analysis, then quantitative analysis if necessary. In a quantitative analysis, we
incorporate various estimates, including estimated future cash flows, asset hold periods and
discount rates, as well as estimates of the probabilities of various scenarios occurring. If the
entity is a VIE, we then determine whether we will absorb the majority of expected losses and/or
receive the majority of expected returns, and if so, consolidate the entity as the primary
beneficiary. This determination of whether we will absorb the majority of expected losses and/or
receive the majority of expected returns includes any impact of an upside economic interest in
the form of a promote that we may have. A promote is a disproportionate interest built into the
distribution structure of the entity based on the entitys achievement of certain return hurdles.
We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing
judgments and estimates that are inherently subjective. If we made different judgments or utilized
different estimates in these evaluations, it could result in differing conclusions as to whether or
not an entity is a VIE and whether or not to consolidate such entity. We are not required to
reconsider the entitys VIE status if the entity incurs losses that exceed expectations, but are
required to reconsider the status if the structure of the entity changes.
49
Our determination of the appropriate accounting method for all other investments in
subsidiaries, including those that are not primary beneficiary interests in VIEs, is based on the
amount of control or influence we have (considering our ownership interest) in the underlying
entity. We consolidate those other subsidiaries over which we exercise control. Those other
investments in subsidiaries where we have the ability to exercise significant influence (but not
control) over operating and financial policies of such subsidiaries (including certain subsidiaries
where we have less than 20% ownership) are accounted for using the equity method.
Tenant Reimbursements. Estimates are used to record cost reimbursements from tenants for real
estate taxes and operating expenses. We recognize revenue based upon the amounts to be reimbursed
from our tenants in the same period these reimbursable expenses are incurred. Differences between
estimated recoveries and final amounts billed are recognized in the subsequent year. Leases are not
uniform in dealing with such cost reimbursements and variations exist in computations between
properties and tenants. Adjustments are also made throughout the year to these receivables and the
related cost recovery income based upon our best estimate of the final amounts to be billed and
collected. We analyze the balance of the estimated accounts receivable for real estate taxes and
operating expenses for each of our properties by comparing actual recoveries versus actual
expenses.
Accounts Receivable and Allowance for Doubtful Accounts. We monitor the liquidity and
creditworthiness of our tenants on an ongoing basis. We maintain allowances for doubtful accounts
using the specific identification method for estimated losses resulting from the inability of
certain of our tenants to make payments required by the terms of their respective leases. If the
financial condition of our tenants were to deteriorate, additional allowances may be required.
Assumed Lease Liabilities. As a result of the negotiation of certain leases, we assumed the
liability for the tenants obligation or agreed to reimburse the tenants for their obligation under
leases with their prior landlords. Our policy is to record the estimated net obligation we may be
subject to as a liability. The net obligation is derived by calculating our total contractual
obligation and reducing the amount by existing subleases and an estimate of subleases we anticipate
signing in the future based on the nature of the space, the property and market conditions. We
periodically review these estimates for reasonableness based on changes in market conditions and
executed subleases. Failure to achieve forecasted results could lead to a future increase in the
liabilities associated with these transactions.
Depreciation and Amortization. Depreciation expense for real estate assets is computed using
the straight-line method over the estimated useful lives of the assets: forty years for the
composite life of buildings and improvements and five to ten years for equipment and fixtures.
Expenditures for leasehold improvements and construction allowances paid to tenants are capitalized
and amortized over the initial term of each lease.
Impairment of Long-Lived Assets. In evaluating our assets for impairment, we record impairment
losses on long-lived assets used in operations when events and circumstances indicate that the
assets might be impaired. Assets that display indicators of possible impairment are reviewed to see
if their net book value will be recovered from estimated undiscounted cash flows over an
anticipated hold period. If these undiscounted cash flows, plus the proceeds from a sale at the end
of the anticipated hold period, are less than the net book value of the related asset, our policy
is to record an impairment reserve related to the asset in the amount of the difference between its
net book value and our estimate of its fair market value, less costs of sale. For assets held for
sale, impairment is measured as the difference between carrying value and fair value, less cost to
dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of
interest.
Property Held for Sale. We evaluate held for sale classification of our owned real estate on
a quarterly basis. Assets that are classified as held for sale are recorded at the lower of their
carrying amount or fair value less cost to sell. Assets are generally classified as held for sale
once a sales contract is executed with no contingencies and the prospective buyer has funds at risk
to
ensure performance. The results of operations of these real estate properties are reflected
as discontinued operations in all periods reported.
50
Inflation
Substantially all of our office leases require tenants to pay, as additional rent, a portion
of real estate taxes and operating expenses. In addition, many of our leases provide for fixed
increases in base rent or indexed escalations (based on the Consumer Price Index or other
measures). We believe that inflationary increases in expenses will be offset, in part, by the
expense reimbursements and contractual rent increases described above.
As of December 31, 2009, approximately $11.0 million of our outstanding indebtedness was
subject to interest at floating rates. Future indebtedness may also be subject to floating rate
interest. Inflation, and its impact on floating interest rates, could affect the amount of interest
payments due on such indebtedness. None of our floating rate debt is subject to interest rate cap
agreements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about our financial instruments that are sensitive to
changes in interest rates. For our mortgage notes payable, the table presents principal cash flows,
including principal amortization, and related weighted-average interest rates by expected maturity
dates as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity |
|
|
|
Principal (Notional) Amount by Expected Maturity |
|
|
|
Average Interest Rate |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate amount Face Value |
|
$ |
127.3 |
|
|
$ |
153.4 |
|
|
$ |
|
|
|
$ |
50.0 |
|
|
$ |
330.7 |
|
Weighted-average
interest rate
Face Value |
|
|
6.1 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate amount Carrying Value |
|
$ |
127.4 |
|
|
$ |
153.4 |
|
|
$ |
|
|
|
$ |
50.0 |
|
|
$ |
330.8 |
|
Weighted-average interest rate
Carrying Value |
|
|
6.1 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate amount |
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
9.8 |
|
|
$ |
11.0 |
|
Weighted-average interest rate |
|
|
4.5 |
% |
|
|
4.5 |
% |
|
|
4.5 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
(1) |
|
Based upon the rates in effect at December 31, 2009, the weighted-average interest rates on
our mortgage notes payable at December 31, 2009 was 6.2%. If interest rates on our variable
rate debt increased by one percentage point, our annual interest incurred would increase by
$0.1 million. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X are included in
this Report on Form 10-K commencing on page F-1.
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
51
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management evaluated, under the supervision and with the participation of our
Chief Executive Officer and our Executive Vice PresidentCapital Markets, the officer currently
performing the function of our principal financial officer, the effectiveness of our disclosure
controls and procedures as of December 31, 2009. Based on that evaluation, our Chief Executive
Officer and Executive Vice PresidentCapital Markets concluded that, as of December 31, 2009, our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934), were effective.
(b) Managements Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our
system of internal control over financial reporting is designed to provide reasonable assurance to
our management and our Board regarding the preparation and fair presentation of published financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America.
Because of its inherent limitations, a system of internal control over financial reporting may
not prevent or detect misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2009, our system of internal
control over financial reporting was effective.
This annual report on Form 10-K does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting. Managements report
was not subject to attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only managements report in
this annual report.
(c) Changes in Internal Control over Financial Reporting.
There have not been any changes in our internal control over financial reporting during our
last fiscal quarter within the fiscal year to which this annual report relates that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Trustees
The following table presents certain information as of March 20, 2010 concerning each of our
trustees serving in such capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
Year Term of |
|
Served as a |
|
|
|
|
Occupation and |
|
Office Will |
|
Trustee |
Name |
|
Age |
|
Positions Held |
|
Expire |
|
Since |
David Lichtenstein |
|
49 |
|
Chairman of the Board |
|
2010 |
|
2005 |
Jeffrey A. Patterson |
|
50 |
|
President and Chief Executive Officer, Trustee |
|
2010 |
|
2005 |
Peyton Owen, Jr. |
|
52 |
|
Trustee |
|
2010 |
|
2007 |
John M. Sabin |
|
55 |
|
Independent Trustee |
|
2010 |
|
2005 |
Shawn R. Tominus |
|
51 |
|
Independent Trustee |
|
2010 |
|
2005 |
Bruno de Vinck |
|
64 |
|
Trustee |
|
2010 |
|
2005 |
George R. Whittemore |
|
60 |
|
Independent Trustee |
|
2010 |
|
2005 |
David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005.
David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstones growth into one of
the largest privately-held real estate companies in the United States today. The Lightstone Group
is now ranked among the 25 largest real estate companies in the industry with a diversified
portfolio of approximately 18,000 residential units and approximately 30 million square feet of
office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico.
The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the
largest, mid-price extended-stay hotel company in the United States, with 687 hotels and
approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The
Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and
New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers.
Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay Inc. and Prime Retail,
Inc., all private companies, and is Chief Executive Officer, President and Chairman of the board of
trustees of Lightstone Value Plus Real Estate Investment Trust, Inc. and Lightstone Value Plus Real Estate Investment Trust II, Inc., each, a public company.
Jeffrey A. Patterson. Mr. Patterson has served as our President and Chief Executive Officer
since August 2004 and has served on our Board since February 2005. From October 2003 until August
2004, Mr. Patterson served as our President and Chief Investment Officer. From June 2000 to October
2003, Mr. Patterson served as our Co-President and Chief Investment Officer. From November 1997 to
June 2000, Mr. Patterson served as our Executive Vice President and Chief Investment Officer. In
his current capacity, Mr. Patterson oversees our strategic direction and performance, including
acquisitions, dispositions, joint ventures and development oversight. Mr. Patterson is also
responsible for the asset management, operations, leasing and marketing activities for our
properties. From 1989 to November 1997, Mr. Patterson was Executive Vice President of The Prime
Group, Inc., with primary responsibility for the acquisition, financing and redevelopment of office
and mixed-use properties. Mr. Patterson was also in charge of the overall operations of The Prime
Group, Inc.s office properties, and has provided real estate advisory services for several major
institutional investors. Prior to joining The Prime Group, Inc., Mr. Patterson served as Director
of Development in Tishman Speyer Properties Chicago office
and as a Senior Financial Analyst at Metropolitan Life Insurance Companys Real Estate
Investment Group.
53
Peyton (Chip) Owen, Jr. Mr. Owen joined The Lightstone Group in 2007 as President and Chief
Operating Officer after three years as chief operating officer of Equity Office Properties Trust,
based in Chicago. Prior to Equity Office, Mr. Owen spent almost 20 years at Chicagos Jones Lang
LaSalle, most recently as chief operating officer, Americas Region. Mr. Owen has more than 25
years of real estate leasing, property management and investment experience. He has served on the
board of Extended Stay Hotels since 2007 and previously served on the boards of Metropolitan Family
Services based in Chicago and the University of Virginia Engineering Foundation, both non-profits.
Mr. Owen holds a Bachelor of Science in mechanical engineering and a Master in Business
Administration from the University of Virginia.
John M. Sabin. Mr. Sabin has served on our Board since July 2005. Mr. Sabin is currently the
Chief Financial Officer and General Counsel of Phoenix Health Systems, Inc. He also serves on the
board of Hersha Hospitality Trust since 2003, a publicly traded company. Additionally, during the
past five years Mr. Sabin has also served on the boards of Competitive Technologies, Inc. (from
1996 to 2007) and North American Scientific, Inc. (from 2005 to 2009). From January 2000 to October
2004, Mr. Sabin was the Chief Financial Officer, General Counsel and Secretary of NovaScreen
Biosciences Corporation, a private bioinformatics and contract research biotech company. Prior to
joining NovaScreen, Mr. Sabin served as a finance executive with Hudson Hotels Corporation,
Vistana, Inc., Choice Hotels International, Inc., Manor Care, Inc. and Marriott International, Inc.
In his professional life Mr. Sabin has had commercial lease experience with a national law firm,
transactional real estate experience with national hospitality and health care firms, commercial
real estate financing experience, as well as experience as an audit committee member of other
public companies. Mr. Sabin has received Bachelor of Science degrees in Accounting and in
University Studies; a Masters of Accountancy and a Masters in Business Administration from Brigham
Young University, and he also received a Juris Doctor from the J. Reuben Clark Law School at
Brigham Young University. Mr. Sabin is a licensed CPA and is admitted to the bar in several states.
Shawn R. Tominus. Mr. Tominus has served on our Board since July 2005. Mr. Tominus is the
founder and has served as the President of Metro Management, a real estate investment and
management company, which specializes in the acquisition, financing, construction and redevelopment
of residential, commercial and industrial properties, since 1994. Mr. Tominus is also a director
of The Lightstone Value Plus Real Estate Investment Trust, Inc. and The Lightstone Value Plus Real
Estate Investment Trust II, Inc., both public companies. Mr. Tominus is currently responsible at
Metro Management for the ownership, management and development of assets in excess of $50,000,000.
Mr. Tominus has over 25 years experience in real estate, including in the areas of management,
acquisitions, construction and redevelopment and also acts as a national consultant primarily
focusing on market and feasibility analysis. Prior to Metro Management, Mr. Tominus held the
position of Senior Vice President at Kamson Corporation where he managed a portfolio of over 5,000
residential units as well as commercial and industrial properties. Mr. Tominus holds numerous
professional certifications including from the Institute of Real Estate Management and the
International Council of Shopping Centers.
Bruno de Vinck. Mr. de Vinck has served on our Board since July 2005. Mr. de Vinck is the
Chief Operating Officer, Senior Vice President, Secretary and a director of The Lightstone Value
Plus Real Estate Investment Trust, Inc., a public company, the Secretary and a director of The
Lightstone Value Plus Real Estate Investment Trust II, Inc., a public company, and a director of
Extended Stay Inc., a private company. Mr. de Vinck was also a director of the Park Avenue Bank
New York City, a private company, from 2005 through 2010. Mr. de Vinck is also involved in the
management and renovation of various multi-family, retail and industrial properties for The
Lightstone Group and has served as its Senior Vice President since April 1994. Prior to this,
Mr. de Vinck was a manager with numerous real estate management companies since 1973, and was
the founding president and Chairman of the Ramsey Homestead Corp., a not-for-profit senior citizen
residential health care facility. Mr. de Vinck is a past New Jersey chapter president for the
Institute of Real Estate Management (IREM), as well as a past Director of the New Jersey
Association of Realtors.
54
George R. Whittemore. Mr. Whittemore has served on our Board since July 2005. Mr. Whittemore
has extensive experience in accounting, banking, finance and real estate. Mr. Whittemore currently
serves as a director of The Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone
Value Plus Real Estate Investment Trust II, Inc., Village Bank & Trust in Richmond, Virginia, and
Supertel Hospitality, Inc. in Norfolk, Nebraska, all public companies. Mr. Whittemore previously
served as President and CEO of Supertel Hospitality Trust, Inc. from November 2001 until August
2004 and as Senior Vice President and director of both Anderson & Strudwick, Incorporated, a
brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from
October 1996 until October 2001. Mr. Whittemore has also served as a director, President and
Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation from
September 1982 until August 1994, when these institutions were acquired by a merger with Signet
Banking Corporation (now Wachovia Corporation), and as President of Mills Value Adviser, Inc., a
registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Prior
to that, Mr. Whittemore was the treasurer of Pioneer Federal Savings Bank from 1975 through 1985.
Mr. Whittemore started his career in public accounting with Ernst & Ernst (the predecessor company
of Ernst & Young LLP) and received his CPA certificate from the State of Virginia in 1975.
Certain Proceedings Regarding Trustees
Mr. Lichtenstein is the founder and owner of Lightstone and serves as a director and/or executive
officer of certain of its affiliates, and Mr. de Vinck is a Senior Vice President of Lightstone and
serves as a director and/or executive officer of certain of its affiliates. Certain of
Lightstones direct or indirect affiliates at the property-ownership level, which are not
subsidiaries of PGRT or our Operating Partnership, have had receivers appointed in connection with
the exercise by mortgage holders of their remedies relating to the
non-payment of loans affecting the relevant properties. In addition,
affiliates of Lightstone (i) consisting of an entity which owns extended stay hotel properties,
filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York in
June 2009, and (ii) consisting of a private bank headquartered in New York City, was closed
by the New York State Banking Department on March 12, 2010 and a receiver appointed, neither of
which entities are subsidiaries of PGRT or our Operating Partnership.
Executive Officers
The following table presents certain information as of March 20, 2010 concerning each of our
executive officers and key employees serving in such capacities:
|
|
|
|
|
Name |
|
Age |
|
Position |
David Lichtenstein |
|
49 |
|
Chairman of the Board |
Jeffrey A. Patterson |
|
50 |
|
President and Chief Executive Officer, Trustee |
James F. Hoffman |
|
47 |
|
Senior Executive Vice PresidentGeneral Counsel and Secretary |
Steven R. Baron |
|
61 |
|
Executive Vice PresidentLeasing |
Paul G. Del Vecchio |
|
45 |
|
Executive Vice PresidentCapital Markets |
Victoria A. Cory |
|
45 |
|
Senior Vice PresidentLoan Administration, Real Estate Tax and Due Diligence |
Anita T. Pallardy |
|
51 |
|
Senior Vice PresidentLeasing |
David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005.
David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstones growth into one of
the largest privately-held real estate companies in the United States today. The Lightstone Group
is now ranked among the 25 largest real estate companies in the industry with a diversified
portfolio of approximately 18,000 residential units and approximately 30 million square feet of
office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico.
The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the
largest, mid-price extended-stay hotel company in the United States, with 687 hotels and
approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The
Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and
New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers.
Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay
Inc. and Prime Retail, Inc., all private companies, and is Chief Executive Officer, President
and Chairman of the board of trustees of Lightstone Value Plus Real
Estate Investment Trust, Inc. and Lightstone Value Plus Real Estate
Investment Trust II, Inc., each, a public company.
55
Jeffrey A. Patterson. Mr. Patterson has served as our President and Chief Executive Officer
since August 2004 and has served on our Board since February 2005. From October 2003 until August
2004, Mr. Patterson served as our President and Chief Investment Officer. From June 2000 to October
2003, Mr. Patterson served as our Co-President and Chief Investment Officer. From November 1997 to
June 2000, Mr. Patterson served as our Executive Vice President and Chief Investment Officer. In
his current capacity, Mr. Patterson oversees our strategic direction and performance, including
acquisitions, dispositions, joint ventures and development oversight. Mr. Patterson is also
responsible for the asset management, operations, leasing and marketing activities for our
properties. From 1989 to November 1997, Mr. Patterson was Executive Vice President of The Prime
Group, Inc., with primary responsibility for the acquisition, financing and redevelopment of office
and mixed-use properties. Mr. Patterson was also in charge of the overall operations of The Prime
Group, Inc.s office properties, and has provided real estate advisory services for several major
institutional investors. Prior to joining The Prime Group, Inc., Mr. Patterson served as Director
of Development in Tishman Speyer Properties Chicago office and as a Senior Financial Analyst at
Metropolitan Life Insurance Companys Real Estate Investment Group.
James F. Hoffman. Mr. Hoffman has served as our Senior Executive Vice PresidentGeneral
Counsel and Secretary since February 2007. From October 2000 to February 2007, Mr. Hoffman served
as our Executive Vice PresidentGeneral Counsel and Secretary. Mr. Hoffman obtained his law degree
in 1987 from Harvard Law School where he graduated Cum Laude and obtained his finance degree in
1984 from the University of Illinois where he graduated with Highest Honors. From March 1998 to
October 2000, Mr. Hoffman served as our Senior Vice PresidentGeneral Counsel and Secretary and
before that as our Vice President and Associate General Counsel. Prior to working for us,
Mr. Hoffman served as Assistant General Counsel of our predecessor company, The Prime Group, Inc.,
and was an associate with the law firm of Mayer, Brown & Platt (now Mayer Brown LLP).
Steven R. Baron. Mr. Baron serves as our Executive Vice President-Office Leasing. Mr. Baron
is involved in overseeing the leasing and performing asset management and development services in
connection with the 1407 Broadway Avenue building in New York. He also oversees all the leasing
activity for our suburban portfolio of properties. Mr. Baron has previously served as the Executive
Vice President in charge of our Industrial Group, responsible for overseeing the leasing and build
to suit development and served as our Senior Vice President-Development and Leasing, where he was
responsible for the oversight of our redevelopment of the 180 North LaSalle Street building in
Chicago, Illinois. Previous to the 180 North LaSalle redevelopment project, Mr. Baron was the
senior leasing executive responsible for the overall leasing activity of the Companys Chicago
central business district portfolio. Prior to joining Prime Group Realty Trust, Mr. Baron held
senior leasing and/or development positions with The Prime Group, Inc., Metropolitan Structures,
Inc., and Stein & Co. where he leased over 7 million square feet of CBD office space. Mr. Baron is
a licensed real estate broker and has taught at DePaul University and Kellogg School of Management
at Northwestern University, where he lectured on commercial real estate development, leasing and
marketing.
56
Paul G. Del Vecchio. Mr. Del Vecchio serves as our Executive Vice PresidentCapital Markets.
From April 2003 to February 2007, Mr. Del Vecchio served as our Senior Vice PresidentCapital
Markets. From February 2000 to April 2003, Mr. Del Vecchio served as our Vice PresidentCapital
Markets and from November 1998 to February 2000, Mr. Del Vecchio served as our Assistant Vice
PresidentCapital Markets. Prior to joining us, Mr. Del Vecchio
was an Assistant Vice President for Prime Capital Funding LLC from October 1997 to August
1998. Mr. Del Vecchio is a licensed real estate broker and a certified public accountant.
Victoria A. Cory. Ms. Cory serves as our Senior Vice PresidentLoan Administration,
Real Estate Tax and Due Diligence. From April 2000 to February 2006, Ms. Cory served as our
Vice PresidentLoan Administration, Real Estate Tax and Due Diligence. Prior to joining us,
Ms. Cory was the Senior Vice PresidentLoan Administration for Prime Capital Funding LLC from
January 1998 until March 2000.
Anita T. Pallardy. Ms. Pallardy serves as our Senior Vice PresidentLeasing, CBD, overseeing
the leasing and marketing of our 180 North LaSalle Street and 330 North Wabash Avenue properties.
From March 2001 to November 2006, Ms. Pallardy served as our Vice PresidentLeasing, CBD, and from
May 1998 to February 2001 served as Portfolio Leasing Manager, CBD. Prior to joining us, Ms.
Pallardy served as Vice President, Leasing for The John Buck Company, in Chicago, Illinois.
57
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and trustees, and
persons who own more than ten percent of a registered class of our equity securities, to file
reports of the ownership and changes in the ownership (Forms 3, 4 and 5) with the SEC and the NYSE.
Officers, trustees and beneficial owners of more than ten percent of our equity securities are
required by SEC regulations to furnish us with copies of all such forms which they file.
Based solely on our review of the copies of Forms 3, 4 and 5 and the amendments thereto
received by it for the year ended December 31, 2009, or written representations from certain
reporting persons that no Forms 3, 4 or 5 were required to be filed by those persons, to our
knowledge, no transactions were reported late during the year ended December 31, 2009.
Code of Ethics
We have adopted a code of ethics that applies to all employees, including but not limited to
our President and Chief Executive Officer (our principal executive officer), Executive Vice
PresidentCapital Markets (our principal financial officer) and Vice PresidentCorporate Accounting
(our principal accounting officer), and other persons that may perform similar functions from time
to time. Our code of ethics is published on our website at www.pgrt.com. In addition our
code of ethics is available in print to any shareholder who requests it from our investor relations
representative c/o Prime Group Realty Trust, Investor Relations Representative, 330 North Wabash
Avenue, Suite 2800, Chicago, Illinois 60611. In the event that any future amendment to, or waiver
from, a provision of our code of ethics would otherwise require disclosure under Item 5.05 of Form
8-K, we intend to satisfy that disclosure requirement by posting such amendment or waiver on our
website.
Information Regarding Audit Committee
Our Board has established an audit committee. The charter of our audit committee is available
on our web site at www.pgrt.com. Since July 1, 2005 the audit committee has consisted of
Messrs. Sabin, Tominus and Whittemore, each of whom is independent within the meaning of the NYSE
listing standards. Mr. Whittemore was named chairman of the audit committee on July 1, 2005. The
Board determined that Messrs. Whittemore and Sabin are qualified as audit committee financial
experts as defined in Item 407(d) of Regulation S-K. For more information regarding
Messrs. Whittemore and Sabins relevant professional experience, see Trustees.
Information Regarding Compensation Committee (or equivalent)
Because only our Series B Shares are listed on the NYSE, we are not required to have a
separate compensation committee of the Board under applicable NYSE listing requirements. Likewise,
we are not required to have and do not operate under a compensation charter. We believe it is
appropriate for us not to have a compensation committee or compensation charter because our common
shares are not publicly traded and our common shares are wholly owned and we are controlled by an
affiliate of Lightstone, a private company.
The members of our Boards Executive Committee, consisting of Mr. Lichtenstein, our Chairman,
Mr. Patterson, our President and Chief Executive Officer and Mr. Owen, a member of our Board,
periodically review our compensation practices. Our compensation program consists of a base salary
and opportunity to receive a cash bonus for our executive officers, and fees for our trustees. No
cash bonuses were paid to our executive officers for 2009. Fees for our trustees are unchanged for
calendar years 2008 and 2009. Mr. Pattersons base salary for 2009 was set pursuant to the terms
of his employment agreement, which was previously approved by our Board.
58
We did not engage a compensation consultant to assist us in determining compensation for
calendar year 2009.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our compensation philosophy is based on aligning managements business objectives with those
of our shareholders in order to provide compensation that will enable us to attract and retain
talented executives, and link the interests of our executive officers to those of our shareholders.
Accordingly, the employment agreement for Jeffrey A. Patterson, our President and Chief Executive
Officer, provides that annual bonuses may be earned by him based on increases in the net operating
income of our properties. In addition, Mr. Patterson had an option through the end of 2009 which
allowed him to acquire membership interests in Prime Office on similar terms as our existing
shareholders other initial equity investors. Finally, a significant portion of the compensation of
our leasing personnel is directly tied to the execution of leases at our properties. Annual salary
increases and bonuses for our other officers and employees are determined based upon a review of
their individual performance and the performance of their relevant departments during the year.
We believe that, through the foregoing employment agreements and arrangements, the financial
interests of our President and Chief Executive Officer and key executives are as a whole aligned
with the interests of our shareholders. Throughout 2009, we had employment agreements with certain
of our senior executives. See Employment Agreements for more information regarding these
employment agreements.
Mr. Patterson was named the Companys President and Chief Executive Officer in August 2004,
prior to the Acquisition. Mr. Pattersons annual base salary was $463,710 for calendar year 2009
and pursuant to the terms of his employment agreement was increased by 3% to $477,621 for calendar
year 2010. Mr. Patterson did not receive an annual bonus for 2009.
In general, executive officers, including our President and Chief Executive Officer, are
eligible for, and participate in, our compensation and benefits programs according to the same
general terms as those available to all of our employees. For example, the health and welfare
benefit programs are the same for all of our employees, including our executive officers, and
executive officers participate in the same 401(k) Plan, according to the same terms, as all of our
employees.
Each element of the compensation program is intended to target compensation levels at rates
that take into account current market practices. Offering market-comparable pay opportunities is
designed to allow us to maintain a stable, successful management team. Our market for compensation
comparison purposes is comprised of a group of companies that own, manage, lease, develop and
redevelop office and industrial real estate primarily in the Chicago metropolitan area. In
evaluating this comparison group for compensation purposes, discretion is exercised and judgments
made after considering relevant factors.
The key elements of our executive compensation program for executive officers are base salary
and annual cash bonuses. Each of these is addressed separately below. In determining initial
compensation for executive officers, the companys management considers all elements of an
executive officers total compensation package in comparison to current market practices, ability
to participate in savings plans and other benefits. On at least an annual basis, members of our
Boards Executive Committee consider each executive officers overall compensation, and
determine if such executive officer is entitled to receive a year-end cash bonus and if so,
the amount of the cash bonus.
59
Base Salaries. Base salaries for executive officers are initially determined by evaluating
the executives levels of responsibility, prior experience, breadth of knowledge, internal equity
issues and external pay practices, with particular reference to the market in the Chicago
metropolitan area. Increases to base salaries are driven by performance and market conditions, and
evaluated based on sustained levels of contribution to the company by the relevant executive.
Annual Cash Bonuses. All of the Companys employees are eligible to participate in the
Companys cash bonus program, with executive officer bonuses determined as described above. The
cash bonus program allows us to communicate specific goals that are of primary importance during
each year and motivates executives to achieve these goals. Because of the poor economic conditions
in the real estate industry for calendar year 2009, except for certain leasing related bonuses to
our leasing personnel, we did not pay discretionary bonuses for calendar year 2009.
Summary Compensation Table
The following table sets forth the compensation earned for the years ended December 31, 2009
and 2008 with respect to Mr. Patterson (our President and Chief Executive Officer), Mr. Del Vecchio
(our Executive Vice PresidentCapital Markets and our principal financial officer) and the three
other persons who were our most highly compensated executive officers during 2009 (the Named
Executive Officers).
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option |
|
|
Compen- |
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
sation |
|
|
|
|
Name and Principal Position |
|
Year |
|
|
($) (1) |
|
|
($) (1)(2) |
|
|
($) (3) |
|
|
($) (4) |
|
|
Total ($) |
|
|
Jeffrey A. Patterson |
|
|
2009 |
|
|
|
463,710 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
469,210 |
|
President and Chief |
|
|
2008 |
|
|
|
449,657 |
|
|
|
250,000 |
|
|
|
106,000 |
|
|
|
5,500 |
|
|
|
811,157 |
|
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James F. Hoffman |
|
|
2009 |
|
|
|
260,075 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
265,575 |
|
Senior Executive Vice |
|
|
2008 |
|
|
|
252,083 |
|
|
|
110,000 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
367,583 |
|
PresidentGeneral
Counsel and Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul G. Del Vecchio |
|
|
2009 |
|
|
|
206,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
211,500 |
|
Executive Vice President |
|
|
2008 |
|
|
|
199,167 |
|
|
|
60,000 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
264,667 |
|
Capital Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven R. Baron |
|
|
2009 |
|
|
|
170,000 |
|
|
|
30,383 |
|
|
|
0 |
|
|
|
4,521 |
|
|
|
204,904 |
|
Executive Vice |
|
|
2008 |
|
|
|
170,000 |
|
|
|
178,175 |
|
|
|
0 |
|
|
|
5,500 |
|
|
|
353,675 |
|
PresidentLeasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anita T. Pallardy |
|
|
2009 |
|
|
|
132,500 |
|
|
|
53,080 |
|
|
|
0 |
|
|
|
3,211 |
|
|
|
188,791 |
|
Senior Vice President |
|
|
2008 |
|
|
|
132,500 |
|
|
|
188,045 |
|
|
|
0 |
|
|
|
3,312 |
|
|
|
323,857 |
|
Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown include cash and non-cash compensation or bonuses, as applicable, as reported
in the year in which the service was performed, even if such compensation or bonuses, as
applicable, were paid or vested in a subsequent year. |
|
(2) |
|
Bonus amounts for 2008 include cash bonuses paid in the ordinary course in early 2009 for
services performed in 2008. Further, Ms. Pallardy and Mr. Barons bonuses consisted of
leasing bonuses received during the years indicated above. |
60
|
|
|
(3) |
|
Consisting of grants of options to acquire either directly or through equity interests in
Prime Office a 3.5% ownership interest in the Operating Partnership and us on substantially
the same economic terms as Prime Offices other initial equity investors. The option award in
the 2008 row expired on December 31, 2008 without being exercised and the option award in the
2009 row expired on December 31, 2009 without being exercised. No new option agreement has
been issued in 2010. |
|
(4) |
|
Includes employer matching to the Operating Partnerships 401(k) Plan. |
Employment Agreements
On June 1, 2005, Prime Office entered into employment agreements dated as of May 31, 2005 with
Jeffrey A. Patterson, our President and Chief Executive Officer, and James F. Hoffman, our
Senior Executive Vice President, General Counsel and Secretary. On July 1, 2005, in connection
with the completion of the Acquisition, we and the Operating Partnership adopted and assumed the
two employment agreements.
On December 31, 2008, we entered into amendments to the employment agreements dated as of May
31, 2005 with Jeffrey A. Patterson, our President and Chief Executive Officer, and James F.
Hoffman, our Senior Executive Vice President, General Counsel and Secretary (the Executives).
The amendments were entered into solely to make the necessary changes to the employment agreements
in order to comply with the terms of the recently adopted Section 409A of the Internal Revenue Code
of 1986, as amended (the Code). The transition period for Code Section 409A ended on
December 31, 2008 and it was necessary for the two amendments to be finalized by the end of the
transition period.
The amendments generally add additional Code imposed obligations on the part of the Executives
such as adding required notice and cure periods benefiting the Company and limiting the events for
which the Executives can terminate the agreements for good reason. The modifications include:
(i) requiring that prior to terminating the employment agreements because of a default by the
Company, the Executives must first provide written notice to the Company specifying in reasonable
detail the nature of the defaults within 90 days after the initial existence of such defaults and
that the Company shall have 30 days to cure such default, and (ii) eliminating the right of the
Executives to unilaterally terminate the Agreement upon the occurrence of a change of control of
the Company. The two amendments do not modify the terms of the Companys previously disclosed
retention and severance program, which is described below.
The employment agreements provided for initial base salaries of $412,000 and $226,600,
respectively, and increasing each year thereafter by no less than three percent. Further, the
employment agreements of both Messrs. Patterson and Hoffman provide for the opportunity for the
executives to earn annual bonus compensation as set forth in the respective employment agreement.
Mr. Pattersons agreement provides for an annual bonus based on increases in the net operating
income for our properties, subject to a minimum annual bonus of $500,000 for calendar years 2005,
2006 and 2007, and for discretionary bonuses thereafter. The employment agreements each have an
initial thirty month term and automatically renew for successive one year terms, unless either
party gives written notice of termination to the other party.
The employment agreements provide that if either agreement is terminated by (i) us without
cause (as defined in the agreements), (ii) us in the event of the executives disability (as
defined in the agreements), (iii) the respective executive within specified time periods following
the occurrence of a change of control and (a) a resulting diminution event (as each term is
defined in the agreements) or (b) a resulting relocation of the respective executives office to a
location more than twenty-five miles from its current location, (iv) by the respective
executive for good reason (as defined in the agreements) or (v) automatically upon the respective
executives death, the applicable executive shall be entitled to a pro rata portion of any bonus
compensation otherwise payable to executive for or with respect to the calendar year in which the
termination occurs and a lump sum termination payment equal to the aggregate base compensation
payable to the executive over the remainder of the employment term as in effect immediately prior
to the effective date of the termination.
61
Assuming on December 31, 2009 Mr. Pattersons employment with us was terminated pursuant to
any of clause (i) through (v) above, the estimated value of Mr. Pattersons severance pursuant to
his employment agreement would be $477,621, which is the bonus compensation payable to Mr.
Patterson with respect to the calendar year 2009 and the aggregate base compensation payable to Mr.
Patterson through December 31, 2010. Assuming on December 31, 2009 Mr. Hoffmans employment with
us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr.
Hoffmans severance pursuant to his employment agreement would be $267,877, which is based on and
includes the bonus compensation payable to Mr. Hoffman with respect to the calendar year 2009 and
the aggregate base compensation payable to Mr. Hoffman through December 31, 2010. There are no
material conditions to receipt by the executives of these termination benefits. The amount and
terms of these severance arrangements was determined by Prime Office, and included consideration of
market practices for other similar officers of comparable companies.
The employment agreements also subject the executives to certain confidentiality obligations
and non-solicitation restrictions, and in the case of Mr. Patterson certain non-competition
restrictions, all as more fully set forth in the agreements. Mr. Pattersons agreement also
granted him an option for eighteen months after the closing date of the Acquisition to acquire
membership interests in Prime Office equivalent to a 3.5% ownership interest in the Operating
Partnership and us. Pursuant to a letter agreement dated March 15, 2007, between Mr. Patterson and
Prime Office, Mr. Patterson and Prime Office agreed to extend the exercise period for the option to
the earlier of the occurrence of a change of control involving the Company or December 31, 2007.
This option expired on December 31, 2007. In January 2008, Mr. Patterson and Prime Office, entered
into an Equity Option Agreement dated as of December 31, 2007, granting Mr. Patterson an option to
acquire either directly or through equity ownership in Prime Office up to 3.5% of the equity
interests in the Company and the Operating Partnership pursuant to the terms set forth in such
agreement (the Equity Interest). This option expired on December 31, 2008. As of December 31,
2008, Mr. Patterson entered into a new Equity Option Agreement granting Mr. Patterson the right to
acquire the Equity Interest. The purchase price for the Equity Interest was on substantially the
same economic terms as the class, price and economic terms applicable to Prime Offices other
initial equity investors, taking into account both capital contributions and distributions since
the date of the investors original investment. In addition, the purchase price for the Equity
Interest was increased at the rate of seven percent (7%) per year, pro-rated on a per diem basis,
from January 1, 2007, through the date of the closing of the purchase of the Equity Interest. The
option expired on December 31, 2009, subject to earlier termination if not exercised prior to
Mr. Pattersons termination of employment under his employment agreement. The option was not
exercised prior to its expiration. The closing on the purchase of the Equity Interest was only to
be effective on the earlier of (i) immediately preceding a change of control as defined in Mr.
Pattersons employment agreement and (ii) December 31, 2009. The closing would still have occurred
and the exercise of the option would be effective if Mr. Pattersons employment was terminated in
connection with or in anticipation of a change of control or otherwise after the exercise of the
option but prior to the closing on the purchase of the Equity Interest.
62
In addition, as of June 12, 2008, we instituted a retention and severance program for
corporate employees, including Mr. Patterson (our CEO), Mr. Hoffman (our General Counsel),
Mr. Del Vecchio (our EVP), Mr. Baron (our Leasing EVP) and Ms. Pallardy (our SVP). The
program provides for the payment of certain retention bonuses in the event of a change of control
of the Company. A change of control is defined as a sale of more than 50% of the voting shares
of the Company, a merger or other business combination of the Company (other than a transaction
where voting control does not change), a change in any 12 month period of a majority of our Board
of Trustees (unless elected by a majority of incumbent directors unless such election was the
result of an election contest of the type contemplated by Regulation 14a-11), a sale or disposition
of a substantial portion of the Companys assets, or a transaction pursuant to which the Company is
no longer subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended.
With respect to our CEO and General Counsel, the program provides for a payment to such
executive only if he remains employed seven days after the effective date of the change of control,
in which case he would each receive a payment equal to (i) the remaining base compensation he would
be entitled to under his existing employment agreement with the Company for the remainder of its
term, (ii) a pro-rata annual bonus through to the date of the change of control for the year in
which the change of control occurs based on his most recent annual bonus (and a bonus for the prior
calendar year if the change of control happens early in a calendar year prior to the payment of
annual bonuses), and (iii) a discretionary bonus of at least $300,000 for our CEO and $100,000 for
our General Counsel. This program is a retention program and does not amend or modify our CEOs
and General Counsels existing employment agreements.
With respect to our EVP, the program provides that the retention payment to him would be paid
if he is employed at the time of the change of control, or if he is terminated within six months
prior to the change of control in anticipation of the change of control. The payment due to our
EVP under the program equals: (i) twelve months of his then current base salary, (ii) an amount
equal to the annual bonus paid to him with respect to the 2007 calendar year, (iii) a pro-rata
annual bonus as set forth in clause (ii) of the preceding paragraph, and (iv) a discretionary bonus
of at least $100,000.
With respect to our Leasing EVP and SVP, the payment triggers are the same as for our EVP and
the amount that would be due is equal to six months of his or her then current base salary.
In addition, for the Companys corporate employees who receive an annual bonus, annual bonuses
for the calendar year 2008 paid in February 2009 were approximately one-half of the amount for 2007
bonuses. The retention program referred to above was modified to provide that the remaining
one-half would be paid if and when any payment became due under the retention program.
None of our other Named Executive Officers are entitled to termination benefits upon
termination of their employment that are not generally available to our other employees.
Option Grants, Exercises and Holdings
Other than as described above, we did not grant any options to purchase our common shares to
the Named Executive Officers during 2009 and the Named Executive Officers did not hold any options
to purchase our common shares. There were no exercises of options or vesting of stock during 2009.
See Employment Agreements for more information regarding Mr. Pattersons option. As part of
the terms of her employment agreement, Ms. Nancy J. Fendley, our prior Executive Vice President -
Leasing, was granted an option to purchase a membership interest in Prime Office equivalent to a
1.0% ownership interest in the Operating Partnership and us. In
May 2007, we terminated Ms. Fendleys employment and her option. Ms. Fendley has disputed
such termination and initiated a lawsuit relating to the termination of her option, which the
Company believes to be without merit.
63
Compensation of Trustees
The following table sets forth the compensation earned for the year ended December 31, 2009
with respect to our trustees other than Mr. Patterson (who is also a Named Executive Officer) and
whose compensation as a trustee is fully reflected in the Summary Compensation Table and other
portions of this Form 10-K. In addition to trustees fees, our trustees receive reimbursement of
all travel and lodging expenses related to their attendance at both Board and committee meetings.
As of December 31, 2009, our trustees did not hold any options to purchase our common shares or
hold any of our common shares.
|
|
|
|
|
|
|
Fees |
|
|
|
Earned or |
|
|
|
Paid in |
|
|
|
Cash ($) |
|
Name |
|
(1) |
|
|
|
|
|
|
David Lichtenstein |
|
$ |
|
|
John M. Sabin |
|
|
55,500 |
|
Peyton Owen, Jr. |
|
|
31,000 |
|
Shawn R. Tominus |
|
|
45,500 |
|
Bruno de Vinck |
|
|
31,000 |
|
George R. Whittemore |
|
|
50,500 |
|
|
|
|
(1) |
|
We pay our trustees who are not our employees or affiliated with us a fee for their
services as trustees. Such persons receive annual compensation of $26,000 plus a fee of
$1,000 for attendance at each meeting of the Board and $500 for attendance at each
committee meeting. Members of the audit committee receive an additional $10,000 per year
(which is currently being paid to Messrs. Whittemore, Sabin and Tominus), plus an
additional $5,000 per year for the chairman of the audit committee (Mr. Whittemore). In
addition, Mr. Sabin received a $10,000 fee for serving on a special committee of the
Board. |
Compensation Committee Interlocks and Insider Participation
Our Chairman and the Executive Committee of our Board are charged with determining
compensation for our President and Chief Executive Officer. Mr. Patterson is a member of our Board
and our President and Chief Executive Officer. No executive officer of ours served as a (i) member
of the compensation committee of another entity in which one of the executive officers of such
entity served on our Board or (ii) director of another entity in which one of the executive
officers of such entity served on our Board, during the year ended December 31, 2009.
Compensation Report
Members of the Board have reviewed and discussed with management the Companys Compensation
Discussion and Analysis presented in this annual report on Form 10-K. Members of management with
whom members of the Board discussed the Compensation Discussion and Analysis include the President
and Chief Executive Officer, the Senior Executive Vice President, General Counsel and Secretary,
the Executive Vice President-Capital Markets and the Vice President-Corporate Accounting.
Based on its review and discussions noted above, the Board determined that the Compensation
Discussion and Analysis be included in this annual report on Form 10-K.
64
BOARD OF TRUSTEES
David Lichtenstein
Peyton Owen, Jr.
Jeffrey A. Patterson
John M. Sabin
Shawn R. Tominus
Bruno de Vinck
George R. Whittemore
Our Compensation Policies and Practices as they relate to Our Risk Management
The Company does not believe that its compensation policies and practices for employees
generally are reasonably likely to create a material adverse affect relating to risk-taking by its
employees. Although the Companys Series B preferred shares are publicly traded, the Companys
common shares are not publicly traded and its employees compensation is not tied to market
fluctuations in the price of the preferred or common shares. In addition, the Company does not
have outstanding any stock option, restricted or unrestricted stock or other similar awards which
may encourage employees to focus excessively on short-term fluctuations in the market price of the
Companys shares. In addition, although no bonuses were paid for calendar year 2009, historically,
bonuses and pay raises at the Company have not been based on short-term or other factors which the
Company believes may cause an employee to take excessive risks in order to maximize his or her
bonus or pay raise for a calendar year or other period of time. There are several employees
involved in leasing activities at the Company who receive leasing bonuses based on the signing of
leases with third-party tenants, but the terms of these leases are subject to the prior review and
approval of the Trusts Investment Committee, which consists entirely of employees who do not
receive leasing compensation based on the approval of such leases.
65
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS. |
Principal Security Holders Of The Company
As more fully described in Item 1BusinessBackground and General, on July 1, 2005, in
connection with the Acquisition, all of our common shares outstanding prior to the transaction were
acquired by Prime Office whose principal business address is 1985 Cedar Bridge Avenue, Lakewood,
New Jersey 08701 and all options to acquire our common shares were cancelled. Prime Office is owned
indirectly by David Lichtenstein, the Chairman of our Board.
The following table furnishes information, as of March 20, 2010, as to common units of our
Operating Partnership, in each case which are beneficially owned by each trustee, each Named
Executive Officer and trustees and executive officers as a group. Unless otherwise indicated in the
footnotes to the tables, all of such interests are owned directly, and the indicated person or
entity has sole voting and investment power.
|
|
|
|
|
|
|
|
|
|
|
Number of Common Units of |
|
|
|
|
|
|
Prime Group |
|
|
|
|
Name and Address of |
|
Realty L.P. Beneficially |
|
|
Percent of All Common Units |
|
Beneficial Owner |
|
Owned(1) |
|
|
of Prime Group Realty, L.P. |
|
|
|
|
|
|
|
|
|
|
David Lichtenstein (2) |
|
|
26,724,872 |
|
|
|
100 |
% |
Jeffrey A. Patterson |
|
|
|
|
|
|
|
|
James F. Hoffman |
|
|
|
|
|
|
|
|
Steven R. Baron |
|
|
|
|
|
|
|
|
Paul G. Del Vecchio |
|
|
|
|
|
|
|
|
Anita T. Pallardy |
|
|
|
|
|
|
|
|
Peyton Owen, Jr. |
|
|
|
|
|
|
|
|
John M. Sabin |
|
|
|
|
|
|
|
|
Shawn R. Tominus |
|
|
|
|
|
|
|
|
Bruno de Vinck |
|
|
|
|
|
|
|
|
George R. Whittemore |
|
|
|
|
|
|
|
|
Our trustees and
executive officers as
a group ([11]
persons) |
|
|
26,724,872 |
|
|
|
100 |
|
|
|
|
(1) |
|
The ownership of common units of our Operating Partnership presented in this table is derived
from the transfer records maintained by the Operating Partnership based on information
provided by the limited partners. |
|
(2) |
|
Mr. Lichtenstein controls (i) Prime Office which owns 99.1% of the common units of limited
partner interest in the Operating Partnership and 100% of our common shares and (ii) PGRT
currently owns 0.9% of the outstanding common units of limited partner interest in the
Operating Partnership. |
|
|
|
Except for the dispute described herein relating to a terminated option to acquire a 1.0%
ownership interest in the Operating Partnership and us previously held by Ms. Fendley, none of
our trustees or executive officers own any shares of any other class of our equity securities
or equity securities of any of our parent or our subsidiaries. |
66
Equity Compensation Plan Information
As of December 31, 2009, we do not have any equity securities that may be issued upon the
exercise of options, warrants and rights under a share incentive plan because our share incentive
plan was terminated as a part of the Acquisition on July 1, 2005. The Company has no other
compensation plans pursuant to which equity securities may be issued.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons
BHAC Capital IV, L.L.C. On September 18, 2009, with a transaction effective date of July 16,
2009, PGRT ESH assigned its membership interest in BHAC to LSG-ESH LLC (LSG-ESH), an affiliate of
the Companys Chairman of the Board and our parent company, Prime Office. In connection with the
transaction, PGRT ESH was released from liability for the obligations under the Citicorp Loan. Due
to the related party nature of the transfer of the BHAC interest, including the assumption of the
obligations under the Citicorp Loan, this transaction was approved unanimously by our independent
trustees and we recorded this transaction as an increase to additional paid-in capital and a
reduction of mortgage and notes payable of $80.0 million and a reduction in accrued financing fees
included in accounts payable and accrued expenses of $2.1 million. During 2009, the affiliates of
Prime Office paid $6.1 million on the Citicorp Loan.
Review, Approval or Ratification of Transaction with Related Persons
It is our policy that any material related party transactions involving us and any of our
Board members or shareholder be approved by a majority of the disinterested independent members of
the Board after their review and consideration of the fairness of the transaction. The material
terms of transactions with related persons referred to above are reviewed and discussed by senior
management with the Board and approved by the relevant disinterested independent members of the
Board. The foregoing related party transactions were approved consistent with the requirements of
this policy.
Director Independence
Since July 1, 2005 our board has included, and our audit committee has consisted of,
Messrs. Sabin, Tominus and Whittemore, each of whom is independent within the meaning of the NYSE
listing standards. Further, since July 1, 2005 and as a result of the Acquisition, only our Series
B Shares are listed on a national securities exchange and therefore, pursuant to Section 303A
Corporate Governance Rules of the NYSE, we are not required to maintain a compensation committee or
a nominating committee with independent members. Since July 1, 2005, the functions of the
nominating committee have been performed by our Board as a whole and the compensation committee
have been performed by the Executive Committee of our Board.
67
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit And Non-Audit Fees
Fees billed to the Company for professional services provided by our independent registered
public accounting firm in each of the last two fiscal years, in each of the following categories
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernst & Young LLP |
|
|
Grant Thornton LLP |
|
|
Total |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees |
|
$ |
363,000 |
|
|
$ |
|
|
|
$ |
35,310 |
|
|
$ |
412,028 |
|
|
$ |
398,310 |
|
|
$ |
412,028 |
|
Audit-Related Fees |
|
|
37,800 |
|
|
|
|
|
|
|
44,273 |
|
|
|
273,934 |
|
|
|
82,073 |
|
|
|
273,934 |
|
Tax Fees |
|
|
9,933 |
|
|
|
108,904 |
|
|
|
91,602 |
|
|
|
232,840 |
|
|
|
101,535 |
|
|
|
341,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
410,733 |
|
|
$ |
108,904 |
|
|
$ |
171,185 |
|
|
$ |
918,802 |
|
|
$ |
581,918 |
|
|
$ |
1,027,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neither Ernst & Young LLP our independent registered public accounting firm since July 2009,
nor Grant Thornton LLP, our independent registered accounting firm from October 2005 through July
2009, provided any financial information systems design and implementation services during 2009 or
2008. Audit-related services generally include fees for 401(k) plan and individual property audits,
due diligence, technical consulting and transaction structuring. Tax services generally relate to a
review of tax returns prior to filing, tax consultation and transaction structuring.
The audit committee has adopted policies and procedures for pre-approving all non-audit work
performed by our independent registered public accounting firm. Specifically, the audit committee
has pre-approved the use of Ernst & Young LLP as of July 2009, and had pre-approved prior to July
2009, Grant Thornton, for detailed, specific types of services within the following categories of
non-audit services: certain tax related services (including tax compliance matters, REIT
compliance, federal state and local tax audits, private letter rulings, technical tax guidance and
corporate acquisition, disposition and partnership tax matters); registration statements and
related matters; debt covenant compliance letters; technical accounting guidance; internal control
documentation; and SEC comment letters. Further, the audit committee has required management to
report to it on an annual basis (or as more frequently as the audit committee may request) the
specific engagements of our independent registered public accounting firm pursuant to the
pre-approval policies and procedures. All engagements of either Ernst & Young LLP or Grant Thornton
LLP related to the audit-related fees and tax fees disclosed in the table above for 2009 and 2008
were eligible to be approved pursuant to our pre-approval policies, though some engagements were
specifically approved by the audit committee prior to the commencement of the engagement.
68
PRIME GROUP REALTY TRUST
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Consolidated Financial Statements
|
|
|
|
|
F-2 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-9 |
|
|
|
Financial Statement Schedule |
|
|
|
|
|
|
|
F-36 |
All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
69
(3) Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Purchase Agreement dated as of August 2, 2004 by and between
CenterPoint Properties Trust and Prime Group Realty, L.P., as
filed as exhibit 99.2 to our Current Report on Form 8-K (filed
August 6, 2004, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
2.2 |
|
|
First Amendment to Purchase Agreement dated as of October 8, 2004
by and between Prime Group Realty, L.P. and CenterPoint Properties
Trust, as filed as exhibit 99.3 to our Current Report on Form 8-K
(filed October 15, 2004, File No. 001-13589) and incorporated
herein by reference. |
|
|
|
|
|
|
2.3 |
|
|
Agreement and Plan of Merger dated as of February 17, 2005 by and
among Prime Office Company, LLC, Prime Office Merger Sub LLC,
Prime Office Merger Sub I, LLC, Prime Group Realty Trust and Prime
Group Realty, L.P., as filed as exhibit 10.1 to our Current Report
on Form 8-K (filed February 17, 2005, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
3.1 |
|
|
Articles of Amendment and Restatement of Declaration of Trust of
Prime Group Realty Trust, as amended by Articles Supplementary to
the Articles of Amendment and Restatement of Declaration of Trust
and the First Amendment to Amended and Restated Declaration of
Trust as filed as exhibit 3.1 to our Annual Report on Form 10-K
for the year ended December 31, 2005 and incorporated herein by
reference. |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of Prime Group Realty Trust, as
amended by the First Amendment to Amended and Restated Bylaws and
the Second Amendment to Amended and Restated Bylaws as filed as
exhibit 3.2 to our Annual Report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
|
|
|
|
|
|
3.3 |
|
|
Second Amended and Restated Agreement of Limited Partnership of
Prime Group Realty, L.P. dated as of July 1, 2005, as filed as
exhibit 3.9 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005 and incorporated herein by reference. |
|
|
|
|
|
|
10.1 |
|
|
Environmental Escrow Agreement dated as of October 8, 2004 by and
among Prime Group Realty, L.P., CenterPoint Properties Trust and
Chicago Title and Trust Company, as filed as exhibit 99.4 to our
Current Report on Form 8-K (filed October 15, 2004, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.2 |
|
|
Escrow Agreement dated as of October 8, 2004 by and among
CenterPoint Properties Trust and Prime Group Realty, L.P. and
Chicago Title and Trust Company, as filed as exhibit 99.5 to our
Current Report on Form 8-K (filed October 15, 2004, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.3 |
|
|
Settlement and Release dated as of May 18, 2005 by and among
Prime/Mansur Investment Partners, LLC, Cumberland Blues Merger
Sub, LLC, Cumberland Blues, LLC, The Prime Group, Inc. Prime
Partners, LLC, Prime Group Realty Trust, and Prime Group Realty,
L.P., as filed as exhibit 10.6 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2005 and incorporated herein
by reference. |
70
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.4 |
|
|
Thistle Interest Option
Agreement dated as of May
18, 2005 by and between
Phoenix Office, L.L.C. and
Prime/Mansur Investment
Partners, LLC, as filed as
exhibit 10.8 to our
Quarterly Report on Form
10-Q for the quarter ended
June 30, 2005 and
incorporated herein by
reference. |
|
|
|
|
|
|
10.5 |
* |
|
Amended and Restated
Employment Agreement dated
as of May 31, 2005 by and
between Prime Office
Company, LLC and Jeffrey
A. Patterson, as filed as
exhibit 10.1 to our
Quarterly Report on Form
10-Q for the quarter ended
September 30, 2005 and
incorporated herein by
reference. |
|
|
|
|
|
|
10.6 |
* |
|
Employment Agreement dated
as of May 31, 2005 by and
between Prime Office
Company, LLC and James F.
Hoffman, as filed as
exhibit 10.2 to our
Quarterly Report on Form
10-Q for the quarter ended
September 30, 2005, and
incorporated herein by
reference. |
|
|
|
|
|
|
10.7 |
|
|
Guarantee of Interest and
Recourse Obligations dated
as of December 30, 2005
between Prime Group
Realty, L.P. and IPC
Investments Holdings
Canada, Inc., as filed as
exhibit 10.5 to our
Current Report on Form 8-K
(filed January 11, 2006,
File No. 001-13589) and
incorporated herein by
reference. |
|
|
|
|
|
|
10.8 |
|
|
Amended and Restated Tax
Indemnity Agreement dated
as of January 10, 2006 by
and among Prime Group
Realty, L.P., Roland E.
Casati, Richard A. Heise,
CTA General Partner, LLC
and Continental Towers,
L.L.C., as filed as
exhibit 10.5 to our
Current Report on Form 8-K
(filed January 18, 2006,
File No. 001-13589) and
incorporated herein by
reference. |
|
|
|
|
|
|
10.9 |
|
|
Assumption Agreement dated
as of January 10, 2006
among Prime Group Realty,
L.P. Chicago Title Land
Trust Company, as trustee
under Land Trust Numbers
40935 and 5602,
Continental Towers
Associates-I, L.P.,
Continental Towers,
L.L.C., Richard A. Heise
and Roland E. Casati, as
filed as exhibit 10.7 to
our Current Report on Form
8-K (filed
January 18, 2006, File No.
001-13589) and
incorporated herein by
reference. |
|
|
|
|
|
|
10.10 |
|
|
Promissory Note dated as
of November 21, 2006 from
Continental Towers
Associates III, LLC, and
Continental Towers, L.L.C,
jointly and severally,
payable to the order of
CWCapital LLC in the
original principal amount
of $115.0 million., as
filed as exhibit 10.1 to
our Current Report on Form
8-K (filed November 28,
2006, File No. 001-13589)
and incorporated herein by
reference. |
|
|
|
|
|
|
10.11 |
|
|
Mortgage, Security
Agreement and Fixture
Financing Statement dated
as of November 21, 2006 by
Continental Towers
Associates III, LLC and
Continental Towers,
L.L.C., jointly and
severally, in favor of
CWCapital LLC., as filed
as exhibit 10.2 to our
Current Report on Form 8-K
(filed November 28, 2006,
File No. 001-13589) and
incorporated herein by
reference. |
|
|
|
|
|
|
10.12 |
|
|
Guaranty dated as of
November 21, 2006 by Prime
Group Realty, L.P. for the
benefit of CWCapital LLC.,
as filed as exhibit 10.3
to our Current Report on
Form 8-K (filed November
28, 2006, File No.
001-13589) and
incorporated herein by
reference. |
71
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.13 |
|
|
Subordination and Standstill Agreement dated as of November 21,
2006 by PGRT Equity LLC for the benefit of CWCapital LLC., as
filed as exhibit 10.4 to our Current Report on Form 8-K (filed
November 28, 2006, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.14 |
|
|
First Amendment to Amended and Restated Tax Indemnity Agreement
dated as of November 21, 2006 by and among Prime Group Realty,
L.P., Richard A. Heise, CTA General Partner, LLC and Continental
Towers, L.L.C., as filed as exhibit 10.6 to our Current Report on
Form 8-K (filed November 28, 2006, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.15 |
|
|
Amended and Restated Promissory Note dated as of November 21, 2006
from Continental Towers, L.L.C. and Continental Towers Associates
III, LLC payable to the order of PGRT Equity, L.L.C., as filed as
exhibit 10.7 to our Current Report on Form 8-K (filed November 28,
2006, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.16 |
|
|
Second Amended and Restated Loan Agreement dated as of November
21, 2006 by and between PGRT Equity, LLC, and Continental Towers
Associates III, LLC and Continental Towers, L.L.C., as filed as
exhibit 10.8 to our Current Report on Form 8-K (filed November 28,
2006, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.17 |
|
|
Amended and Restated Mortgage and Security Agreement dated as of
November 21, 2006 by Continental Towers, L.L.C. and Continental
Towers Associates III, LLC, in favor of and for the benefit of
PGRT Equity, L.L.C., as filed as exhibit 10.9 to our Current
Report on Form 8-K (filed November 28, 2006, File No. 001-13589)
and incorporated herein by reference. |
|
|
|
|
|
|
10.18 |
|
|
Indemnification Agreement dated as of November 8, 2006 between
Prime Group Realty, L.P. and 131 South Dearborn LLC as filed as
exhibit 10.59 to our Annual Report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.19 |
|
|
Reciprocal Easement Agreement dated as of December 29, 2006, by
and between Continental Towers, L.L.C. and Continental Towers
Associates III, LLC as filed as exhibit 10.62 to our Annual Report
on Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference. |
|
|
|
|
|
|
10.20 |
|
|
Management Agreement dated as of December 29, 2006, by and between
Continental Towers, L.L.C. and Prime Group Management, L.L.C. as
filed as exhibit 10.63 to our Annual Report on Form 10-K for the
year ended December 31, 2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.21 |
|
|
Management Agreement dated as of December 29, 2006, by and between
Continental Towers Associates III, LLC and Prime Group Management,
L.L.C. as filed as exhibit 10.64 to our Annual Report on Form 10-K
for the year ended December 31, 2006 and incorporated herein by
reference. |
72
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.22 |
|
|
Amended and Restated Promissory Note dated as of December 29,
2006, from Continental Towers Associates III, LLC to Wells Fargo
Bank, N.A., as trustee for the registered holders of Cobalt CMBS
Commercial Mortgage Trust 2006-C1, Commercial Mortgage
Pass-through Certificates, Series 2006-C1 as filed as exhibit
10.65 to our Annual Report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.23 |
|
|
Amended and Restated Mortgage, Security Agreement and Fixture
Financing Statement dated as of December 29, 2006, from
Continental Towers Associates III, LLC to Wells Fargo Bank, N.A.,
as trustee for the registered holders of Cobalt CMBS Commercial
Mortgage Trust 2006-C1, Commercial Mortgage Pass-through
Certificates, Series 2006-C1, c/o CWCapital LLC as filed as
exhibit 10.66 to our Annual Report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.24 |
|
|
Amended and Restated Guaranty dated as of December 29, 2006, by
Prime Group Realty, L.P. to Wells Fargo Bank, N.A., as trustee for
the registered holders of Cobalt CMBS Commercial Mortgage Trust
2006-C1, Commercial Mortgage Pass-through Certificates, Series
2006-C1, regarding the loan to Continental Towers Associates III,
LLC as filed as exhibit 10.67 to our Annual Report on Form 10-K
for the year ended December 31, 2006 and incorporated herein by
reference. |
|
|
|
|
|
|
10.25 |
|
|
Amended and Restated Environmental and Hazardous Substance
Indemnification Agreement dated as of December 29, 2006, from
Continental Towers Associates III, LLC to Wells Fargo Bank, N.A.,
as trustee for the registered holders of Cobalt CMBS Commercial
Mortgage Trust 2006-C1, Commercial Mortgage Pass-through
Certificates, Series 2006-C1 as filed as exhibit 10.68 to our
Annual Report on Form 10-K for the year ended December 31, 2006
and incorporated herein by reference. |
|
|
|
|
|
|
10.26 |
|
|
Amended and Restated Promissory Note dated as of December 29,
2006, from Continental Towers, L.L.C. to Wells Fargo Bank, N.A.,
as trustee for the registered holders of Cobalt CMBS Commercial
Mortgage Trust 2006-C1, Commercial Mortgage Pass-through
Certificates, Series 2006-C1 as filed as exhibit 10.69 to our
Annual Report on Form 10-K for the year ended December 31, 2006
and incorporated herein by reference. |
|
|
|
|
|
|
10.27 |
|
|
Amended and Restated Mortgage, Security Agreement and Fixture
Financing Statement dated as of December 29, 2006, from
Continental Towers, L.L.C. to Wells Fargo Bank, N.A., as trustee
for the registered holders of Cobalt CMBS Commercial Mortgage
Trust 2006-C1, Commercial Mortgage-Pass through Certificates,
Series 2006-C1, c/o CWCapital LLC as filed as exhibit 10.70 to our
Annual Report on Form 10-K for the year ended December 31, 2006
and incorporated herein by reference. |
|
|
|
|
|
|
10.28 |
|
|
Amended and Restated Guaranty dated as of December 29, 2006, by
Prime Group Realty, L.P. to Wells Fargo Bank, N.A., as trustee for
the registered holders of Cobalt CMBS Commercial Mortgage Trust
2006-C1, Commercial Mortgage Pass-through Certificates, Series
2006-C1, regarding the loan to Continental Towers, L.L.C as filed
as exhibit 10.71 to our Annual Report on Form 10-K for the year
ended December 31, 2006 and incorporated herein by reference. |
73
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.29 |
|
|
Amended and Restated Environmental and Hazardous Substance
Indemnification Agreement dated as of December 29, 2006, from
Continental Towers, L.L.C. to Wells Fargo Bank, N.A., as trustee
for the registered holders of Cobalt CMBS Commercial Mortgage
Trust 2006-C1, Commercial Mortgage Pass-through Certificates,
Series 2006-C1 as filed as exhibit 10.72 to our Annual Report on
Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference. |
|
|
|
|
|
|
10.30 |
|
|
Second Amended and Restated Promissory Note dated as of December
29, 2006, from Continental Towers Associates III, LLC to PGRT
Equity, L.L.C. as filed as exhibit 10.73 to our Annual Report on
Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference. |
|
|
|
|
|
|
10.31 |
|
|
Second Amended and Restated Environmental Indemnification
Agreement dated as of December 29, 2006, from Continental Towers
Associates III, LLC to PGRT Equity, L.L.C. as filed as exhibit
10.74 to our Annual Report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.32 |
|
|
Third Amended and Restated Loan Agreement dated as of December 29,
2006, between Continental Towers Associates III, LLC and PGRT
Equity, L.L.C. as filed as exhibit 10.75 to our Annual Report on
Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference. |
|
|
|
|
|
|
10.33 |
|
|
Second Amended and Restated Mortgage and Security Agreement dated
as of December 29, 2006, from Continental Towers, L.L.C. to PGRT
Equity, L.L.C. as filed as exhibit 10.76 to our Annual Report on
Form 10-K for the year ended December 31, 2006 and incorporated
herein by reference. |
|
|
|
|
|
|
10.34 |
|
|
Second Amended and Restated Promissory Note dated as of December
29, 2006, from Continental Towers, L.L.C. to PGRT Equity, L.L.C.
as filed as exhibit 10.77 to our Annual Report on Form 10-K for
the year ended December 31, 2006 and incorporated herein by
reference. |
|
|
|
|
|
|
10.35 |
|
|
Third Amended and Restated Loan Agreement dated as of December 29,
2006, by and between Continental Towers, L.L.C. and PGRT Equity,
L.L.C. as filed as exhibit 10.78 to our Annual Report on Form 10-K
for the year ended December 31, 2006 and incorporated herein by
reference. |
|
|
|
|
|
|
10.36 |
|
|
Second Amended and Restated Mortgage and Security Agreement dated
as of December 29, 2006, from Continental Towers Associates III,
LLC to PGRT Equity, L.L.C. as filed as exhibit 10.79 to our Annual
Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference. |
|
|
|
|
|
|
10.37 |
|
|
Second Amended and Restated Environmental Indemnification
Agreement dated as of December 29, 2006, from Continental Towers,
L.L.C. to PGRT Equity, L.L.C. as filed as exhibit 10.80 to our
Annual Report on Form 10-K for the year ended December 31, 2006
and incorporated herein by reference. |
74
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.38 |
|
|
Amended and Restated Subordination and Standstill Agreement dated
as of December 29, 2006, by PGRT Equity LLC to Wells Fargo Bank,
N.A., as trustee for the registered holders of Cobalt CMBS
Commercial Mortgage Trust 2006-C1, Commercial Mortgage
Pass-through Certificates, Series 2006-C1, regarding the loan to
Continental Towers, L.L.C. as filed as exhibit 10.81 to our Annual
Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference. |
|
|
|
|
|
|
10.39 |
|
|
Amended and Restated Subordination and Standstill Agreement dated
as of December 29, 2006, by PGRT Equity LLC to Wells Fargo Bank,
N.A., as trustee for the registered holders of Cobalt CMBS
Commercial Mortgage Trust 2006-C1, Commercial Mortgage
Pass-through Certificates, Series 2006-C1, regarding the loan to
Continental Towers Associates III, LLC as filed as exhibit 10.82
to our Annual Report on Form 10-K for the year ended December 31,
2006 and incorporated herein by reference. |
|
|
|
|
|
|
10.40 |
|
|
Promissory Note A, dated as of March 18, 2008, from 330 N. Wabash
Avenue, L.L.C. (330 N. Wabash), payable to the order of ING USA
Annuity and Life Insurance Company, in the original principal
amount of $88.0 million, as filed as exhibit 10.1 to our Current
Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.41 |
|
|
Promissory Note B, dated as of March 18, 2008, from 330 N. Wabash,
payable to the order of General Electric Capital Corporation, in
the original principal amount of $100.0 million, as filed as
exhibit 10.2 to our Current Report on Form 8-K (filed March 24,
2008, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.42 |
|
|
Loan Agreement (Loan B), dated as of March 18, 2008, among 330 N.
Wabash, the lenders party thereto and General Electric Capital
Corporation, as collateral agent (in such capacity, the Agent),
as filed as exhibit 10.3 to our Current Report on Form 8-K (filed
March 24, 2008, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.43 |
|
|
Mortgage, Assignment of Leases, Security Agreement and Fixture
Filing, dated as of March 18, 2008, by 330 N. Wabash in favor of
the Agent, as filed as exhibit 10.4 to our Current Report on Form
8-K (filed March 24, 2008, File No. 001-13589) and incorporated
herein by reference. |
|
|
|
|
|
|
10.44 |
|
|
Leasehold Mortgage, Assignment of Leases, Security Agreement and
Fixture Filing, dated as of March 18, 2008, by 330 N. Wabash in
favor of the Agent, as filed as exhibit 10.5 to our Current Report
on Form 8-K (filed March 24, 2008, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.45 |
|
|
Guaranty of Non-Recourse and Environmental Indemnity Obligations,
dated as of March 18, 2008, by Prime Group Realty, L.P. (the
Operating Partnership) in favor of the Agent, as filed as
exhibit 10.6 to our Current Report on Form 8-K (filed March 24,
2008, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.46 |
|
|
Completion Guaranty, dated as of March 18, 2008, by the Operating
Partnership in favor of the Agent, as filed as exhibit 10.7 to our
Current Report on Form 8-K (filed March 24, 2008, File No.
001-13589) and incorporated herein by reference. |
75
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.47 |
* |
|
Form of Letters regarding Retention Program, dated as of June 12,
2008 as filed as exhibit 10.1 to our Quarterly Report on Form
10-Q/A (filed March 27, 2008, File No. 001-13589) and incorporated
herein by reference. |
|
|
|
|
|
|
10.48 |
|
|
Amended and Restated Loan Agreement dated as of June 6, 2008 by
and between PGRT ESH, Inc. and Citicorp USA, Inc. 2008 as filed as
exhibit 10.2 to our Quarterly Report on Form 10-Q/A (filed March
27, 2009, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.49 |
|
|
Amended and Restated Guaranty dated as of June 6, 2008, by
David Lichtenstein in favor of Citicorp USA, Inc. 2008 as filed as
exhibit 10.3 to our Quarterly Report on Form 10-Q/A (filed March
27, 2009, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.50 |
|
|
Amended and Restated Pledge Agreement dated as of June 6, 2008 by
PGRT ESH, Inc. in favor of Citicorp USA, Inc. 2008 as filed as
exhibit 10.4 to our Quarterly Report on Form 10-Q/A (filed March
27, 2009, File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.51 |
|
|
Amended and Restated Promissory Note dated as of June 6, 2008 by
PGRT ESH, Inc. to Citicorp USA, Inc. 2008 as filed as exhibit 10.5
to our Quarterly Report on Form 10-Q/A (filed March 27, 2009, File
No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.52 |
* |
|
Equity Purchase Agreement dated as of December 31, 2007, by and
between Jeffrey A. Patterson, and Prime Office Company LLC as
filed as exhibit 10.81 to our Annual Report of Form 10-K/A for the
year ended December 31, 2007 (filed March 27, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.53 |
|
|
180 N. LaSalle Purchase and Sale Agreement dated as of August 12,
2008 between 180 N. LaSalle II, L.L.C. and Younan Properties, Inc.
as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q
(filed March 27, 2009, File No. 001-13589) and incorporated herein
by reference. |
|
|
|
|
|
|
10.54 |
|
|
First Amendment to Purchase and Sale Agreement dated as of August
29, 2008 between 180 N. LaSalle II, L.L.C. and Younan Properties,
Inc. as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q
(filed March 27, 2009, File No. 001-13589) and incorporated herein
by reference. |
|
|
|
|
|
|
10.55 |
|
|
Second Amendment to Purchase and Sale Agreement dated as of
September 3, 2008 between 180 N. LaSalle II, L.L.C. and Younan
Properties, Inc. as filed as exhibit 10.3 to our Quarterly Report
on Form 10-Q (filed March 27, 2009, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.56 |
|
|
Third Amendment to Purchase and Sale Agreement dated as of
September 30, 2008 between 180 N. LaSalle II, L.L.C and Younan
Properties, Inc. as filed as exhibit 10.4 to our Quarterly Report
on Form 10-Q (filed March 27, 2009, File No. 001-13589) and
incorporated herein by reference. |
76
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.57 |
|
|
Fourth Amendment to Purchase and Sale Agreement dated as of
October 15, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N.
LaSalle Owner, LLC as filed as exhibit 10.63 to our Annual Report
on Form 10-K for the year ended December 31, 2008 (filed March 31,
2009, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.58 |
|
|
First Amendment to Loan Agreement dated as of October 31, 2008
between PGRT ESH, Inc., Lightstone Holdings, LLC, David
Lichtenstein and Citicorp USA, Inc. as filed as exhibit 10.64 to
our Annual Report on Form 10-K for the year ended
December 31, 2008 (filed March 31, 2009, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.59 |
|
|
First Amendment to Amended and Restated Guaranty dated as of
October 31, 2008 between David Lichtenstein and Citicorp USA, Inc.
as filed as exhibit 10.65 to our Annual Report on Form 10-K for
the year ended December 31, 2008 (filed March 31, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.60 |
|
|
Fifth Amendment to Purchase and Sale Agreement dated as of
November 20, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N.
LaSalle Owner, LLC. as filed as exhibit 10.66 to our Annual Report
on Form 10-K for the year ended December 31, 2008 (filed March 31,
2009, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.61 |
|
|
Sixth Amendment to Purchase and Sale Agreement dated as of
December 9, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N.
LaSalle Owner, LLC. as filed as exhibit 10.67 to our Annual Report
on Form 10-K for the year ended December 31, 2008 (filed March 31,
2009, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.62 |
|
|
Second Amendment to Loan Agreement dated December 31, 2008 among
PGRT ESH, Inc., Lightstone Holdings LLC, David Lichtenstein and
Citicorp USA, Inc. as filed as exhibit 10.68 to our Annual Report
on Form 10-K for the year ended December 31, 2008 (filed March 31,
2009, File No. 001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.63 |
* |
|
Amendment to the Amended and Restated Employment
Agreement dated as of December 31, 2008 by and
between Prime Group Realty Trust, Prime Group
Realty, L.P. and Jeffrey A. Patterson as filed as
exhibit 10.69 to our Annual Report on Form 10-K
for the year ended December 31, 2008 (filed March
31, 2009, File No. 001-13589) and incorporated
herein by reference. |
|
|
|
|
|
|
10.64 |
* |
|
First Amendment to Employment Agreement dated as
of December 31, 2008 by and between Prime Group
Realty Trust, Prime Group Realty, L.P. and James
F. Hoffman as filed as exhibit 10.70 to our Annual
Report on Form 10-K for the year ended
December 31, 2008 (filed March 31, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.65 |
* |
|
Equity Purchase Agreement dated as of December 31,
2008, by and between Jeffrey A. Patterson, and
Prime Office Company LLC as filed as exhibit 10.71
to our Annual Report on Form 10-K for the year
ended December 31, 2008 (filed March 31, 2009,
File No. 001-13589) and incorporated herein by
reference. |
77
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.66 |
|
|
Letter Agreement dated December 31, 2008 among
PGRT ESH, Inc., Lightstone Holdings LLC,
David Lichtenstein and Citicorp USA, Inc. as
filed as exhibit 10.72 to our Annual Report on
Form 10-K for the year ended December 31, 2008
(filed March 31, 2009, File No. 001-13589) and
incorporated herein by reference. |
|
|
|
|
|
|
10.67 |
|
|
Forbearance Extension dated as of January 30,
2009 among PGRT ESH, Inc., Lightstone Holdings
LLC, David Lichtenstein and Citicorp USA, Inc. as
filed as exhibit 10.1 to our Quarterly Report on
Form 10-Q (filed May 15, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.68 |
|
|
Third Amendment to Loan Agreement dated as of
January 30, 2009 among PGRT ESH, Inc., Lightstone
Holdings LLC, David Lichtenstein and Citicorp
USA, Inc. as filed as exhibit 10.2 to our
Quarterly Report on Form 10-Q (filed May 15,
2009, File No. 001-13589) and incorporated herein
by reference. |
|
|
|
|
|
|
10.69 |
|
|
Forbearance Extension dated as of March 2, 2009
among PGRT ESH, Inc., Lightstone Holdings LLC,
David Lichtenstein and Citicorp USA, Inc. as
filed as exhibit 10.3 to our Quarterly Report on
Form 10-Q (filed May 15, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.70 |
|
|
Waiver and Fourth Amendment to Loan Agreement
dated as of March 2, 2009 among PGRT ESH, Inc.,
Lightstone Holdings LLC, David Lichtenstein and
Citicorp USA, Inc. as filed as exhibit 10.4 to
our Quarterly Report on Form 10-Q (filed May 15,
2009, File No. 001-13589) and incorporated herein
by reference. |
|
|
|
|
|
|
10.71 |
|
|
Letter dated as of July 20, 2009 from Grant
Thornton to the U.S. Securities and Exchange
Commission as filed as Exhibit 16.1 to our
Current Report on Form 8-K (filed July 20, 2009,
File No. 001-13589) and incorporated herein by
reference. |
|
|
|
|
|
|
10.72 |
|
|
Forbearance Extension dated as of April 30, 2009
among PGRT ESH, Inc., Lightstone Holdings LLC,
David Lichtenstein and Citicorp USA, Inc. as
filed as exhibit 10.1 to our Quarterly Report on
Form 10-Q (filed August 14, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
10.73 |
|
|
Fifth Amendment to Loan Agreement dated as of
April 30, 2009 among PGRT ESH, Inc., Lightstone
Holdings LLC, David Lichtenstein and
Citicorp USA, Inc. as filed as exhibit 10.2 to
our Quarterly Report on Form 10-Q (filed August
14, 2009, File No. 001-13589) and incorporated
herein by reference. |
|
|
|
|
|
|
10.74 |
|
|
Assignment and Assumption effective as of July
16, 2009, by PGRT ESH, Inc. and LSG-ESH LLC. as
filed as exhibit 10.1 to our Quarterly Report on
Form 10-Q (filed November 12, 2009, File No.
001-13589) and incorporated herein by reference. |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of Registrant. |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) Certification of Jeffrey A. Patterson, President and
Chief Executive Officer of Registrant. |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a) Certification of Paul G. Del Vecchio, Executive Vice
President Capital Markets of Registrant. |
78
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of Jeffrey A.
Patterson, President and Chief Executive Officer of the Board of
Registrant. |
|
|
|
|
|
|
32.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of Paul G. Del
Vecchio, Executive Vice President Capital Markets of Registrant. |
|
|
|
* |
|
Management contracts or compensatory plan or arrangement required to be filed as an exhibit to
this Report on Form 10-K pursuant to Item 15(b) of the Report on Form 10-K. |
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on April 9, 2010.
|
|
|
|
|
|
|
|
|
PRIME GROUP REALTY TRUST |
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Jeffrey A. Patterson |
|
|
|
|
|
|
|
|
|
Name:
|
|
Jeffrey A. Patterson |
|
|
|
|
Title:
|
|
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Jeffrey A. Patterson
Jeffrey A. Patterson
|
|
President, Chief Executive Officer and Trustee (Principal
Executive Officer)
|
|
April 9, 2010 |
|
|
|
|
|
/s/ Paul G. Del Vecchio
Paul G. Del Vecchio
|
|
Executive Vice President Capital Markets (Principal
Financial Officer)
|
|
April 9, 2010 |
|
|
|
|
|
/s/ Jeremy Zednick
Jeremy Zednick
|
|
Vice President -Corporate Accounting (Principal
Accounting Officer)
|
|
April 9, 2010 |
|
|
|
|
|
/s/ Bruno de Vinck
Bruno de Vinck
|
|
Trustee
|
|
April 9, 2010 |
|
|
|
|
|
/s/ David Lichtenstein
David Lichtenstein
|
|
Chairman of the Board of Trustees
|
|
April 9, 2010 |
|
|
|
|
|
/s/ Peyton (Chip) Owen, Jr.
Peyton (Chip) Owen, Jr.
|
|
Trustee
|
|
April 9, 2010 |
|
|
|
|
|
/s/ John M. Sabin
John M. Sabin
|
|
Trustee
|
|
April 9, 2010 |
|
|
|
|
|
/s/ Shawn R. Tominus
Shawn R. Tominus
|
|
Trustee
|
|
April 9, 2010 |
|
|
|
|
|
/s/ George R. Whittemore
George R. Whittemore
|
|
Trustee
|
|
April 9, 2010 |
80
PRIME GROUP REALTY TRUST
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Consolidated Financial Statements
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms |
|
|
F2 |
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008 |
|
|
F4 |
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007 |
|
|
F5 |
|
|
|
|
|
|
Consolidated Statements of Changes in Equity for the
years ended December 31, 2009, 2008 and 2007 |
|
|
F6 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007 |
|
|
F7 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F9 |
|
|
|
|
|
|
Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
Schedule III Real Estate and Accumulated Depreciation as of December 31, 2009 |
|
|
F36 |
|
All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission (SEC) are not required under the related instructions or
are inapplicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Trustees
Prime Group Realty Trust
We have audited the accompanying consolidated balance sheet of Prime Group Realty Trust (the
Company) as of December 31, 2009, and the related consolidated statements of operations, changes in
equity, and cash flows for the year then ended. Our audit also included the financial statement
schedule listed in the accompanying index at Item 15(a). These financial statements and schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2009 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Prime Group Realty Trust at December 31, 2009, and
the consolidated results of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its
method of accounting for noncontrolling interests with the adoption of the guidance originally
issued in FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (codified primarily in FASB ASC Topic 810, Consolidation), effective January 1, 2009 and applied retroactively.
/s/ Ernst & Young LLP
Chicago, Illinois
9 April 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying consolidated balance sheet of Prime Group Realty Trust and
Subsidiaries (collectively, the Company) as of December 31, 2008, and the related consolidated
statements of operations, shareholders equity and cash flows for each of the two years in the
period ended December 31, 2008. Our audits of the basic financial statements included the
financial statement schedule listed in the index appearing under Item 15(a)(1). These financial
statements and financial statement schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of BHAC Capital IV LLC
(BHAC), a joint venture, the investment in which, as discussed in note 12 to the financial
statements, is accounted for by the equity method of accounting. The investment in BHAC was $-0-
as of December 31, 2008, and the equity in its net loss was $(60,352,000) and $(47,848,000) for the
years ended December 31, 2008 and 2007, respectively. The financial statements of BHAC were
audited by other auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for BHAC, is based solely on the report of the other auditors.
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 audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits and
the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the financial statements
referred to above present fairly, in all material respects, the financial position of Prime Group
Realty Trust and Subsidiaries as of December 31, 2008, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
As discussed in Note 2 to the accompanying consolidated financial statements, the Company changed
its method of accounting for noncontrolling interests due to the adoption of the guidance on
noncontrolling interests in consolidated financial statements pursuant to Accounting Standards
Codification Topic 810, Consolidation, effective January 1, 2009 and applied retrospectively.
As discussed in Note 10 to the accompanying consolidated financial statements, the primary assets
and liabilities of properties sold or classified as held for disposition through December 31, 2009
have been reclassified within the consolidated balance sheet as of December 31, 2008, and the
related operating results for discontinued operations have been reclassified within the
consolidated statement of operations for the two years in the period ended December 31, 2008.
/s/ Grant Thornton LLP
Chicago, Illinois
March 31, 2009 (except for
Notes 2 and 10, as to which the
date is April 9, 2010)
F-3
PRIME GROUP REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
75,236 |
|
|
$ |
81,865 |
|
Building and improvements |
|
|
255,559 |
|
|
|
334,280 |
|
Tenant improvements |
|
|
47,891 |
|
|
|
57,799 |
|
Furniture, fixtures and equipment |
|
|
875 |
|
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
379,561 |
|
|
|
475,103 |
|
Accumulated depreciation |
|
|
(69,747 |
) |
|
|
(61,651 |
) |
|
|
|
|
|
|
|
|
|
|
309,814 |
|
|
|
413,452 |
|
In-place lease value, net |
|
|
5,580 |
|
|
|
10,445 |
|
Above-market lease value, net |
|
|
6,905 |
|
|
|
11,901 |
|
|
|
|
|
|
|
|
|
|
|
322,299 |
|
|
|
435,798 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
11,876 |
|
|
|
15,419 |
|
Investments in unconsolidated joint ventures |
|
|
53 |
|
|
|
6 |
|
Receivables, net of allowance for doubtful accounts of
$1,566 and $846 at December 31, 2009 and 2008,
respectively: |
|
|
|
|
|
|
|
|
Tenant |
|
|
241 |
|
|
|
1,388 |
|
Deferred rent |
|
|
13,814 |
|
|
|
13,072 |
|
Other |
|
|
488 |
|
|
|
1,043 |
|
Restricted cash escrows |
|
|
29,825 |
|
|
|
37,254 |
|
Deferred costs, net |
|
|
13,755 |
|
|
|
16,859 |
|
Other |
|
|
833 |
|
|
|
819 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
393,184 |
|
|
$ |
521,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and notes payable |
|
$ |
341,750 |
|
|
$ |
447,871 |
|
Accrued interest payable |
|
|
1,806 |
|
|
|
2,945 |
|
Accrued real estate taxes |
|
|
17,130 |
|
|
|
18,244 |
|
Accrued tenant improvement allowances |
|
|
744 |
|
|
|
6,884 |
|
Accrued environmental remediation liabilities |
|
|
9,676 |
|
|
|
7,839 |
|
Accounts payable and accrued expenses |
|
|
5,562 |
|
|
|
9,409 |
|
Liabilities for leases assumed |
|
|
2,709 |
|
|
|
3,279 |
|
Below-market lease value, net |
|
|
3,574 |
|
|
|
5,450 |
|
Other |
|
|
6,503 |
|
|
|
13,769 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
389,454 |
|
|
|
515,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred Shares, $0.01 par value; 30,000,000
shares authorized: |
|
|
|
|
|
|
|
|
Series B Cumulative Redeemable Preferred
Shares, 4,000,000 shares designated, issued and
outstanding |
|
|
40 |
|
|
|
40 |
|
Common Shares, $0.01 par value; 100,000,000 shares
authorized; 236,483 shares issued and outstanding |
|
|
2 |
|
|
|
2 |
|
Additional paid-in capital |
|
|
243,688 |
|
|
|
155,396 |
|
Retained deficit |
|
|
(157,891 |
) |
|
|
(149,470 |
) |
|
|
|
|
|
|
|
Total equity Prime Group Realty Trust |
|
|
85,839 |
|
|
|
5,968 |
|
Noncontrolling interest |
|
|
(82,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
3,730 |
|
|
|
5,968 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
393,184 |
|
|
$ |
521,658 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
41,793 |
|
|
$ |
44,176 |
|
|
$ |
46,523 |
|
Tenant reimbursements |
|
|
30,588 |
|
|
|
31,304 |
|
|
|
30,307 |
|
Other property revenues |
|
|
4,553 |
|
|
|
6,100 |
|
|
|
6,685 |
|
Services Company revenue |
|
|
981 |
|
|
|
1,163 |
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
77,915 |
|
|
|
82,743 |
|
|
|
86,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Property operations |
|
|
26,020 |
|
|
|
27,116 |
|
|
|
27,534 |
|
Real estate taxes |
|
|
15,504 |
|
|
|
15,866 |
|
|
|
17,691 |
|
Depreciation and amortization |
|
|
27,619 |
|
|
|
23,898 |
|
|
|
30,203 |
|
General and administrative |
|
|
6,211 |
|
|
|
6,873 |
|
|
|
6,210 |
|
Services Company operations |
|
|
1,063 |
|
|
|
1,484 |
|
|
|
2,835 |
|
Provision for asset impairment |
|
|
63,013 |
|
|
|
|
|
|
|
|
|
Loss on tax indemnification |
|
|
1,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
141,229 |
|
|
|
75,237 |
|
|
|
84,473 |
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(63,314 |
) |
|
|
7,506 |
|
|
|
2,401 |
|
Interest and other income |
|
|
4,948 |
|
|
|
1,394 |
|
|
|
2,928 |
|
Income (loss) from investments in
unconsolidated joint ventures |
|
|
84 |
|
|
|
(60,343 |
) |
|
|
(49,687 |
) |
Provision for asset impairment
from unconsolidated joint ventures |
|
|
|
|
|
|
(5,633 |
) |
|
|
|
|
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
(25,790 |
) |
|
|
(32,098 |
) |
|
|
(35,425 |
) |
Amortization of deferred
financing costs |
|
|
(4,244 |
) |
|
|
(2,244 |
) |
|
|
(910 |
) |
Recovery of distributions and
losses to noncontrolling interest
in excess of basis |
|
|
|
|
|
|
14,222 |
|
|
|
|
|
Distributions and losses to
noncontrolling interest in excess
of basis |
|
|
|
|
|
|
(20,293 |
) |
|
|
(14,222 |
) |
Gain on sales of real estate and
joint venture interests |
|
|
|
|
|
|
39,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(88,316 |
) |
|
|
(58,295 |
) |
|
|
(94,915 |
) |
Discontinued operations |
|
|
36 |
|
|
|
(3,272 |
) |
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(88,280 |
) |
|
|
(61,567 |
) |
|
|
(93,920 |
) |
Net (income) loss attributable to
noncontrolling interest |
|
|
79,879 |
|
|
|
(11,769 |
) |
|
|
34,902 |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Prime
Group Realty Trust |
|
|
(8,401 |
) |
|
|
(73,336 |
) |
|
|
(59,018 |
) |
Net income allocated to preferred
shareholders, net of
noncontrolling interest of $8,920
in 2009 |
|
|
(80 |
) |
|
|
(9,000 |
) |
|
|
(9,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss available to common
shareholders |
|
$ |
(8,481 |
) |
|
$ |
(82,336 |
) |
|
$ |
(68,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
attributable to common
shareholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(35.86 |
) |
|
$ |
(348.05 |
) |
|
$ |
(287.66 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.12 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
shareholders per common
share basic and diluted |
|
$ |
(35.86 |
) |
|
$ |
(348.17 |
) |
|
$ |
(287.62 |
) |
|
|
|
|
|
|
|
|
|
|
F-5
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(dollars in thousands, except for share/unit and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Distributions |
|
|
|
|
|
|
|
|
|
Series B |
|
|
|
|
|
|
Additional |
|
|
in Excess of) |
|
|
Non- |
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
Capital |
|
|
Deficit |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
$ |
40 |
|
|
$ |
2 |
|
|
$ |
105,539 |
|
|
$ |
(1,206 |
) |
|
$ |
20,770 |
|
|
$ |
125,145 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,018 |
) |
|
|
(34,902 |
) |
|
|
(93,920 |
) |
Series B preferred share dividends declared ($2.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,000 |
) |
|
|
|
|
|
|
(9,000 |
) |
Distributions and losses to noncontrolling interest in excess of basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,222 |
|
|
|
14,222 |
|
Other comprehensive loss interest rate protection agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
40 |
|
|
|
2 |
|
|
|
105,539 |
|
|
|
(69,224 |
) |
|
|
|
|
|
|
36,357 |
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,336 |
) |
|
|
11,769 |
|
|
|
(61,567 |
) |
Series B preferred share dividends declared ($1.6875 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,750 |
) |
|
|
|
|
|
|
(6,750 |
) |
Common share dividends declared ($0.67353 per common share/unit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160 |
) |
|
|
(17,840 |
) |
|
|
(18,000 |
) |
Contributions from parent company |
|
|
|
|
|
|
|
|
|
|
49,857 |
|
|
|
|
|
|
|
|
|
|
|
49,857 |
|
Recovery of distributions and losses to controlling interest in
excess of basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,222 |
) |
|
|
(14,222 |
) |
Distributions and losses to noncontrolling interest in excess of basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,293 |
|
|
|
20,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
40 |
|
|
|
2 |
|
|
|
155,396 |
|
|
|
(149,470 |
) |
|
|
|
|
|
|
5,968 |
|
Stock option expense (1) |
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,401 |
) |
|
|
(79,879 |
) |
|
|
(88,280 |
) |
Series B preferred share dividends declared
($0.5625 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(2,230 |
) |
|
|
(2,250 |
) |
Contributions from parent company |
|
|
|
|
|
|
|
|
|
|
88,186 |
|
|
|
|
|
|
|
|
|
|
|
88,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
40 |
|
|
$ |
2 |
|
|
$ |
243,688 |
|
|
$ |
(157,891 |
) |
|
$ |
(82,109 |
) |
|
$ |
3,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Grant of options to Prime Group Realty L.P. employee to acquire a 3.5% ownership interest
in Prime Office Company LLC which have expired unexercised and are no longer outstanding. |
See accompanying notes.
F-6
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(88,280 |
) |
|
$ |
(61,567 |
) |
|
$ |
(93,920 |
) |
Adjustments to reconcile net loss to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of mortgage notes payable |
|
|
(747 |
) |
|
|
(1,106 |
) |
|
|
(1,326 |
) |
Amortization of above/below-market lease value (included in rental
revenue) |
|
|
3,386 |
|
|
|
2,592 |
|
|
|
2,222 |
|
Amortization of in-place lease value |
|
|
4,865 |
|
|
|
4,505 |
|
|
|
9,919 |
|
Provision for doubtful accounts |
|
|
772 |
|
|
|
204 |
|
|
|
996 |
|
Gain on sales of real estate and unconsolidated joint venture interests |
|
|
|
|
|
|
(39,700 |
) |
|
|
(2,220 |
) |
Gain on earnest deposit from cancellation of sale of real estate |
|
|
(5,339 |
) |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,491 |
|
|
|
22,726 |
|
|
|
23,704 |
|
Provision for asset impairment |
|
|
69,873 |
|
|
|
1,600 |
|
|
|
|
|
Provision for asset impairment from unconsolidated
joint ventures |
|
|
|
|
|
|
5,633 |
|
|
|
|
|
Gain on extinguishment of debt |
|
|
(8,323 |
) |
|
|
|
|
|
|
|
|
Net equity in (income) loss from investments in unconsolidated joint
ventures |
|
|
(84 |
) |
|
|
60,343 |
|
|
|
49,687 |
|
Recovery of distributions and losses to noncontrolling interest in
excess of basis |
|
|
|
|
|
|
(14,222 |
) |
|
|
|
|
Distributions and losses to noncontrolling interest in excess of basis |
|
|
|
|
|
|
20,293 |
|
|
|
14,222 |
|
Net changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(108 |
) |
|
|
(4,155 |
) |
|
|
(3,090 |
) |
Other assets |
|
|
873 |
|
|
|
(180 |
) |
|
|
684 |
|
Accrued interest payable |
|
|
1,628 |
|
|
|
839 |
|
|
|
(67 |
) |
Accrued real estate taxes |
|
|
(925 |
) |
|
|
(601 |
) |
|
|
(1,056 |
) |
Accounts payable and accrued expenses |
|
|
(668 |
) |
|
|
(654 |
) |
|
|
470 |
|
Other liabilities |
|
|
(545 |
) |
|
|
5,213 |
|
|
|
909 |
|
Distribution as a return on investment from unconsolidated joint
venture |
|
|
37 |
|
|
|
|
|
|
|
6,167 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,906 |
|
|
|
1,763 |
|
|
|
7,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for real estate and equipment |
|
|
(11,092 |
) |
|
|
(23,976 |
) |
|
|
(17,410 |
) |
Proceeds from sales of real estate and unconsolidated joint venture
interests |
|
|
|
|
|
|
101,099 |
|
|
|
4,685 |
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
(120,000 |
) |
Change in restricted cash escrows |
|
|
4,247 |
|
|
|
4,442 |
|
|
|
2,295 |
|
Leasing costs (includes lease assumption costs and leasing commissions) |
|
|
(1,163 |
) |
|
|
(2,224 |
) |
|
|
(5,437 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(8,008 |
) |
|
|
79,341 |
|
|
|
(135,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs |
|
|
|
|
|
|
(7,502 |
) |
|
|
(644 |
) |
Proceeds from mortgages and notes payable |
|
|
|
|
|
|
149,600 |
|
|
|
120,000 |
|
Repayment of mortgages and notes payable |
|
|
(3,277 |
) |
|
|
(231,274 |
) |
|
|
(1,758 |
) |
Dividends paid to Series B-preferred shareholders |
|
|
(2,250 |
) |
|
|
(9,000 |
) |
|
|
(11,250 |
) |
Dividends paid to common shareholder |
|
|
|
|
|
|
(160 |
) |
|
|
|
|
Contributions from parent company |
|
|
6,086 |
|
|
|
12,598 |
|
|
|
|
|
Distributions paid to common unit holder |
|
|
|
|
|
|
(17,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
559 |
|
|
|
(103,578 |
) |
|
|
106,348 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,543 |
) |
|
|
(22,474 |
) |
|
|
(22,218 |
) |
Cash and cash equivalents at beginning of year |
|
|
15,419 |
|
|
|
37,893 |
|
|
|
60,111 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
11,876 |
|
|
$ |
15,419 |
|
|
$ |
37,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
26,057 |
|
|
$ |
33,600 |
|
|
$ |
38,600 |
|
Income taxes paid |
|
|
|
|
|
|
27 |
|
|
|
200 |
|
F-7
PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
Supplemental cash flow information for net assets sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net |
|
$ |
|
|
|
$ |
33,400 |
|
|
$ |
5,513 |
|
Investments in unconsolidated joint ventures |
|
|
|
|
|
|
21,759 |
|
|
|
|
|
Mortgage notes payable assumed by buyer |
|
|
|
|
|
|
|
|
|
|
(2,701 |
) |
Deferred costs, net |
|
|
|
|
|
|
5 |
|
|
|
48 |
|
Accrued real estate taxes |
|
|
|
|
|
|
(1,136 |
) |
|
|
(369 |
) |
Other assets and (liabilities), net |
|
|
|
|
|
|
7,371 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets sold |
|
|
|
|
|
|
61,399 |
|
|
|
2,465 |
|
Proceeds from sale of real estate |
|
|
|
|
|
|
101,099 |
|
|
|
4,685 |
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of real estate and
unconsolidated joint venture interests |
|
$ |
|
|
|
$ |
39,700 |
|
|
$ |
2,220 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant improvement allowances |
|
$ |
372 |
|
|
$ |
2,031 |
|
|
$ |
1,488 |
|
Environmental remediation costs |
|
$ |
2,144 |
|
|
$ |
6,481 |
|
|
$ |
2,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment of interest in unconsolidated joint
venture: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in additional paid-in capital |
|
$ |
82,100 |
|
|
$ |
|
|
|
$ |
|
|
Decrease in mortgage and notes payable |
|
$ |
(80,000 |
) |
|
$ |
|
|
|
$ |
|
|
Decrease in accounts payable and accrued interest |
|
$ |
(2,100 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conveyance of real estate in exchange for
release from mortgage and notes payable: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in mortgage and notes payable |
|
$ |
21,251 |
|
|
$ |
|
|
|
$ |
|
|
Decrease in real estate, net |
|
|
(14,492 |
) |
|
|
|
|
|
|
|
|
Decrease in restricted cash escrows |
|
|
(1,685 |
) |
|
|
|
|
|
|
|
|
Decrease in accrued interest payable |
|
|
2,767 |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt |
|
$ |
8,323 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-8
Prime Group Realty Trust
Notes to Consolidated Financial Statements
1. Business
Formation and Organization of the Company
We are a fully-integrated, self-administered and self-managed real estate investment trust
(REIT) which owns, manages, leases, develops and redevelops office and industrial real estate,
primarily in the Chicago metropolitan area. Our portfolio of properties consists of 8 office
properties, containing an aggregate of 3.3 million net rentable square feet. As of December 31,
2009, we had a joint venture interest in one office property located in Phoenix, Arizona containing
an aggregate of 0.1 million net rentable square feet. We lease and manage 3.3 million square feet
comprising all of our wholly-owned properties. We are also the asset and development manager for
an approximately 1.1 million square foot office building located at 1407 Broadway Avenue in New
York, New York, which is owned by affiliates of Lightstone, although we are currently scheduled to
cease performing these services effective April 4, 2010.
Our joint venture interest is accounted for as an investment in unconsolidated joint venture
under the equity method of accounting which consists of a 23.1% common interest in a joint venture
which owns a 101,006 square foot office building located in Phoenix, Arizona.
We were organized in Maryland on July 21, 1997 as a REIT under the Internal Revenue Code of
1986, as amended (the Code), for federal income tax purposes. On November 17, 1997, we completed
our initial public offering and contributed the net proceeds to Prime Group Realty, L.P. (our
Operating Partnership) in exchange for common and preferred partnership interests.
Prior to our acquisition (the Acquisition) by an affiliate of The Lightstone Group, LLC
(Lightstone), we were the sole general partner of the Operating Partnership and owned all of the
preferred units and 88.5% of the common units of the Operating Partnership then issued. Each
preferred unit and common unit entitled the owners thereof to receive distributions from our
Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares
are based upon the distributions received by us with respect to the common units and preferred
units we own in the Operating Partnership.
On June 28, 2005, our common shareholders approved the Acquisition by Lightstone and on July
1, 2005, the Acquisition was completed. The Acquisition closed pursuant to the terms of the
previously announced agreement and plan of merger dated as of February 17, 2005, among certain
affiliates of Lightstone, the Operating Partnership and us. As a result of the Acquisition, each of
our common shares and limited partnership units of the Operating Partnership were cancelled and
converted into the right to receive cash in the amount of $7.25 per common share/unit, without
interest. In connection with the Acquisition, all outstanding options with an exercise price equal
to or greater than the sales price of $7.25 per common share/unit were cancelled and each
outstanding option for a common share with an exercise price less than the sales price were
entitled to be exchanged for cash in an amount equal to the difference between $7.25 and the
exercise price. Our Series B Cumulative Redeemable Preferred Shares (the Series B Shares) remain
outstanding after the completion of the Acquisition and continue to be publicly traded on the New
York Stock Exchange (NYSE).
As a result of the Acquisition, Prime Office Company LLC (Prime Office), a subsidiary of
Lightstone, owns 100.0%, or 236,483, common shares and 99.1%, or 26,488,389, of the outstanding
common units in the Operating Partnership. Prime Group Realty Trust (the Company or PGRT) owns
0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred
units in the Operating Partnership, and remains the sole general partner of the Operating Partnership and
thus consolidates the Operating Partnership and its wholly-owned subsidiaries for financial
reporting purposes.
F-9
1. Business (continued)
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Our consolidated financial statements include our Operating Partnership and the other entities
in which we have control or from which we receive all economic benefits. Investments in
corporations and partnerships in which we do not have a controlling financial interest but do have
significant influence or a majority interest are accounted for under the equity method of
accounting. These entities are reflected on our consolidated financial statements as investments in
unconsolidated entities.
Significant intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in the prior period financial statements presented have been reclassified to
conform to the current year presentation.
As of December 31, 2009, we have one primary reportable segment consisting principally of
our ongoing ownership and operation of eight office properties, and a joint venture interest in one
office property located in Phoenix, Arizona (which is leased through operating leases to unrelated
third parties).
2. Summary of Significant Accounting Policies
Real Estate
Real estate assets, including acquired assets, are recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the related assets, which
are as follows:
|
|
|
Buildings
|
|
40 years weighted average life |
Building improvements
|
|
10 to 30 years |
Tenant improvements
|
|
Term of related leases |
Furniture and equipment
|
|
310 years |
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred.
Significant renovations and improvements which improve and/or extend the useful life of the asset
are capitalized and depreciated over their estimated useful life.
Impairment of Long-Lived Assets
We periodically evaluate our long-lived assets, including our investments in real estate and
unconsolidated joint ventures, for indicators of permanent impairment in accordance with U.S. GAAP.
We record impairment losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets during the expected hold period are less than the carrying amounts of
those assets.
F-10
2. Summary of Significant Accounting Policies (continued)
Impairment losses are measured as the difference between carrying value and fair value of
assets. For assets held for sale, impairment is measured as the difference between carrying value
and fair value, less costs to dispose. Fair value is based on estimated cash flows discounted at a
risk-adjusted rate of interest.
The estimated cash flows used for the impairment analysis and to determine estimated fair
value are based on our plans for our respective assets and our views of market and economic
conditions. The estimates consider matters such as current and historical rental rates, occupancies
for the respective properties and comparable properties and recent sales data for comparable
properties. Changes in estimated future cash flows due to changes in our plans or views of market
and economic conditions could result in the recognition of impairment losses, which, under the
applicable accounting guidance, could be substantial. During 2009, the Company recorded asset
impairments totaling $69.9 million on six of its properties (see Note 3 Asset Impairments).
Sales of Real Estate
In accordance with U.S. GAAP, we recognize gains on sale of real estate using the full accrual
method upon sale, provided the sales price is reasonably assured, the risks and rewards of
ownership are transferred to the buyer, and we are not obligated to perform significant activities
after the sale. However, when we agree to assume responsibility for re-leasing sold properties for
a period beyond the date of sale and where we use estimates to support our intent to mitigate our
net liability, we defer recognition of the gain on sale of real estate until such time as we can
more reasonably determine our actual liability with executed subleases (see Note 15 Property
Dispositions).
Net income and gain (loss) on sales of real estate for properties sold or properties held for
sale are reflected in our Consolidated Balance Sheets and Statements of Operations as discontinued
operations for all years presented.
2009
180 North LaSalle Street Sale. In September 2008, we entered into a purchase and sale
agreement (as amended, the Agreement) with Younan Properties, Inc. (Purchaser) whereby
Purchaser became obligated to purchase 180 North LaSalle Street, Chicago, Illinois (the
Property), from the subsidiary of the Company, 180 N. LaSalle II, L.L.C. (180 LLC) that owns
the Property.
Pursuant to the terms of the Agreement, the Purchaser was obligated to close the transaction
and purchase the Property from 180 LLC on February 18, 2009. The Purchaser failed to close by that
deadline. On February 19, 2009, 180 LLC sent a letter to the Purchaser stating that the Purchaser
was in default under the Agreement and that 180 LLC was terminating the Agreement. Because the
Purchaser failed to close the transaction and purchase the Property prior to the February 18, 2009
deadline, under the terms of the agreement, 180 LLC is entitled to retain as liquidated damages the
$6.0 million of earnest money that the Purchaser previously deposited with 180 LLC. As a result,
we have recorded $5.3 million, net of costs, as other income in our consolidated financial
statements. In addition, in the first quarter of 2009, we reinstated depreciation and amortization
associated with the property related to the period that it was classified as property held for sale
in 2008, which was approximately $3.0 million. In accordance with U.S. GAAP, the Company ceases
depreciation and amortization when a property is classified as held for sale.
F-11
2. Summary of Significant Accounting Policies (continued)
On February 13, 2009, the Purchaser filed a lawsuit against 180 LLC seeking to rescind the
Agreement and obtain the return of the earnest money because the Purchaser claims it was impossible
for it to obtain financing for the acquisition due to economic conditions at the time. On July 7,
2009, the judge dismissed the Purchasers lawsuit with prejudice. The Purchaser filed an appeal of
this decision on July 10, 2009. In our opinion, after consultation with legal counsel, we believe
the Purchasers appeal is without merit and anticipate that we will prevail in the appeal.
Although there can be no assurances about the eventual outcome, we believe the ultimate outcome
will not have a material adverse effect on our consolidated financial condition or results of
operations.
Property Held for Sale
We evaluate held for sale classification of our owned real estate on a quarterly basis. Assets
that are classified as held for sale are recorded at the lower of their carrying amount or fair
value less cost to sell. Assets are generally classified as held for sale once a sales contract is
executed with no contingencies and the prospective buyer has funds at risk to ensure performance.
The results of operations of these real estate properties are reflected as discontinued operations
in all periods reported.
There were no properties considered as held for sale at December 31, 2009 or 2008. At
December 31, 2008, our 180 North LaSalle Street property was considered held for sale and was
subsequently placed back into operations in 2009 when a previously executed purchase and sale
agreement was terminated.
Intangible Assets
The above-market lease values and below-market lease values are amortized as an adjustment to
rental income over the remaining lease term while in-place lease values are amortized to expense
over the remaining lease term.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
Intangible Asset Category |
|
AmountGross |
|
|
Amortization |
|
|
Amount Net |
|
|
|
(dollars in thousands) |
|
In-place lease value |
|
$ |
19,852 |
|
|
$ |
(14,272 |
) |
|
$ |
5,580 |
|
Above-market lease value |
|
|
26,756 |
|
|
|
(19,851 |
) |
|
|
6,905 |
|
Below-market lease value |
|
|
(8,591 |
) |
|
|
5,017 |
|
|
|
(3,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,017 |
|
|
$ |
(29,106 |
) |
|
$ |
8,911 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
Intangible Asset Category |
|
AmountGross |
|
|
Amortization |
|
|
Amount Net |
|
|
|
(dollars in thousands) |
|
In-place lease value |
|
$ |
33,573 |
|
|
$ |
(23,128 |
) |
|
$ |
10,445 |
|
Above-market lease value |
|
|
30,136 |
|
|
|
(18,235 |
) |
|
|
11,901 |
|
Below-market lease value |
|
|
(13,540 |
) |
|
|
8,090 |
|
|
|
(5,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,169 |
|
|
$ |
(33,273 |
) |
|
$ |
16,896 |
|
|
|
|
|
|
|
|
|
|
|
F-12
2. Summary of Significant Accounting Policies (continued)
Estimated amortization for each of the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InPlace |
|
|
Abovemarket |
|
|
Belowmarket |
|
Year ending December 31, |
|
Lease Value |
|
|
Lease Value |
|
|
Lease Value |
|
|
|
(dollars in thousands) |
|
2010 |
|
$ |
1,989 |
|
|
$ |
2,235 |
|
|
$ |
(1,009 |
) |
2011 |
|
|
1,209 |
|
|
|
1,124 |
|
|
|
(783 |
) |
2012 |
|
|
825 |
|
|
|
1,084 |
|
|
|
(416 |
) |
2013 |
|
|
666 |
|
|
|
997 |
|
|
|
(300 |
) |
2014 |
|
|
553 |
|
|
|
927 |
|
|
|
(284 |
) |
Thereafter |
|
|
338 |
|
|
|
538 |
|
|
|
(782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,580 |
|
|
$ |
6,905 |
|
|
$ |
(3,574 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
We consider highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Restricted Cash
Restricted cash consists primarily of cash held for real estate taxes, insurance and property
reserves for maintenance and expansion or tenant improvements as required by certain leases and
loan agreements.
Deferred Costs
Financing Costs. Costs incurred in connection with financings, refinancings or debt
modifications are capitalized as deferred financing costs and are amortized using the straight-line
method over the lives of the related loans, which approximates the effective interest method. Upon
the early extinguishment of debt, remaining deferred financing costs associated with the
extinguished debt are fully amortized to interest expense.
Leasing Costs. Leasing commissions, lease assumption costs and other leasing costs directly
attributable to tenant leases are capitalized as deferred leasing costs and are amortized on the
straight-line method over the terms of the related lease agreements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our estimate of the amounts of the recorded
accounts receivable at the balance sheet date that will not be recovered from cash receipts in
subsequent periods. Our policy is to record a periodic provision for doubtful accounts based on the
age of the receivable. We also periodically review specific tenant balances and determine whether
an additional allowance is necessary. In recording such a provision, we consider a tenants
creditworthiness, ability to pay, probability of collection and consideration of the tenant. The
allowance for doubtful accounts is reviewed periodically based upon our historical experience. As a
result, we recorded a provision of $0.8 million, $0.2 million and $1.0 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
F-13
2. Summary of Significant Accounting Policies (continued)
Leases Assumed
In connection with certain tenant leases, we have assumed the liability for the remaining
terms of the tenants existing leases in their previous location. We have recorded a liability for
the difference between the total remaining costs for leases assumed and the expected benefits from
actual and estimated future subleasing of the assumed lease obligations. The related incentive to
the lessee has been capitalized as a deferred cost and is being amortized as a reduction of rental
revenue over the life of the respective lease. The deferred cost and related liability are adjusted
prospectively for changes in the estimated benefits from subleases.
Revenue Recognition
Rental revenue is recorded on a straight-line basis which includes the effects of rent steps
and rent abatements under the leases. We commence rental revenue recognition when the tenant takes
possession of the leased space and the leased space is substantially ready for its intended use.
In addition, in circumstances where we provide a tenant improvement allowance that is not used by
the tenant, we recognize the unused allowance as a reduction of rental revenue on a straight-line
basis over the term of the lease. Differences between rental revenue earned and amounts due per
the respective lease agreements are credited or charged, as applicable, to deferred rent
receivable. Rental payments received prior to their recognition as income are classified as rent
received in advance and are included in other liabilities. Lease termination income (included in
rental revenue) represents amounts received from tenants in connection with the early termination
of their remaining lease obligation reduced by any outstanding tenant receivables (including
deferred rent receivable). Unamortized tenant improvements, deferred lease commissions and leasing
costs related to terminated leases are recorded as additional depreciation and amortization expense
upon lease termination.
Real estate leasing commissions are recognized upon execution of appropriate lease and
commission agreements and receipt of full or partial payment, and, when payable upon certain events
such as tenant occupancy or rent commencement, upon occurrence of such events. All other
commissions and fees, including management fees, are recognized at the time the related services
have been performed by the Company, unless future contingencies exist.
Noncontrolling Interest in Consolidated Real Estate Partnerships
Interests held in consolidated real estate partnerships by limited partners other than the
Company are reflected as noncontrolling interest in consolidated real estate partnerships.
Noncontrolling interest in real estate partnerships represents the noncontrolling interests share
of the underlying net assets of the Companys consolidated real estate partnerships.
On January 1, 2009, we adopted new accounting guidance for noncontrolling interest as issued
by the Financial Accounting Standards Board (FASB). Application of the new accounting guidance
has resulted in the reclassification of amounts previously attributable to minority interest (now
referred to as noncontrolling interest) to a separate component of equity on the accompanying
consolidated balance sheets. Additionally, net income attributable to noncontrolling interests is
shown separately from net income in the consolidated statements of operations.
Prior to the adoption of the new accounting guidance, Prime Group Realty Trust would have been
allocated additional losses that now are allocable to noncontrolling interests. As a result of the
adoption of the new accounting guidance, losses to noncontrolling interest in excess of basis will
no longer be allocated to PGRT but rather will be allocated to Prime Group Realty, L.P. (our
Operating Partnership) even though the allocation results in a deficit noncontrolling interest
balance.
F-14
2. Summary of Significant Accounting Policies (continued)
Included in the year ended December 31, 2008 consolidated statements of operations prior to
the new accounting guidance being effective was $14.2 million in recovery of distributions and
losses to noncontrolling interest in excess of basis, which was related to the recovery of losses
previously recognized in 2007. Additionally, the $20.3 million and $14.2 million, for the years
ended December 31, 2008 and 2007, respectively, in distributions and losses to noncontrolling
interest in excess of basis represents 2008 and 2007 losses, respectively resulting in a deficit
position in the noncontrolling interest balance. At that time, losses in excess of the
noncontrolling interest basis were charged to operations as a result of the noncontrolling interest
holder having no contractual obligation to return such amounts, to fund operations or to restore
any capital deficits.
The following pro forma condensed statements of operation are presented as if the new
accounting guidance was not effective during the current period (dollar in thousands, except per
share amounts):
|
|
|
|
|
|
|
Pro forma |
|
|
|
Year |
|
|
|
ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
|
|
|
|
Net income (loss) attributable to Prime Group Realty Trust |
|
$ |
(88,280 |
) |
Net income allocated to preferred shareholders |
|
|
(9,000 |
) |
|
|
|
|
Net loss attributable to common shareholders |
|
$ |
(97,280 |
) |
|
|
|
|
|
|
|
|
|
Pro forma earnings attributable to common shareholders
per common share basic and diluted: |
|
|
|
|
Net loss attributable per common share basic and diluted |
|
$ |
(411.36 |
) |
|
|
|
|
Earnings Per Share
Basic and diluted earnings per share (EPS) is calculated by dividing net income (loss)
available to common shareholders by the weighted average number of common shares outstanding during
the period.
Income Taxes
We have elected to be taxed as a REIT under the Code. As a REIT, we generally will not be
subject to federal income tax to the extent that we distribute at least 90.0% of our REIT taxable
income to our shareholders. REITs are subject to a number of organizational and operational
requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable income at regular
corporate tax rates.
We account for income taxes payable by Prime Group Realty Services, Inc., a Maryland
corporation and a wholly-owned subsidiary of the Operating Partnership and its affiliates
(collectively, the Services Company), a taxable REIT subsidiary, in accordance with U.S. GAAP.
It requires that deferred tax assets and liabilities be recognized using enacted tax rates for the
effect of temporary differences between the book and tax basis of recorded assets and liabilities.
It also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be realized. We evaluate the
realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the
amount of the allowance, if necessary. The factors used to assess the likelihood of realization are
our forecast of future taxable income and available tax planning strategies that could be
implemented to realize the net deferred tax asset. We have used tax planning strategies to realize
or renew net deferred tax assets in order to avoid the potential loss of future tax benefits.
F-15
2. Summary of Significant Accounting Policies (continued)
The Services Company recorded a tax benefit of $54,800 and $200,000 for the year ended
December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the Services Company had
a deferred tax asset of $65,000 and $197,000, respectively. There were no valuation allowances at
December 31, 2009 and 2008. The Services Company paid $0 and $27,000 in income taxes for the year
ended December 31, 2009 and 2008, respectively.
Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. Additionally, the Company, from
time to time, may be required to record other assets at fair value on a nonrecurring basis.
The Company groups assets and liabilities at fair value in a three level hierarchy, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value.
These levels are:
|
Level 1 |
|
Valuation is based upon quoted prices for identical assets or liabilities in
active markets. |
|
Level 2 |
|
Valuation is based upon quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market. |
|
Level 3 |
|
Valuation is based on unobservable and significant assumptions to the fair
value measurement. |
During 2009, we recorded asset impairment charges totaling $69.9 million ($6.9 million
included in discontinued operations) on six properties to reduce the net book value of the property
to its estimated fair value. We utilized a discounted cash flow technique based on Level 3
assumptions including occupancy, discount rates and capitalization rates in estimating the fair
value (see Note 3 Asset Impairment).
The mortgage and notes payable carrying amount of our variable rate borrowings approximates
their fair value. The fair values of our fixed rate debt agreements are estimated using discounted
cash flow analyses based upon index rates, market spreads and incremental borrowing rates for
similar types of borrowing arrangements. Similar debt instruments are traded in active markets so
we classify our mortgage and notes payable to be classified within Level 2 of the valuation
hierarchy. The estimated current fair value of our mortgage and notes payable is estimated at
$258.7 million and $428.5 million as of December 31, 2009 and 2008, respectively. Our recorded
carrying value is $341.8 million and $447.9 million as of December 31, 2009 and 2008, respectively.
Recent Issued Accounting Pronouncements
In June 2009, the FASB issued the new Accounting Standards Codification (ASC) as the source
of authoritative accounting principles recognized by the FASB to be applied in the preparation of
financial statements in conformity with U.S. GAAP for SEC registrants. The ASC is not intended to
change or alter existing U.S. GAAP and is effective for financial statements issued for fiscal
years and interim periods ending after September 15, 2009. ASC did not have a material impact on
our consolidated financial statements.
F-16
2. Summary of Significant Accounting Policies (continued)
We adopted the provisions of the FASB Staff Position (FSP) relating to Fair Value
Measurements and Disclosures on January 1, 2009 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring basis. The
implementation of this FSP did not have a material impact on our financial position or results of
operations other than requiring expanded disclosures.
The new accounting guidance related to business combinations as issued by the FASB was
effective for us for business combinations with an acquisition date on or after January 1, 2009.
The new accounting guidance broadens the previous guidance extending its applicability to all
transactions and other events in which one entity obtains control over one or more other
businesses. The new accounting guidance also broadens the fair value measurement and recognition of
assets acquired, liabilities assumed, and interests transferred as a result of business
combinations; and acquisition related costs will generally be expensed rather than included as part
of the basis of the acquisition. This Statement expands required disclosures to improve the ability
to evaluate the nature and financial effects of business combinations. The adoption did not have a
material impact on our Companys financial position or results of operations, but could impact our
future financial results to the extent that we acquire significant amounts of real estate, since
related acquisition costs will be expensed as incurred compared to prior years practice of
capitalizing such costs and amortizing them over the estimated useful life of the assets acquired.
We adopted the provisions of a FSP relating to Fair Value Measurements and Disclosures as of
June 30, 2009. This FSP provides guidance on estimating the fair value of assets and liabilities
in the current economic environment and reemphasizes that the objective of a fair value measurement
remains the price that would be received to sell an asset or paid to transfer a liability at the
measurement date. The implementation of this FSP did not have a material impact on our financial
position or results of operations.
We adopted the provisions of a FSP on Financial Assets as of June 30, 2009. This FSP required
disclosures about fair value of financial instruments in interim financial statements, adding to
the current requirement to make those disclosures in annual financial statements. This FSP also
requires that companies disclose the method or methods and significant assumptions used to estimate
the fair value of financial instruments and a discussion of changes, if any, in the method or
methods and significant assumptions during the period. The implementation of this FSP did not have
a material impact on our financial position or results of operations other than requiring expanded
disclosures.
F-17
3. Asset Impairments
We recorded the following non-cash provisions for asset impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties (1) |
|
$ |
69,873 |
|
|
$ |
1,600 |
|
|
$ |
|
|
Investment in unconsolidated joint ventures (2) |
|
|
|
|
|
|
5,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,873 |
|
|
$ |
7,233 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company evaluated its operating properties for indicators of permanent
impairment and deemed it necessary to write-down six properties totaling $69.9
million (including $6.9 million in discontinued operations) in 2009 and one
property for $1.6 million in 2008 which is included in discontinued operations.
The impairment indicators were based on operational performance, current and
expected cash flows, and market conditions. |
|
|
|
In the fourth quarter of 2009, our Continental Towers property was
considered impaired based on the property generating negative cash flows,
a decline in occupancy and forecasted future losses. The Company recorded
an asset impairment of $59.9 million which represents the difference
between the carrying value and estimated fair value of this property. The
carrying value of this property is approximately $65.3 million, which is
less than the debt balance of $115.0 million at December 31, 2009. The
Company is currently in discussions with the Lender on a potential deed
in lieu of foreclosure transaction with the lender (see Note 17 -
Subsequent Events). If this transaction materializes, the difference
between the loan balance and carrying value of the property would be
recognized as a gain on extinguishment of debt in the period the
transaction closes. |
|
|
|
The other properties that were impaired during the fourth quarter of 2009
consisted of Brush Hill Office Court ($1.8 million), 7100 Madison Avenue
($0.5 million), Enterprise Center II ($0.1 million) and Atrium Building
($0.7 million). |
|
|
|
The Company may in the future have to take additional impairment charges on these and/or other properties to the extent market conditions continue to deteriorate or for other specific reasons applicable to a particular property.
|
|
(2) |
|
During 2008, we recorded an asset impairment of $5.6 million related to the
write-down of the remaining balance of our investment in the membership
interest in BHAC as the investment was deemed to be other than temporary due to
past and expected future inability to sustain earnings at a level which would
justify the carrying value. |
4. Deferred Costs
Deferred costs consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Financing costs |
|
$ |
6,321 |
|
|
$ |
10,264 |
|
Leasing costs |
|
|
13,124 |
|
|
|
13,396 |
|
|
|
|
|
|
|
|
|
|
|
19,445 |
|
|
|
23,660 |
|
Less: Accumulated amortization |
|
|
(5,690 |
) |
|
|
(6,801 |
) |
|
|
|
|
|
|
|
|
|
$ |
13,755 |
|
|
$ |
16,859 |
|
|
|
|
|
|
|
|
F-18
5. Mortgage Notes Payable
Mortgage Notes Payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Mortgage Notes Payable (1), (2): |
|
|
|
|
|
|
|
|
Mortgage notes payable to various
financial institutions, collateralized by
various properties, interest at fixed
rates ranging from 5.43% to 8.76% per
annum, with principal and interest payable
monthly through December 1, 2016. The
weighted average rates at December 31,
2009 and 2008 were 6.26% and 6.71%,
respectively (See Note 17 - Subsequent
Events) |
|
$ |
330,775 |
|
|
$ |
354,979 |
|
Mortgage notes payable to various
financial institutions, collateralized by
various properties, interest at variable
rates based on an index rate of 2.50% at
December 31, 2009 plus 200 basis points
with interest payable monthly through June
4, 2013. The weighted average rates at
December 31, 2009 and 2008 were 4.50% and
10.47%, respectively |
|
|
10,975 |
|
|
|
92,892 |
|
|
|
|
|
|
|
|
Total mortgage notes payable |
|
$ |
341,750 |
|
|
$ |
447,871 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage notes payable are subject to various operating and
financial covenants. In addition, we are required to periodically fund
and maintain escrow accounts to make future real estate tax and
insurance payments, as well as to fund certain tenant releasing costs
and capital expenditures. These are included in restricted cash
escrows. |
|
(2) |
|
Our mortgage notes payable are secured by our real estate assets. |
BHAC Capital IV, L.L.C. On June 29, 2007, through our wholly-owned qualified REIT subsidiary
PGRT ESH, we obtained a $120.0 million non-recourse loan (the Citicorp Loan) from Citicorp USA,
Inc. (Citicorp). The loan was interest only and accrued interest at a variable rate of 4.0%
above the London Interbank Offered Rate (LIBOR) or 1.50% above Citicorps base interest rate, as
selected by PGRT ESH from time to time. The loan had a maturity date of June 10, 2008 and was
guaranteed by an affiliate of Lightstone, Lightstone Holdings LLC (Lightstone Holdings), and our
Chairman of the Board of Trustees (Board), Mr. David Lichtenstein (the Guarantors), both of
whom are affiliates of our parent company. The loan was non-recourse to PGRT ESH and is secured
by, among other things, a pledge of PGRT ESHs membership interest in BHAC.
Effective June 10, 2008, PGRT ESH extended the maturity date of the Citicorp Loan from June
10, 2008 until June 15, 2009. The interest rate for the extension was at PGRT ESHs election (a)
one or three-month LIBOR plus 6% or (b) the lenders base rate plus 4% per annum.
In January 2008, PGRT ESH was informed that BHAC was indefinitely suspending distributions on
the membership units held by PGRT ESH. After that time, the debt service and fees on the
non-recourse Citicorp Loan were funded by capital contributions from our parent company, Prime
Office, to the Company and, in turn, to PGRT ESH.
F-19
5. Mortgage Notes Payable (continued)
On November 5, 2008, PGRT ESH entered into an amendment to the Citicorp Loan documents dated
as of October 31, 2008, modifying various terms of the Citicorp Loan. Pursuant to this amendment,
the interest rate of the Citicorp Loan was increased to LIBOR plus 10%. On April 30, 2009, PGRT
ESH entered into another amendment to the Citicorp Loan documents modifying certain terms of the
Citicorp Loan. Pursuant to this amendment, the date for making any further required principal
repayments on the loan was extended from April 30, 2009 until the maturity date of the loan on June
15, 2009. In addition, Citicorp further agreed not to exercise any of its rights and remedies
under the Citicorp Loan documents relating to the repayment of the loan and certain specified
covenant defaults through July 15, 2009. On June 16, 2009, ESH filed for Chapter 11 bankruptcy
protection.
On September 18, 2009, with a transaction effective date of July 16, 2009, PGRT ESH assigned
its membership interest in BHAC to LSG-ESH LLC (LSG-ESH), an affiliate of the Companys Chairman
of the Board and our parent company, Prime Office. In connection with the transaction, PGRT ESH
was released from liability for the obligations under the Citicorp Loan. Due to the related party
nature of the transfer of the BHAC interest, including the assumption of the obligations under the
Citicorp Loan, this transaction was approved unanimously by our independent trustees and we
recorded this transaction as an increase to additional paid-in capital and a reduction of mortgage
and notes payable of $80.0 million and a reduction in accrued financing fees included in accounts
payable and accrued expenses of $2.1 million.
800-810 Jorie Boulevard. On October 20, 2008, we received a notice of default from the
special servicer of the non-recourse mortgage note on our 800-810 Jorie Boulevard property. Due to
the property generating negative cash flows, debt service payments were discontinued as of
September 1, 2008. The default on the Jorie Boulevard loan did not cause a default on any of the
Companys other loans. On July 28, 2009, we conveyed the Jorie Boulevard property to the lender in
exchange for a release of the loan. The Company recorded a gain on extinguishment of $8.3 million
which is included in discontinued operations on the consolidated statement of operations in the
third quarter of 2009 representing the difference between the extinguished loan balance and accrued
interest and the carrying value of the property.
Total interest paid on mortgage notes payable was $26.1 million and $33.6 million for the year
ended December 31, 2009 and 2008, respectively. No capitalization of interest occurred in the year
ended December 31, 2009 and 2008. In addition, Prime Office, through a capital contribution to the
Company, repaid $1.5 million and $38.5 million of principal on the PGRT ESH loan for the year ended
December 31, 2009 and 2008, respectively. Prime Office also paid $4.6 million and $11.3 million in
interest and other fees on the PGRT ESH loan for the year ended December 31, 2009 and 2008,
respectively.
Amortization of Principal. We made payments totaling $1.8 million and $1.8 million for
amortization of principal for loans on various properties, in 2009 and 2008, respectively.
F-20
5. Mortgage Notes Payable (continued)
The following represents our future minimum principal payments (excluding extension options)
on our mortgage notes payable outstanding at December 31, 2009:
|
|
|
|
|
Year Ending December 31, |
|
Amount |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
2010 (1) |
|
$ |
127,725 |
|
2011 |
|
|
153,806 |
|
2012 |
|
|
417 |
|
2013 |
|
|
59,725 |
|
|
|
|
|
|
|
$ |
341,673 |
|
|
|
|
|
|
|
|
(1) |
|
On March 5, 2010, the Lender accelerated the maturity date to be
immediately payable on the $115.0 million loan on Continental Towers
due to the loan being in default (see Note 17 Subsequent Events). |
The total carrying value of our mortgage notes payable, as adjusted in conjunction with the
application of purchase accounting related to the Acquisition, is $341.8 million. Also, as a
result of the Acquisition, we are amortizing the fair value adjustment for our debt over the
remaining life of the debt, which is recorded in the accretion of mortgage note payable. For the
year ended December 31, 2009, amortization totaled $1.6 million. The actual amount owed to lenders
for mortgage notes payable at December 31, 2009 is $341.7 million.
6. Debt Covenants
The financial covenants contained in certain of our loan agreements and guarantee agreements
with our lenders include minimum ratios for debt service coverage, as well as minimum net worth
levels and numerous other financial and non-financial covenants (such as, timely issuance of
financial statements to lenders). As of December 31, 2009, we are in compliance with the
requirements of these financial and non-financial covenants.
F-21
7. Leases
We have entered into lease agreements with tenants with lease expirations ranging from
month-to-month through April 2023. The leases generally provide for tenants to share in operating
expenses and real estate taxes, although some leases only provide for sharing amounts in excess of
specified base amounts. Approximately 34.2%, 33.0%, and 28.5% of total revenue for the years ended
December 31, 2009, 2008 and 2007, respectively, was received from five tenants. The largest
tenant, Jenner & Block, represented approximately 16.3% of our total revenues in 2009. This
tenants lease will expire in April 2010 and the tenant did not renew the lease and has vacated
their space.
The total future minimum rentals to be received by us under noncancelable operating leases in
effect at December 31, 2009, exclusive of tenant reimbursements and contingent rentals, are as
follows:
|
|
|
|
|
Year Ending December 31, |
|
Amount |
|
|
|
(dollars in thousands) |
|
2010 |
|
$ |
34,890 |
|
2011 |
|
|
27,358 |
|
2012 |
|
|
23,016 |
|
2013 |
|
|
21,103 |
|
2014 |
|
|
18,615 |
|
Thereafter |
|
|
48,686 |
|
|
|
|
|
|
|
$ |
173,668 |
|
|
|
|
|
As a part of lease agreements entered into with certain tenants, we assumed those tenants
leases at their previous locations and subsequently executed subleases for certain of the assumed
lease space. See Note 14 Commitments and Contingencies Lease Liabilities for a description of
these obligations.
Future minimum rental payments (exclusive of tenant reimbursements) to be paid by us under
leases assumed, net of subleases executed through December 31, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Executed |
|
|
Net |
|
Year Ending December 31, |
|
Amount |
|
|
Subleases |
|
|
Amount |
|
|
|
(dollars in thousands) |
|
2010 |
|
$ |
6,179 |
|
|
$ |
5,204 |
|
|
$ |
975 |
|
2011 |
|
|
5,076 |
|
|
|
4,378 |
|
|
|
698 |
|
2012 |
|
|
3,439 |
|
|
|
2,929 |
|
|
|
510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,694 |
|
|
$ |
12,511 |
|
|
$ |
2,183 |
|
|
|
|
|
|
|
|
|
|
|
8. Noncontrolling Interests
We are the sole general partner of the Operating Partnership and own all of the 4.0 million
outstanding preferred units of the Operating Partnership. We also own 0.9% of the common units of
the Operating Partnership. Each preferred unit and common unit entitles us to receive distributions
from our Operating Partnership. Dividends declared or paid to holders of common shares and
preferred shares of the REIT are based upon the distributions we receive with respect to our common
units and preferred units of the Operating Partnership.
As of December 31, 2009, a subsidiary of Lightstone owned 100.0% of our common shares,
(236,483, common shares) and 99.1%, of the outstanding common units in the Operating Partnership
(26,488,389 common units).
F-22
9. Preferred Shares
We are authorized to issue up to 30,000,000 of non-voting preferred shares of beneficial
interest in one or more series. On June 5, 1998, we completed the sale of 4,000,000 Series B Shares
with a $0.01 par value. Our Series B Shares are publicly traded on the NYSE.
Dividends on our Series B Shares are payable quarterly on or about the last day of January,
April, July and October of each year, at the rate of 9.0% (equivalent to $2.25 per annum per Series
B Share). Our Series B Shares rank senior to our common shares as to the payment of dividends and
as to the dividend of assets upon liquidation. Our Series B Shares may be redeemed, at our option,
at a redemption price of $25.00 per share plus accrued and unpaid dividends. The redemption price
is payable solely out of the proceeds from the sale of other capital shares of beneficial interest
of ours.
On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our
Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly
dividend had a record date of January 19, 2009. These dividends were paid on January 30, 2009.
This dividend has been determined to be a return of capital. Under our declaration of trust, these
dividends are deemed to be the quarterly dividends related to the fourth quarter of 2008. Our
Board did not declare any quarterly dividends for any of the quarters of 2009.
The Boards decision was based on our current capital resources and liquidity needs and the
overall negative state of the economy and capital markets. The Board intends to review the
suspension of our Series B Shares distributions periodically based on the Boards ongoing review of
our financial results, capital resources and liquidity needs, and the condition of the economy and
capital markets. We can give no assurances that distributions on our Series B Shares will be
resumed, or that any financing or other capitalization alternatives will be satisfactorily
concluded.
The total arrearage in payment of dividends on the Series B Shares is four quarters in 2009
and the first quarter of 2010 for a total of $11.25 million. The holders of Series B Shares have
the right to elect two additional members to our Board if six consecutive quarterly dividends on
our Series B Shares are not made. The term of any trustee elected by the holders of Series B Shares
will expire whenever the total dividend arrearage in our Series B Shares has been paid and current
dividends declared and set apart for payment. Any future dividends in respect to our common shares
may not be paid unless all accrued but unpaid preferred share dividends have been or are
concurrently satisfied.
10. Discontinued Operations
U.S. GAAP requires, among other things, that the primary assets and liabilities and the
results of operations of properties which have been sold or held for disposition, be classified as
discontinued operations and segregated in the consolidated statements of operations and balance
sheets. Properties classified as real estate held for disposition generally represent properties
that are sold or under an executed sales contract with no contingencies and the prospective buyer
has funds at risk to ensure performance.
In accordance with U.S. GAAP, we have updated our historical financial statements for the
years ended December 31, 2008 and 2007, to present the primary assets and liabilities and the net
operating results of those properties sold or classified as held for disposition through December
31, 2009 as discontinued operations for all periods presented. The update does not have an impact
on net income available to common shareholders. Discontinued operations only result in the
reclassification of the operating results of all properties sold, disposed, or classified as held
for disposition through December 31, 2009, within the consolidated statements of operations for the
years ended December 31, 2009, 2008 and 2007, and the reclassification of the assets and
liabilities within the consolidated balance sheets for 2009 and 2008.
F-23
10. Discontinued Operations (continued)
Below is a summary of the results of operations for our 800-810 Jorie Boulevard property
(conveyed to the lender in exchange for a release of the related loan in July 2009), our 1051 North
Kirk Road property (sold in 2008), our Narco River Business Center property (sold in 2007) and the
residual effects related to properties sold in prior years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
929 |
|
|
$ |
2,224 |
|
|
$ |
6,277 |
|
Operating expenses |
|
|
1,130 |
|
|
|
2,806 |
|
|
|
5,743 |
|
Provision for asset impairment |
|
|
(6,860 |
) |
|
|
(1,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,061 |
) |
|
|
(2,182 |
) |
|
|
534 |
|
Interest expense, net |
|
|
(1,226 |
) |
|
|
(1,596 |
) |
|
|
(1,759 |
) |
Gain on extinguishment of debt |
|
|
8,323 |
|
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
|
|
|
|
506 |
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) from discontinued operations |
|
$ |
36 |
|
|
$ |
(3,272 |
) |
|
$ |
995 |
|
|
|
|
|
|
|
|
|
|
|
11. Earnings Per Share
The following table sets forth the computation of our basic and diluted net income (loss)
available per weighted-average common share of beneficial interest (dollars in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
Prime Group Realty Trust |
|
$ |
(8,401 |
) |
|
$ |
(82,227 |
) |
|
$ |
(67,947 |
) |
Net income allocated to preferred shareholders
net of noncontrolling interest |
|
|
(80 |
) |
|
|
(80 |
) |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable
to common shareholders |
|
|
(8,481 |
) |
|
|
(82,307 |
) |
|
|
(68,027 |
) |
Discontinued operations attributable to common
shareholders |
|
|
|
|
|
|
(29 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders |
|
$ |
(8,481 |
) |
|
$ |
(82,336 |
) |
|
$ |
(68,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) attributable
to common shareholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(35.86 |
) |
|
$ |
(348.05 |
) |
|
$ |
(287.66 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.12 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
per common share basic and diluted |
|
$ |
(35.86 |
) |
|
$ |
(348.17 |
) |
|
$ |
(287.62 |
) |
|
|
|
|
|
|
|
|
|
|
F-24
12. Investments in Unconsolidated Joint Ventures
We have an investment in one unconsolidated joint venture which we account for under the
equity method of accounting. Additionally, we had an investment in BHAC which was sold during 2009.
The following is a summary of the investments and the amounts reflected in our consolidated
financial statements related to this investment.
Thistle Landing. We own a 23.1% common interest in Plumcor Thistle, L.L.C., (Plumcor/Thistle
JV) which owns a 101,006 square foot office building located in Phoenix, Arizona, that opened in
late 1999. Our interest at December 31, 2009 and 2008 was an equity investment of $53.4 thousand
and $6.0 thousand (included in Investments in unconsolidated joint ventures), respectively. Our
share of the ventures operations was income of approximately $84.0 thousand, $9.0 thousand, and a
loss of $67.0 thousand for the years ended December 31, 2009, 2008 and 2007, respectively (included
in Income (loss) from investments in unconsolidated joint ventures). We received cash
distributions of approximately $37.0 thousand during the year ended December 31, 2009. No
distributions were received in 2008 or 2007.
Extended Stay Hotels. On June 29, 2007, through our wholly-owned subsidiary, PGRT ESH, we
purchased a $120.0 million membership interest in BHAC, an entity which owns 100.0% of ESH, from
Lightstone Holdings, LLC, an affiliate of Lightstone. The purchase price was fully-funded with a
non-recourse loan from Citicorp. ESH and its affiliates own mid-priced extended-stay hotel
properties in the United States and Canada. Because the transaction was with affiliates of
Lightstone, the acquisition of the membership interest was approved unanimously by our independent
trustees. On June 16, 2009, ESH filed for Chapter 11 bankruptcy protection. BHAC did not file for
bankruptcy protection.
On September 18, 2009, with a transaction effective date of July 16, 2009, PGRT ESH assigned
its membership interest in BHAC to LSG-ESH LLC (LSG-ESH), an affiliate of the Companys Chairman
of the Board and our parent company, Prime Office. In connection with the transaction, PGRT ESH
was released from liability for the obligations under the Citicorp Loan. Due to the related party
nature of the transfer of the BHAC interest, including the assumption of the obligations under the
Citicorp Loan, this transaction was approved unanimously by our independent trustees and we
recorded this transaction as an increase to additional paid-in capital and a reduction of mortgage
and notes payable of $80.0 million and a reduction in accrued financing fees included in accounts
payable and accrued expenses of $2.1 million.
Our interest in BHAC at December 31, 2008 was valued at zero (included in Investments in
unconsolidated joint ventures). Our share of BHACs operations, assuming a hypothetical
liquidation, was zero for the year ended December 31, 2009, and a non-cash loss of $60.3 million
for the year ended December 31, 2008. Prior to the sale of BHAC, we had discontinued applying the
equity method of accounting and did not record additional losses as we had no obligation or
guarantee to fund such losses.
During the second quarter of 2008, we recorded a provision for asset impairment of $5.6
million. This represented the remaining balance of our investment in the membership interest in
BHAC as the impairment was deemed to be other than temporary due to past and expected inability to
sustain earnings at a level which would justify the carrying value.
F-25
12. Investments in Unconsolidated Joint Ventures (continued)
The following tables represent the condensed balance sheet and income statement of BHAC on a
historical basis:
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
|
(dollars in |
|
|
|
thousands) |
|
Real estate, at cost (net): |
|
$ |
5,406,059 |
|
Other assets |
|
|
1,024,647 |
|
|
|
|
|
Total assets |
|
$ |
6,430,706 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes and other loans payable |
|
$ |
7,411,073 |
|
Other liabilities |
|
|
100,600 |
|
Total members capital |
|
|
(1,080,967 |
) |
|
|
|
|
Total liabilities and members capital |
|
$ |
6,430,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period |
|
|
|
|
|
|
|
June 29, 2007 |
|
|
|
|
|
|
|
through |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
Total revenue |
|
$ |
860,482 |
|
|
$ |
515,364 |
|
Total expenses |
|
|
(2,236,266 |
) |
|
|
(705,338 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,375,784 |
) |
|
$ |
(189,974 |
) |
|
|
|
|
|
|
|
Our joint venture interests and the membership interest in the unconsolidated entity described
above are considered to be a variable interest in the entity that owns the property, which we
believe is a variable interest entity (VIE). However, based on our evaluations, we are not the
primary beneficiary of the entity, and, therefore, we do not consolidate the VIEs. Our maximum
exposure as a result of the VIEs is not material as a result of losses being limited to our capital
balance.
13. Related Party Transactions
On February 1, 2007, our Board approved of us, through one or more of our subsidiaries,
entering into an asset and development agreement with an affiliate of Lightstone, which provides
that one of our subsidiaries will perform certain asset management, development management and
accounting services for an office and retail building located at 1407 Broadway Avenue in New York
City, New York. The agreement is terminable by either party upon thirty-days notice and provides
for us to receive a base asset management fee and a development fee of 2.5% of any development
costs, plus the reimbursement of out-of-pocket costs such as travel expenses. Total fees received
for providing such services were approximately $0.6 million for the years ended December 31, 2009,
2008 and 2007. This agreement has been terminated by the relevant Lightstone affiliate effective
April 4, 2010.
See the discussion under Note 12 Investments in Unconsolidated Joint Ventures of our
purchase and assignment of a membership interest in the unconsolidated entity that owns ESH.
F-26
14. Commitments and Contingencies
Except as described below, neither we nor any of our properties are presently subject to any
material litigation or legal proceeding, nor, to our knowledge, is any material litigation or legal
proceeding threatened against us, other than routine litigation arising in the ordinary course of
business, some of which is expected to be covered by liability insurance and all of which
collectively is not expected to have a material adverse effect on our consolidated financial
statements.
On October 26, 2005, Prime/Mansur exercised its option to acquire our membership interest in
the Plumcor/Thistle JV, and the parties subsequently executed the purchase and sale agreement for
the sale. On December 22, 2005, we terminated the purchase and sale agreement relating to the
Plumcor/Thistle JV because Prime/Mansur had failed to obtain our joint venture partners consent to
the transaction by the December 15, 2005 deadline contained in the agreement. Prime/Mansur
subsequently sent us a letter disputing our right to terminate the agreement, to which we replied
with a letter reaffirming our right to terminate the agreement. On January 31, 2006, Prime/Mansur
filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the
purchase and sale agreement was not justified. Prime/Mansur requested the court to grant it either
specific performance and order us to convey our joint venture interest in Plumcor Thistle to
Prime/Mansur or damages in the amount of $5.0 million. On September 21, 2009, the judge in the case
granted our motion for summary judgment and ruled that Prime/Mansur case had no merit.
Prime/Mansur has appealed the decision and we intend to vigorously defend the
judges decision. We believe the judges decision will not
be reversed on appeal and the ultimate outcome will not have a material adverse affect on our
consolidated financial condition or results of operations.
During 2006, the IRS began an examination of the income tax returns for our Operating
Partnership for the years ended 2003 and 2004 and 180 N. LaSalle, L.L.C. for the year ended 2004.
The IRS concluded its 2003 examination and we have been notified that no adjustments were proposed
for the Operating Partnership for that tax year. As a result of its examination of the income tax
return for 180 N. LaSalle, L.L.C. for the year ended 2004, the IRS has issued a Notice of Proposed
Adjustment. The proposed adjustment would not have a cash or U.S. GAAP effect on us but would
decrease the amount of capital loss reported and carried forward on the tax return from the sale of
its residual interest it held in a REMIC. We have appealed the adjustment and believe that we have
legitimate defenses that the basis in the REMIC, as reported on the tax return, was correct. The
IRS examination of the 2004 Operating Partnership income tax return will remain open until the
final IRS ruling on the 2004 180 N. LaSalle L.L.C. income tax return has been resolved.
In May 2007, we terminated the employment of Nancy Fendley, our former Executive Vice
President of Leasing. Ms. Fendley has disputed such termination and, on May 29, 2007, filed a
lawsuit against us in the Circuit Court of Cook County, Illinois alleging a breach of her
employment agreement and seeking approximately $9.0 million in damages. We believe we have valid
defenses to her claims and intend to vigorously contest the lawsuit. Although there can be no
assurances about the eventual outcome, we believe the ultimate outcome will not have a material
adverse affect on our consolidated financial condition or results of operations.
In connection with the purchase and sale agreement for the proposed sale of our 180 N. LaSalle
Street property that our subsidiary, 180 LLC, entered into in August 2008 and later terminated
because of the failure of the Purchaser to timely close, one of the purchasers under the agreement
(YPI LaSalle Owner, LLC, a subsidiary of the original Purchaser) filed a lawsuit on February 13,
2009 against 180 LLC in the Circuit Court of Cook County, Illinois, Chancery Division. In the
lawsuit, the Purchaser claims that the purchase agreement should be rescinded due to the doctrine
of impossibility and impracticability and that 180 LLC should return the $6.0 million earnest money
to Purchaser because it was impossible for Purchaser to obtain financing and that therefore it
should be excused from closing, even though the purchase agreement contained no financing
contingency. On July 7, 2009, the judge dismissed the
Purchasers lawsuit with prejudice. The Purchaser filed an appeal of this decision on July 10,
2009. In our opinion, after consultation with legal counsel, we believe that this appeal is
without merit and that we will prevail in it. Although there can be no assurances about the
eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our
consolidated financial condition or results of operations.
F-27
14. Commitments and Contingencies (continued)
On October 20, 2009, Mr. Dean Konstand filed a shareholder derivative complaint in the
Circuit Court of Cook County, Illinois, Chancery Division, against us, Lightstone, Prime Office and
the members of our Board in place immediately after the closing of our acquisition by Lightstone,
consisting of David Lichtenstein, Jeffrey A. Patterson, John M. Sabin, Michael M. Schurer, Shawn R.
Tominus, Bruno De Vinck and George R. Whittemore. In this case, the plaintiff is alleging that the
common dividends declared by the Board in July 2005 and February 2006 constituted a breach of the
Boards duty of loyalty and care, and good faith and fair dealing, to the Company and the holders
of the Series B Shares, and that this breach was directed by Lightstone and Prime Office. The
plaintiff requests for the benefit of the Company that the court grant a judgment in favor of the
Company against all of the other defendants in the amount of $106 million, the amount of the
dividends that were declared on the foregoing dates.
We are incurring the costs of defense of this action as it relates to the members of our Board
under our indemnification obligations with our Board members. The Defendants have filed a Motion
to Dismiss this action and briefs are being filed by the parties. The costs of defense of the
Board members may be covered in whole or in part by our directors and officers liability insurance,
subject to coverage limits and applicable deductibles.
Although there can be no assurances about the eventual outcome, we believe the ultimate outcome
will not have a material adverse affect on our consolidated financial condition or results of
operations.
We are a defendant in various other legal actions arising in the normal course of business.
We record a provision for a liability when it is both probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Although the outcome of any litigation is
uncertain, we believe that such legal actions will not have a material adverse affect on our
consolidated financial condition or results of operations.
Environmental. In November 2001, at the request of the Department of the Army of the United
States of America (the DOA), we granted the DOA a right of entry for environmental assessment and
response in connection with our property known as the Atrium located at 280 Shuman Boulevard in
Naperville, Illinois. The DOA informed us that the property was located north of a former Nike
missile base and that the DOA was investigating whether certain regional contamination of the
groundwater by trichloethene (TCE) emanated from the base and whether the DOA would be required
to restore the environmental integrity of the region under the Defense Environmental Restoration
Program for Formerly Used Defense Sites. In December 2001, the results from the tests of the
groundwater from the site indicated elevated levels of TCE. It is currently our understanding based
on information provided by the DOA and an analysis prepared by its environmental consultants that
(i) the source of the TCE contamination did not result from the past or current activities on the
Atrium property, and (ii) the TCE contamination is a regional problem that is not confined to the
Atrium. Our environmental consultants have advised us that the United States Environmental
Protection Agency (the EPA) has issued a Statement of Policy towards owners of property
containing contaminated aquifers. According to this policy, it is the EPAs position that where
hazardous substances have come to be located on a property solely as a result of subsurface
migration in an aquifer from an offsite source, the EPA will not take enforcement actions against
the owner of the property. The groundwater underneath this property is relatively deep, and the
property obtains its potable water supply from the City of Naperville and not from a groundwater
well. Accordingly, we do not anticipate any material liability because of this TCE contamination.
F-28
14. Commitments and Contingencies (continued)
Our 330 N. Wabash Avenue office property currently contains asbestos in the form of spray-on
insulation located on the decking and beams of the building. We have been informed by our
environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly maintained
and no remediation of the asbestos is necessary. However, we have in the past and we may in the
future voluntarily decide to remove or otherwise remediate some or all of this asbestos in connection with
the releasing and/or redevelopment of this property. Pursuant to the existing accounting rules, a
conditional asset retirement obligation is an unconditional legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. Therefore, we are required to
recognize a liability for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. We recorded an asset of $10.2 million and a
liability of $9.7 million related to asbestos abatement as of December 31, 2009.
A conditional asset retirement obligation for the removal of asbestos at our 330 N. Wabash
Avenue property was estimated to be $7.8 million as of December 31, 2008. For the year ended
December 31, 2009, this obligation increased as follows: (i) an increase in our cost estimate of
$2.2 million due to the increased probability of abatement as lease terminations moved closer; (ii)
a $0.7 million increase in the liability based on the increased present value at 9% of anticipated
future abatement expenditures as the estimated date of abatement comes closer; and (iii) reduced by
payments of $1.0 million made for asbestos abatement.
We believe that our other properties are in compliance in all material respects with all
federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances.
We have not been notified by any governmental authority, and are not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic substances in connection
with any of our other properties. None of the environmental assessments of our properties have
revealed any environmental liability that we believe would have a material adverse effect on our
financial condition or results of operations taken as a whole, nor are we aware of any such
material environmental liability. Nonetheless, it is possible that our assessments do not reveal
all environmental liabilities or that there are material environmental liabilities of which we are
unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current environmental condition of our
properties will not be affected by tenants, by the condition of land or operations in the vicinity
of our properties (such as the presence of underground storage tanks) or by third parties unrelated
to us. If compliance with the various laws and regulations, now existing or hereafter adopted,
exceeds our budgets for such items, our financial condition could be further adversely affected.
Tax Indemnity Agreements. On December 12, 1997, we purchased and amended a junior mortgage
note encumbering the property known as Continental Towers located in Rolling Meadows, Illinois. As
part of this transaction (the Continental Transaction), our Operating Partnership entered into a
Tax Indemnity Agreement pursuant to which we agreed to indemnify the two limited partners of the
limited partnership which then owned the property, Mr. Casati and Mr. Heise, for, among other
things, the federal and applicable state income tax liabilities that result from the income or gain
which they recognize upon refinancing, sale, foreclosure or other action taken by us with respect
to the property or the mortgage note.
On January 10, 2006, we and Messrs. Casati and Heise, entered into an Amended Tax Indemnity
Agreement in connection with the Continental Transaction, which among other things, reduced the
estimated maximum liability of the Operating Partnership in the event of the consummation of a
taxable transaction relating to our Continental Towers property, calculated at current tax rates,
from approximately $53.2 million to $14.0 million. In connection with the foregoing amendment, we
made a payment to Mr. Casati of $4.2 million and Mr. Casati released us from all of our obligations
under the Amended Tax Indemnity Agreement relating to Mr. Casati. This payment was recorded as
loss on tax indemnification in our consolidated financial statements. The remaining $14.0 million
was further reduced to zero on September 16, 2009, when Mr. Heise sold his remaining interest in
the entity which owns fee title to a portion of Continental Towers to a subsidiary of the Operating
Partnership. In
connection with the sale, the Operating Partnership paid $1.8 million to Mr. Heise and he released
us from all of our obligations under the Amended Tax Indemnity Agreement relating to Mr. Heise.
This payment was recorded as loss on tax indemnification in our consolidated financial statements.
F-29
14. Commitments and Contingencies (continued)
Lease Liabilities. As a part of lease agreements entered into with certain tenants, we assumed
certain financial obligations of tenants leases at their previous locations and subsequently
executed subleases for certain of the assumed lease space.
One of these leases is a lease entered into between the joint venture currently owning the
property known as Citadel Center and Citadel Investment Group, LLC (Citadel). We have agreed to
reimburse the joint venture for its obligation to reimburse Citadel for the financial obligations,
consisting of base rent and the pro rata share of operating expenses and real estate taxes, under
Citadels pre-existing lease (the Citadel Reimbursement Obligation) for 161,488 square feet of
space at the One North Wacker Drive office building in downtown Chicago, Illinois. Due to a
recently executed lease amendment, the premises have been reduced by 8,480 square feet effective
September 1, 2009.
We have executed subleases at One North Wacker Drive for substantially all of the space to
partially mitigate our obligation under the Citadel Reimbursement Obligation, which includes an
estimated remaining nominal gross rental obligation of $25.8 million (or net obligations of $2.7
million after applying estimated future sublease recoveries) over the term of the lease. Although
we have sold our investment in Citadel Center, we have retained 100.0% of this liability.
Liabilities for leases assumed at December 31, 2009 and December 31, 2008 includes $2.7 million and
$3.2 million, respectively, related to the Citadel Reimbursement Obligation.
Effective September 24, 2009, the current owner of Citadel Center (131 LLC), terminated the
management agreement pursuant to which a subsidiary of our Operating Partnership managed the
Citadel Center property. We believe that this termination was wrongful and was in violation of the
terms of our management agreement with 131 LLC. We also believe that under Illinois law, by
wrongfully terminating the management agreement, 131 LLC has released us from liability for the
Citadel Reimbursement Obligation, because the indemnification agreement which provides for such
liability was entered into simultaneously with, and as part of the same transaction as, the
management agreement. On October 13, 2009, we filed suit in the Circuit Court of Cook County,
Illinois against 131 LLC for damages and a declaratory judgment that we no longer have any
obligations under the management agreement, the indemnification agreement, and two related escrow
agreements, and that the amounts held pursuant to such escrow agreements should be paid to us by
131 LLC immediately. We currently intend at this time to continue satisfying the Citadel
Reimbursement Obligation while the case is pending and until we receive a ruling that we no longer
have any liability for such obligations, although this intention could change in the future.
F-30
15. Property Dispositions
The following properties were sold or disposed in 2009, 2008 and 2007. The results of their
operations are excluded in our consolidated statements of operations from their respective
transaction dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month |
Property |
|
Location |
|
Sales Price |
|
|
Sold/Disposed |
|
|
|
|
(dollars in |
|
|
|
|
|
|
|
thousands) |
|
|
|
2009 Dispositions |
|
|
|
|
|
|
|
|
800-810 Jorie Boulevard (1) |
|
Oak Brook IL |
|
|
N/A |
|
|
July |
|
|
|
|
|
|
|
|
|
2008 Sales |
|
|
|
|
|
|
|
|
Office: |
|
|
|
|
|
|
|
|
The United Building (2) |
|
Chicago, IL |
|
$ |
50,000 |
|
|
January |
330 N. Wabash Avenue (3) |
|
Chicago, IL |
|
$ |
46,000 |
|
|
March |
1051 N. Kirk Road (4) |
|
Batavia, IL |
|
$ |
4,080 |
|
|
May |
|
|
|
|
|
|
|
|
|
2007 Sales |
|
|
|
|
|
|
|
|
Office: |
|
|
|
|
|
|
|
|
Narco River Business Center (5) |
|
Calumet City, IL |
|
$ |
7,400 |
|
|
May |
|
|
|
(1) |
|
On July 28, 2009, we conveyed the Jorie Boulevard property to the lender in exchange
for a release of the loan. The Company recorded a gain on extinguishment of $8.3 million
which is included in discontinued operations on the consolidated statement of operations in
the third quarter of 2009 representing the difference between the extinguished loan balance
and accrued interest and the carrying value of the property. |
|
(2) |
|
On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The
United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture
partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments.
We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire
the outstanding balance on two Citicorp mezzanine loans. |
|
(3) |
|
On March 18, 2008, one of our subsidiaries, 330 LLC, completed the sale of Floors 2 through
13 of our 330 N. Wabash Avenue property for the purchase price of $46.0 million, subject to
customary prorations and adjustments as provided in the purchase and sale agreement. We
recognized a book gain on the sale of approximately $9.8 million. |
|
(4) |
|
On May 2, 2008, we closed on the sale of this property. The net proceeds from the sale of
$4.1 million were used to retire the outstanding debt on the property. We recognized a book
gain of $0.5 million in the second quarter of 2008. |
|
(5) |
|
On May 22, 2007, we closed on the sale of our Narco River Business Center property located in
Calumet City, Illinois, for a sales price of $7.4 million. We recognized a gain of $2.2
million and retired debt of $2.7 million related to this property. |
16. Interim Financial Information (unaudited)
The following is our consolidated quarterly summary of operations for 2009 and 2008. All
amounts have been restated in accordance with the discontinued operations provisions of U.S.
GAAP and reflect dispositions through December 31, 2009. All amounts presented in the quarters
may not equal the same amounts previously reported in the respective Form 10-Qs filed with the
SEC as a result of changes in discontinued operations due to additional property dispositions
during 2009.
F-31
16. Interim Financial Information (unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
(dollars in thousands, except per share amounts) |
|
Total revenue |
|
$ |
19,392 |
|
|
$ |
19,726 |
|
|
$ |
19,740 |
|
|
$ |
19,057 |
|
Operating (loss) income |
|
$ |
(2,824 |
) |
|
$ |
2,101 |
|
|
$ |
(820 |
) |
|
$ |
(61,771 |
) |
Loss from continuing operations |
|
$ |
(7,860 |
) |
|
$ |
(6,289 |
) |
|
$ |
(6,814 |
) |
|
$ |
(67,353 |
) |
Discontinued operations |
|
$ |
(666 |
) |
|
$ |
(7,425 |
) |
|
$ |
8,129 |
|
|
$ |
(2 |
) |
Net (loss) income |
|
$ |
(8,526 |
) |
|
$ |
(13,714 |
) |
|
$ |
1,315 |
|
|
$ |
(67,355 |
) |
Net loss available to common shareholders |
|
$ |
(4,496 |
) |
|
$ |
(2,996 |
) |
|
$ |
(372 |
) |
|
$ |
(617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
attributable to common shareholders per
common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(18.99 |
) |
|
$ |
(12.39 |
) |
|
$ |
(1.88 |
) |
|
$ |
(2.61 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
|
(0.28 |
) |
|
|
0.31 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common shareholder per
common share basic and diluted |
|
$ |
(19.01 |
) |
|
$ |
(12.67 |
) |
|
$ |
(1.57 |
) |
|
$ |
(2.61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding basic and diluted |
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
First |
|
|
Second |
|
|
|
Quarter |
|
|
Quarter |
|
Total revenues previously reported in
Form 10-Q |
|
$ |
19,774 |
|
|
$ |
20,151 |
|
Total revenues subsequently reclassified to discontinued operations |
|
|
(382 |
) |
|
|
(425 |
) |
|
|
|
|
|
|
|
Total revenues disclosed in Form 10-K |
|
$ |
19,392 |
|
|
$ |
19,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss previously reported in Form 10-Q |
|
$ |
(2,898 |
) |
|
$ |
(4,839 |
) |
Operating income subsequently reclassified to discontinued
operations |
|
|
74 |
|
|
|
6,940 |
|
|
|
|
|
|
|
|
Operating (loss) income disclosed in
Form 10-K |
|
$ |
(2,824 |
) |
|
$ |
2,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations previously reported in Form 10-Q |
|
$ |
(8,484 |
) |
|
$ |
(13,786 |
) |
Loss from continuing operations subsequently reclassified to
discontinued operations |
|
|
624 |
|
|
|
7,497 |
|
|
|
|
|
|
|
|
Loss from continuing operations disclosed
in Form 10-K |
|
$ |
(7,860 |
) |
|
$ |
(6,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations previously reported in Form 10-Q |
|
$ |
(42 |
) |
|
$ |
72 |
|
Discontinued operations subsequently reclassified to discontinued
operations |
|
|
(624 |
) |
|
|
(7,497 |
) |
|
|
|
|
|
|
|
Discontinued operations disclosed in
Form 10-K |
|
$ |
(666 |
) |
|
$ |
(7,425 |
) |
|
|
|
|
|
|
|
F-32
16. Interim Financial Information (unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
(dollars in thousands, except per share amounts) |
|
Total revenue |
|
$ |
21,324 |
|
|
$ |
20,634 |
|
|
$ |
21,120 |
|
|
$ |
19,665 |
|
Operating income |
|
$ |
670 |
|
|
$ |
1,153 |
|
|
$ |
4,859 |
|
|
$ |
824 |
|
Loss from continuing operations |
|
$ |
(14,571 |
) |
|
$ |
(19,420 |
) |
|
$ |
(9,790 |
) |
|
$ |
(14,514 |
) |
Discontinued operations |
|
$ |
(487 |
) |
|
$ |
63 |
|
|
$ |
(2,271 |
) |
|
$ |
(577 |
) |
Net loss |
|
$ |
(15,058 |
) |
|
$ |
(19,357 |
) |
|
$ |
(12,061 |
) |
|
$ |
(15,091 |
) |
Net loss available to common
shareholders |
|
$ |
(48,209 |
) |
|
$ |
(15,306 |
) |
|
$ |
(8,460 |
) |
|
$ |
(10,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
attributable to common shareholders
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(203.84 |
) |
|
$ |
(64.72 |
) |
|
$ |
(35.69 |
) |
|
$ |
(43.79 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
|
0.00 |
|
|
|
(0.08 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common shareholder per
common share basic and diluted |
|
$ |
(203.86 |
) |
|
$ |
(64.72 |
) |
|
$ |
(35.77 |
) |
|
$ |
(43.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding basic and diluted |
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
236,483 |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
First |
|
|
Second |
|
|
|
Quarter |
|
|
Quarter |
|
Total revenues previously reported in
Form 10-Q |
|
$ |
22,026 |
|
|
$ |
21,209 |
|
Total revenues subsequently reclassified to discontinued operations |
|
|
(702 |
) |
|
|
(575 |
) |
|
|
|
|
|
|
|
Total revenues disclosed in Form 10-K |
|
$ |
21,324 |
|
|
$ |
20,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income previously reported in Form 10-Q |
|
$ |
445 |
|
|
$ |
986 |
|
Operating income subsequently reclassified to discontinued operations |
|
|
225 |
|
|
|
167 |
|
|
|
|
|
|
|
|
Operating income disclosed in
Form 10-K |
|
$ |
670 |
|
|
$ |
1,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations previously reported in Form 10-Q |
|
$ |
(15,080 |
) |
|
$ |
(19,870 |
) |
Loss from continuing operations subsequently reclassified to
discontinued operations |
|
|
509 |
|
|
|
450 |
|
|
|
|
|
|
|
|
Loss from continuing operations disclosed
in Form 10-K |
|
$ |
(14,571 |
) |
|
$ |
(19,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations previously reported in Form 10-Q |
|
$ |
22 |
|
|
$ |
514 |
|
Discontinued operations subsequently reclassified to discontinued
operations |
|
|
(509 |
) |
|
|
(451 |
) |
|
|
|
|
|
|
|
Discontinued operations disclosed in
Form 10-K |
|
$ |
(487 |
) |
|
$ |
63 |
|
|
|
|
|
|
|
|
F-33
17. Subsequent Events
On January 11, 2010, the Company announced its intention to delist its Series B Shares from
the NYSE and remove the Series B Shares from registration under the Securities and Exchange Act of
1934, as amended. The Company expects to voluntarily cease trading on the NYSE. The Companys
Board of Trustees has approved the delisting from the NYSE and deregistration of the Series B
Shares under the Exchange Act in order to save significant costs associated with compliance with these
regulatory provisions.
On February 1, 2010 we completed the sale of our 7100 Madison Avenue property for the purchase
price of $4.3 million and received $0.5 million in net proceeds.
180 North LaSalle Street Sale. On February 25, 2010, the Companys entered into a purchase
and sale agreement to sell the 180 North LaSalle Street property to an entity indirectly controlled
by Mr. Michael Silberberg of Nanuet, New York which was approved by the Companys Board of
Directors. The gross purchase price for this property is $72.25 million, subject to customary
pro-rations, credits and adjustments.
The closing of the sale is conditioned upon the existing first mortgage lender consenting to
the assumption of the propertys existing debt by the purchaser, unless the purchaser notifies the
Company that the purchaser has elected not to assume the existing debt and will instead obtain new
financing for the acquisition. The purchaser has deposited $4.0 million in escrow to secure its
obligation to purchase this property, which is nonrefundable except upon (i) the failure of the
first mortgage lender to consent to the assumption of the existing debt by the purchaser or (ii)
the occurrence of certain other customary events, such as a default by the Company or the failure
of the Company to deliver certain satisfactory tenant estoppel certificates. The Company currently
estimates that after closing adjustments and costs, that it will receive net proceeds of
approximately $12.8 million.
It is currently contemplated that the closing will occur in May or June 2010. In the event
that the purchaser defaults on its obligation to purchase this property, the Companys sole remedy
is to receive the $4.0 million deposited in escrow.
Continental Towers Loan Default. A subsidiary of the Company, Continental Towers, L.L.C.
(CT LLC), is the owner of Tower I, Tower III and the Commercium at the Continental Towers Complex
in Rolling Meadows, Illinois (the CT Property). The CT Property is currently encumbered by a
first mortgage loan from CWCapital LLC (Lender) in the principal amount of $73.6 million (the CT
Loan). A separate subsidiary of the Company, Continental Towers Associates III, LLC (CTA III),
is the owner of Tower II at the Continental Towers Complex (the CTA III Property). The CTA III
Property is currently encumbered by a first mortgage loan from Lender in the principal amount of
$41.4 million (the CTA III Loan).
F-34
17. Subsequent Events (continued)
On February 26, 2010, CTA III informed the Lender that it is in default under the CTA III Loan
because the cash flow from the CTA III Property is not sufficient to pay the required escrows and
debt service payments on the CTA III Loan. On the same day, CT LLC acknowledged to the Lender that
the CT Loan is in default because it is cross-defaulted with the CTA III Loan. On March 5, 2010,
we received notices from the lender accelerating the maturity dates of both the CT Loan and CTA III
Loan. At December 31, 2009, the carrying value of the Continental Towers complex was $65.3 million
which is less than the debt balance of $115.0 million. If the deed in lieu of foreclosure
transaction were to materialize, the difference between the current loan balance and the carrying
value of the property would be recognized at a gain on extinguishment of debt.
CTA III and CT LLC are currently in discussions with the Lender regarding the foregoing.
The CT Loan and the CTA III Loan are non-recourse to their respective borrowers, subject to
customary non-recourse carve-outs, including but not limited to, certain environmental matters,
fraud, waste, misapplication of funds, various special purpose entity covenants, the filing of a
voluntary bankruptcy and other similar matters, which non-recourse carve-outs have been guaranteed
by the Companys operating partnership, Prime Group Realty, L.P. The Company is currently not
aware of the occurrence of any event that would constitute a non-recourse carve-out on either loan.
On March 10, 2010, the Company announced that its Board of Trustees determined not to declare
a quarterly distribution on its Series B Preferred Shares for the first quarter of 2010, and that
the Board is unable to determine when the Company might recommence distributions on the Series B
Preferred Shares. The Board is also in the process of considering various financing,
capitalization, asset sales and other alternatives for the Company.
The first mortgage loan on our Brush Hill Office Court property matured on January 1, 2010.
This loan is non-recourse, subject to customary non-recourse
carve-outs. On January 14, 2010, our subsidiary which owns Brush Hill Office Court was notified by the loan
servicer that the loan had matured and that the borrower is in default. The principal in the
amount of approximately $7.47 million has not been paid by the borrower. This property is
generating positive cash flow and we continue to make the debt service payments on this loan. We
are currently in discussions with the lender on this loan regarding a potential one-year extension
of the maturity date. A default on the Brush Hill Office Court property loan does not cause a
default on any of the Companys other loans.
F-35
PRIME GROUP REALTY TRUST
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2009
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount Carried at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized |
|
|
Close of Period |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
Subsequent to Acquisition |
|
|
12/31/09 |
|
|
Depreciation |
|
|
|
|
|
|
Encumbrances(1) |
|
|
|
|
|
|
Buildings |
|
|
|
|
|
|
Buildings |
|
|
|
|
|
|
Building |
|
|
|
|
|
|
at |
|
|
Date of |
|
|
|
December 31, |
|
|
|
|
|
|
and |
|
|
|
|
|
|
and |
|
|
|
|
|
|
and |
|
|
|
|
|
|
December 31, |
|
|
Original |
|
|
|
2009 |
|
|
Land |
|
|
Improvements |
|
|
Land |
|
|
Improvements |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
2009 (2) |
|
|
Acquisition |
|
280 Shuman Boulevard
(Atrium Building) |
|
$ |
|
|
|
$ |
2,092 |
|
|
$ |
3,642 |
|
|
$ |
(269 |
) |
|
$ |
164 |
|
|
$ |
1,823 |
|
|
$ |
3,806 |
|
|
$ |
5,629 |
|
|
$ |
1,082 |
|
|
Nov. 1997 |
Continental Towers |
|
|
115,000 |
|
|
|
12,166 |
|
|
|
122,980 |
|
|
|
363 |
|
|
|
(57,159 |
) |
|
|
12,529 |
|
|
|
65,821 |
|
|
|
78,350 |
|
|
|
20,146 |
|
|
Dec. 1997 |
4343 Commerce Court
(Olympian Office Center) |
|
|
10,975 |
|
|
|
2,370 |
|
|
|
13,572 |
|
|
|
(8 |
) |
|
|
833 |
|
|
|
2,362 |
|
|
|
14,405 |
|
|
|
16,767 |
|
|
|
2,346 |
|
|
Nov. 1997 |
330 N. Wabash Avenue |
|
|
137,999 |
|
|
|
45,582 |
|
|
|
126,397 |
|
|
|
(8,013 |
) |
|
|
16,257 |
|
|
|
37,569 |
|
|
|
142,654 |
|
|
|
180,223 |
|
|
|
25,899 |
|
|
Dec. 1999 |
Brush Hill Office Court |
|
|
7,470 |
|
|
|
3,456 |
|
|
|
10,295 |
|
|
|
(491 |
) |
|
|
(106 |
) |
|
|
2,965 |
|
|
|
10,189 |
|
|
|
13,154 |
|
|
|
2,402 |
|
|
Dec. 1999 |
Enterprise Center II |
|
|
5,573 |
|
|
|
1,659 |
|
|
|
5,272 |
|
|
|
(44 |
) |
|
|
844 |
|
|
|
1,615 |
|
|
|
6,116 |
|
|
|
7,731 |
|
|
|
1,074 |
|
|
Jan. 2000 |
7100 Madison Avenue |
|
|
3,590 |
|
|
|
1,268 |
|
|
|
3,663 |
|
|
|
(2 |
) |
|
|
(476 |
) |
|
|
1,266 |
|
|
|
3,187 |
|
|
|
4,453 |
|
|
|
612 |
|
|
Apr. 2000 |
180 N. LaSalle Street |
|
|
61,143 |
|
|
|
15,245 |
|
|
|
55,497 |
|
|
|
(138 |
) |
|
|
2,383 |
|
|
|
15,107 |
|
|
|
57,880 |
|
|
|
72,987 |
|
|
|
16,010 |
|
|
Aug. 2000 |
Other Corporate Assets |
|
|
|
|
|
|
|
|
|
|
464 |
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
267 |
|
|
|
267 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
341,750 |
|
|
$ |
83,838 |
|
|
$ |
341,782 |
|
|
$ |
(8,602 |
) |
|
$ |
(37,457 |
) |
|
$ |
75,236 |
|
|
$ |
304,325 |
|
|
$ |
379,561 |
|
|
$ |
69,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
PRIME GROUP REALTY TRUST
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
AS OF DECEMBER 31, 2009
(1) |
|
See Note 5 Mortgage Notes Payable for a description of our mortgage notes payable. |
(2) |
|
Depreciation is calculated on the straight-line method over the estimated useful lives of
assets, which are as follows: |
|
|
|
Buildings
|
|
40 years weighted average life |
Building improvements
|
|
10 to 30 years |
Tenant improvements
|
|
Term of related leases |
Furniture and equipment
|
|
310 years |
The aggregate gross cost of the properties included above, for federal income tax purposes,
approximated $408.1 million (unaudited) as of December 31, 2009.
The following table reconciles our historical cost for the years ended December 31, 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
475,103 |
|
|
$ |
499,050 |
|
|
$ |
482,447 |
|
Additions |
|
|
3,978 |
|
|
|
9,896 |
|
|
|
21,602 |
|
Disposals including asset impairments |
|
|
(99,520 |
) |
|
|
(33,843 |
) |
|
|
(4,999 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, close of period |
|
$ |
379,561 |
|
|
$ |
475,103 |
|
|
$ |
499,050 |
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the accumulated depreciation for the years ended December
31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
61,651 |
|
|
$ |
52,627 |
|
|
$ |
31,366 |
|
Depreciation and amortization |
|
|
20,904 |
|
|
|
12,671 |
|
|
|
21,629 |
|
Disposals |
|
|
(12,808 |
) |
|
|
(3,647 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, close of period |
|
$ |
69,747 |
|
|
$ |
61,651 |
|
|
$ |
52,627 |
|
|
|
|
|
|
|
|
|
|
|
F-37