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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Jones Lang LaSalle Income Property Trust, Inc.dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ 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: 0-51948

 

 

Excelsior LaSalle Property Fund, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-1432284

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

225 High Ridge Road, Stamford, CT, 06905-3039

(Address of principal executive offices, including Zip Code)

(203) 352-4400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨    NO  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of the registrant’s Class A Common Stock, $.01 par value, outstanding on August 5, 2010 was 4,135,635.

 

 

 

 


Table of Contents

Excelsior LaSalle Property Fund, Inc.

INDEX

 

     PAGE
NUMBER

Part I - FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   3

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June  30, 2010 and 2009

   4

Consolidated Statements of Equity for the six months ended June 30, 2010 and 2009

   5

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   6

Notes to Consolidated Financial Statements

   7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   35

Item 4. Controls and Procedures

   35

Part II - OTHER INFORMATION

  

Item 1. Legal Proceedings

   36

Item 1A. Risk Factors

   36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   36

Item 3. Defaults Upon Senior Securities

   36

Item 4. (Removed and Reserved)

   36

Item 5. Other Information

   36

Item 6. Exhibits

   36

SIGNATURE

   37

 

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Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED BALANCE SHEETS

$ in thousands, except per share amounts

(Unaudited)

 

     June 30,
2010
    December 31,
2009
 

ASSETS

    

Investments in real estate:

    

Land (including from VIEs of $32,593 and $43,579, respectively)

   $ 114,290      $ 125,108   

Buildings and equipment (including from VIEs of $240,157 and $261,827, respectively)

     728,147        750,419   

Less accumulated depreciation (including from VIEs of $(23,205) and $(21,215), respectively)

     (66,307     (60,307
                

Net property and equipment

     776,130        815,220   

Investments in unconsolidated real estate affiliates

     30,458        29,851   

Investments in real estate and other assets held for sale

     —          52,136   
                

Net investments in real estate

     806,588        897,207   

Cash and cash equivalents (including from VIEs of $3,154 and $4,851, respectively)

     40,262        44,258   

Restricted cash (including from VIEs of $2,007 and $2,234, respectively)

     11,041        6,574   

Tenant accounts receivable, net (including from VIEs of $1,056 and $1,470, respectively)

     2,542        3,717   

Deferred expenses, net (including from VIEs of $1,189 and $1,707, respectively)

     4,513        4,996   

Acquired intangible assets, net (including from VIEs of $5,823 and $6,617, respectively)

     48,385        53,548   

Deferred rent receivable, net (including from VIEs of $606 and $1,472, respectively)

     4,659        5,722   

Prepaid expenses and other assets (including from VIEs of $663 and $572, respectively)

     1,244        1,118   
                

TOTAL ASSETS

   $ 919,234      $ 1,017,140   
                

LIABILITIES AND EQUITY

    

Mortgage notes and other debt payable, net (including from VIEs of $192,012 and $225,363, respectively)

   $ 606,581      $ 654,086   

Liabilities held for sale

     —          43,352   

Accounts payable and other accrued expenses (including from VIEs of $1,807 and $3,157, respectively)

     7,141        9,557   

Accrued interest (including from VIEs of $917 and $1,057, respectively)

     2,797        3,055   

Accrued real estate taxes (including from VIEs of $1,904 and $1,211, respectively)

     3,525        4,243   

Manager and advisor fees payable

     915        1,405   

Acquired intangible liabilities, net (including from VIEs of $0 and $82, respectively)

     10,687        12,119   
                

TOTAL LIABILITIES

     631,646        727,817   

Commitments and contingencies

     —          —     

Equity:

    

Common stock: $0.01 par value; 100,000,000 shares authorized; 4,135,635 shares issued and outstanding at June 30, 2010 and December 31, 2009

     41        41   

Additional paid-in capital

     453,244        453,244   

Accumulated other comprehensive loss

     (193     (39

Distributions to stockholders

     (78,361     (78,361

Accumulated deficit

     (99,057     (98,246
                

Total Excelsior LaSalle Property Fund, Inc. stockholders’ equity

     275,674        276,639   
                

Noncontrolling interests

     11,914        12,684   
                

Total equity

     287,588        289,323   
                

TOTAL LIABILITIES AND EQUITY

   $ 919,234      $ 1,017,140   
                

The abbreviation “VIEs” above means Variable Interest Entities.

See notes to consolidated financial statements.

 

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Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

$ in thousands, except per share amounts

(Unaudited)

 

 

     Three Months
Ended
June  30,

2010
    Three Months
Ended
June  30,

2009
    Six Months
Ended
June 30,

2010
    Six Months
Ended
June 30,

2009
 

Revenues:

        

Minimum rents

   $ 19,222      $ 19,880      $ 38,585      $ 40,565   

Tenant recoveries and other rental income

     4,753        5,235        9,231        10,398   
                                

Total revenues

     23,975        25,115        47,816        50,963   

Operating expenses:

        

Real estate taxes

     2,958        3,273        5,262        6,414   

Property operating

     5,601        5,932        11,277        11,904   

Manager and advisor fees

     857        1,654        1,851        3,580   

Fund level expenses

     523        603        1,013        1,214   

Provision for doubtful accounts

     176        68        410        167   

General and administrative

     279        361        489        1,007   

Net recovery of provision for impairment of real estate

     (1,039     —          (1,580     —     

Loss on extinguishment of debt

     73        —          73        —     

Depreciation and amortization

     7,353        8,627        14,520        17,262   
                                

Total operating expenses

     16,781        20,518        33,315        41,548   
                                

Operating income

     7,194        4,597        14,501        9,415   

Other income and (expenses):

        

Interest income

     3        4        3        89   

Interest expense

     (8,796     (9,063     (17,528     (18,003

Equity in loss of unconsolidated affiliates

     (190     (5,232     (590     (5,266
                                

Total other income and (expenses)

     (8,983     (14,291     (18,115     (23,180
                                

Loss from continuing operations

     (1,789     (9,694     (3,614     (13,765

Discontinued operations:

        

(Loss) income from discontinued operations

     (501     263        1,511        765   

Gain on sale of discontinued operations, net

     822        911        822        911   
                                

Total income from discontinued operations

     321        1,174        2,333        1,676   
                                

Net loss

     (1,468     (8,520     (1,281     (12,089
                                

Plus: Net loss attributable to the noncontrolling interests

     272        379        523        643   
                                

Net loss attributable to Excelsior LaSalle Property Fund, Inc.

     (1,196     (8,141     (758     (11,446

Other comprehensive (loss) income:

        

Foreign currency translation adjustment

     (505     916        (154     584   
                                

Total other comprehensive (loss) income

     (505     916        (154     584   
                                

Net comprehensive loss

   $ (1,701   $ (7,225   $ (912   $ (10,862
                                

Net loss from continuing operations attributable to Excelsior LaSalle Property Fund, Inc. per share-basic and diluted

   $ (0.37   $ (2.25   $ (0.74   $ (3.18

Total income from discontinued operations per share-basic and diluted

   $ 0.08      $ 0.28      $ 0.56      $ 0.40   

Net loss attributable to Excelsior LaSalle Property Fund, Inc. per share-basic and diluted

   $ (0.29   $ (1.97   $ (0.18   $ (2.78
                                

Weighted average common stock outstanding-basic and diluted

     4,135,635        4,130,811        4,135,635        4,120,823   
                                

See notes to consolidated financial statements.

 

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Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF EQUITY

$ in thousands, except per share amounts

(Unaudited)

 

               Additional
Paid in
Capital
   Other
Comprehensive
(Loss) Income
    Distributions
to Stockholders
    Retained
Earnings/
(Accumulated
Deficit)
    Noncontrolling
Interests
    Total
Equity
 
     Common Stock              
     Shares    Amount              

Balance, January 1, 2010 (previously reported)

   4,135,635    $ 41    $ 453,244    $ (39   $ (78,361   $ (98,246   $ 12,684      $ 289,323   

Cumulative effect of change in accounting principle

   —        —        —        —          —          (53     (104     (157
                                                           

Balance, January 1, 2010 (as restated, see Note 4)

   4,135,635    $ 41    $ 453,244    $ (39   $ (78,361   $ (98,299   $ 12,580      $ 289,166   

Net loss

   —        —        —        —          —          (758     (523     (1,281

Other comprehensive loss

   —        —        —        (154     —          —          —          (154

Cash contributed from noncontrolling interests

   —        —        —        —          —          —          231        231   

Cash distributed to noncontrolling interests

   —        —        —        —          —          —          (374     (374
                                                           

Balance, June 30, 2010

   4,135,635    $ 41    $ 453,244    $ (193   $ (78,361   $ (99,057   $ 11,914      $ 287,588   
                                                           
               Additional
Paid In
Capital
   Other
Comprehensive
Income (loss)
    Distributions
to Stockholders
    Retained
Earnings/
(Accumulated
Deficit)
    Noncontrolling
Interests
    Total
Equity
 
     Common Stock              
     Shares    Amount              

Balance, January 1, 2009

   4,032,563    $ 40    $ 443,808    $ (1,885   $ (74,755   $ (58,635   $ 15,043      $ 323,616   

Issuance of common stock

   103,072      1      9,436      —          —          —          —          9,437   

Net loss

   —        —        —        —          —          (11,446     (643     (12,089

Other comprehensive income

   —        —        —        584        —          —          —          584   

Cash contributed from noncontrolling interests

   —        —        —        —          —          —          345        345   

Cash distributed to noncontrolling interests

   —        —        —        —          —          —          (659     (659

Distributions declared ($0.875 per share)

   —        —        —        —          (3,606     —          —          (3,606
                                                           

Balance, June 30, 2009

   4,135,635    $ 41    $ 453,244    $ (1,301   $ (78,361   $ (70,081   $ 14,086      $ 317,628   
                                                           

See notes to consolidated financial statements.

 

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Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

$ in thousands, except per share amounts

(Unaudited)

 

     Six Months Ended
June 30,

2010
    Six Months Ended
June 30,

2009
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (1,281   $ (12,089

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation (including discontinued operations)

     9,734        11,404   

Amortization of in-place lease intangible assets (including discontinued operations)

     4,564        6,509   

Amortization of net above- and below-market in-place leases (including discontinued operations)

     (839     (548

Amortization of financing fees (including discontinued operations)

     370        444   

Amortization of debt premium and discount (including discontinued operations)

     (107     (107

Amortization of lease commissions (including discontinued operations)

     340        438   

Gain on sale of discontinued operations

     (822     (911

Loss on extinguishment of debt

     242        35   

Provision for doubtful accounts

     410        167   

Deferred rent (including discontinued operations)

     433        (403

Recovery of provision for impairment of real estate (including discontinued operations)

     (3,142     —     

Equity in loss of unconsolidated affiliates

     590        5,266   

Net changes in assets and liabilities:

    

Tenant accounts receivable

     561        250   

Prepaid expenses and other assets

     (131     (301

Manager and advisor fees payable

     (490     (711

Accounts payable and accrued expenses

     (2,109     (406
                

Net cash provided by operating activities

     8,323        9,037   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from sale of real estate investments

     53,382        9,998   

Capital improvements and lease commissions

     (1,189     (1,948

Distributions received from unconsolidated affiliates in excess of income

     —          1,572   

Loan escrows

     (5,467     (712

Effect of change in accounting principle to beginning cash

     (1,913     —     
                

Net cash provided by investing activities

     44,813        8,910   

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Issuance of common stock

     —          5,991   

Distributions to stockholders

     —          (7,217

Distributions paid to noncontrolling interests

     (374     (659

Contributions received from noncontrolling interests

     231        345   

Draws on credit facility

     —          21,500   

Payments on credit facility

     (6,525     (14,000

Debt issuance costs

     (200     —     

Proceeds from mortgage notes and other debt payable

     —          7   

Principal payments on mortgage notes and other debt payable

     (50,257     (11,395
                

Net cash used in financing activities

     (57,125     (5,428
                

Net (decrease) increase in cash and cash equivalents

     (3,989     12,519   

Effect of exchange rates

     (7     5   

Cash and cash equivalents at the beginning of the period

     44,258        16,395   
                

Cash and cash equivalents at the end of the period

   $ 40,262      $ 28,919   
                

Supplemental disclosure of cash flow information:

    

Interest paid (including discontinued operations)

   $ 18,401      $ 19,626   
                

Non-cash activities:

    

Write-offs of receivables

   $ 331      $ 61   

Write-offs of retired assets

     1,907        256   

Change in liability for capital expenditures

     46        984   

Stock issued through dividend reinvestment plan

     —          3,446   

See notes to consolidated financial statements.

 

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Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$ in thousands, except per share amounts

(Unaudited)

NOTE 1—ORGANIZATION

General

Except where the context suggests otherwise, the terms “we,” “us,” “our” and the “Fund” refer to Excelsior LaSalle Property Fund, Inc.

The Fund is a Maryland corporation and was incorporated on May 28, 2004 (“Inception”). The Fund was created to provide accredited investors within the meaning of Regulation D promulgated under the Securities Act of 1933 (the “Securities Act”) with an opportunity to participate in a private real estate investment fund that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. We are authorized to issue up to 100,000,000 of our Class A common stock, $0.01 par value per share (our “Common Stock” or “Shares”). Please note that while we use the term “Fund,” the Fund is not a mutual fund or any other type of “investment company” as that term is defined by the Investment Company Act of 1940, as amended (the “Investment Company Act”), and will not be registered under the Investment Company Act.

The Fund is managed by Bank of America Capital Advisors LLC (the “Manager”). The Manager is registered as an investment advisor with the Securities and Exchange Commission (the “SEC”). The Manager has the day-to-day responsibility for our management and administration pursuant to a management agreement between the Fund and the Manager (the “Management Agreement”).

LaSalle Investment Management, Inc. (“LaSalle”) acts as our investment advisor (the “Advisor”), pursuant to the advisory agreement between the Fund, LaSalle and the Manager (the “Advisory Agreement”). The Advisor is registered as an investment advisor with the SEC. The Advisor has broad discretion with respect to our investment decisions and is responsible for selecting our investments and for managing our investment portfolio pursuant to the terms of the Advisory Agreement. LaSalle is a wholly-owned but operationally independent subsidiary of Jones Lang LaSalle Incorporated, a New York Stock Exchange-listed real estate services and money management firm. We have no employees as all operations are overseen and undertaken by the Manager and Advisor. In accordance with Maryland law, the Fund does have certain officers who administer the Fund’s operations. These officers are employees of, and are compensated by, the Manager.

The Manager has retained The Townsend Group, at the expense of the Manager, to assist the Manager in reviewing the investment activities of the Advisor and the investment performance of the Fund’s assets and monitoring compliance with the Fund’s investment guidelines. The Townsend Group is a consulting firm whose exclusive focus is the asset class of real estate. Founded in 1983, and with offices in Cleveland, Denver and San Francisco, The Townsend Group is a provider of real estate consulting services to institutional investors in the United States.

Our primary business is the ownership and management of a diversified portfolio of retail, office, industrial and apartment properties primarily located in the United States. As of June 30, 2010, we wholly or majority owned and controlled 34 consolidated properties. As of June 30, 2010, we owned interests in four unconsolidated properties.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and include the accounts of our wholly-owned subsidiaries, consolidated variable interest entities and the unconsolidated investments in real estate affiliates accounted for under the equity method of accounting. We consider the authoritative guidance of accounting for investments in common stock, investments in real estate ventures, investors accounting for an investee when the investor has the majority of the voting interest but the minority partners have certain approval or veto rights, determining whether a general partner or general partners as a group controls a limited partnership or similar entity when the limited partners have certain rights, and the consolidation of variable interest entities in which we own less than a 100% interest. Prior to January 1, 2010, in determining whether we had a controlling interest in a non-wholly owned entity and the requirement to consolidate the accounts of that entity, we considered factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the members as well as whether the entity was a variable interest entity in which the Fund would absorb the majority of the entity’s expected losses, if they occurred, or receive the majority of the expected residual returns, if they occurred, or both. On January 1, 2010, the Fund adopted revised guidance regarding the consolidation of variable interest entities (see Note 4). With respect to our 80% interest in 111 Sutter Street, we have concluded that we do not control the entity, despite having an ownership interest of 50% or greater, because the entity is not considered a variable interest entity and the approval of all of the

 

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Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the commencement, compromise or settlement of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing collateralized by assets of the venture.

For the six months ending June 30, 2010, noncontrolling interests represent the minority members’ proportionate share of the equity in The District at Howell Mill, Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens, Campus Lodge Columbia, The Edge at Lafayette and Campus Lodge Tampa. At acquisition, we measured and recorded the assets, liabilities and non-controlling interests at the implied fair value, based on the purchase price. Noncontrolling interests will increase for the minority members’ share of net income of these entities and contributions and decrease for the minority members’ share of net loss and distributions. As of December 31, 2009, noncontrolling interests represented the minority members’ listed above as well as minority members’ proportionate share of the equity in 9800 South Meridian and 18922 Forge Drive.

The accompanying unaudited interim financial statements have been prepared in accordance with the accounting policies described in the financial statements and related notes included in the Fund’s Form 10-K filed with the SEC on March 15, 2010 (our “2009 Form 10-K”) and should be read in conjunction with such financial statements and related notes. The following notes to these interim financial statements highlight significant changes to the notes included in the December 31, 2009 audited financial statements included in our 2009 Form 10-K and present interim disclosures as required by the SEC.

The interim financial data as of June 30, 2010 and for the three and six months ended June 30, 2010 and June 30, 2009 is unaudited; however, in the opinion of the Fund, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. All significant intercompany balances and transactions have been eliminated in consolidation.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts against the portion of accounts receivable and deferred rent receivable that is estimated to be uncollectible. Such allowance is reviewed periodically based upon our recovery experience. At June 30, 2010 and December 31, 2009, our allowance for doubtful accounts was $789 and $710, respectively.

Deferred Expenses

Deferred expenses consist of debt issuance costs and lease commissions. Debt issuance costs are capitalized and amortized over the terms of the respective agreements as a component of interest expense. Lease commissions are capitalized and are amortized over the term of the related lease as a component of amortization expense. Deferred expenses accumulated amortization at June 30, 2010 and December 31, 2009 was $3,010 and $3,321, respectively.

Acquisitions

We have allocated purchase price to acquired intangible assets, which include acquired in-place lease intangibles, acquired above-market in-place lease intangibles and acquired ground lease intangibles, which are reported net of accumulated amortization of $40,490 and $45,414 at June 30, 2010 and December 31, 2009, respectively, on the accompanying Consolidated Balance Sheets. The acquired intangible liabilities represent acquired below-market in-place leases, which are reported net of accumulated amortization of $12,479 and $11,489 at June 30, 2010 and December 31, 2009, respectively, on the accompanying Consolidated Balance Sheets.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to useful lives of assets, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

NOTE 3—PROPERTY

Discontinued Operations

On June 26, 2009, we sold Hagemeyer Distribution Center, a 300,000 square foot industrial center located in Auburn, GA, for $10,400, resulting in a gain of $911. On September 4, 2009, we sold Waipio Shopping Center, a 137,000 square foot retail center in Waipahu, HI, for $30,850, resulting in a gain of $1,619. The results of operations of the properties are reported as discontinued operations for all periods presented.

On April 15, 2010, we sold Havertys Furniture, a 808,000 square foot industrial center located in Braselton, GA for $35,000 resulting in a gain $113. On the same day, we also sold 25850 S. Ridgeland, a 719,000 square foot industrial center located in Monee, IL for $19,060 resulting in a gain of $709. The results of operations and gain on sale of the properties are reported as discontinued operations for all periods presented.

During the second quarter of 2010, the Advisor determined that the conditions in the capital markets were not opportune to dispose of Georgia Door Sales Distribution Center, 105 Kendall Park Lane and 4001 North Norfleet Road, which as of December 15, 2009 were classified as held for sale. The properties were returned to continuing operations for all periods presented. On April 15, 2010, we placed the properties into held for use status at their fair value on that date. Upon recording the properties at the fair value on April 15, 2010, the Fund recorded a recovery of previously recorded provision for impairment of approximately $1,039.

As of December 31, 2009, Havertys Furniture and 25850 S. Ridgeland were classified as held for sale. The Fund’s investment in real estate and other assets held for sale is comprised of:

 

     December 31,
2009

Land

   $ 6,412

Buildings and equipment, net

     34,768

Acquired intangible assets, net

     5,119

Other assets, net

     5,837
      

Total assets

   $ 52,136
      

Liabilities held for sale are related to the properties listed as held for sale and are as follows:

 

     December 31,
2009

Mortgage notes and other debt payable

   $ 42,431

Other liabilities

     921
      

Total liabilities

   $ 43,352
      

The following table summarizes income from discontinued operations for the three and six months ended June 30, 2010 and 2009:

 

     Three Months
Ended
June  30,

2010
    Three Months
Ended
June  30,

2009
    Six Months
Ended
June  30,

2010
    Six Months
Ended
June  30,

2009
 

Total revenue

   $ 330      $ 2,601      $ 1,647      $ 5,231   

Real estate taxes

     (72     (404     (290     (732

Property operating

     (13     (334     (45     (638

General and administrative

     —          (25     (7     (61

Net recovery of provision for impairment of real estate (see Note 11)

     —          —          1,562        —     

Depreciation and amortization

     (19     (535     (118     (1,089

Loss on extinguishment of debt

     (638     (140     (638     (140

Interest income

     13        79        89        158   

Interest expense

     (102     (979     (689     (1,964
                                

(Loss) income from discontinued operations

   $ (501   $ 263      $ 1,511      $ 765   
                                

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

NOTE 4—VARIABLE INTEREST ENTITIES

In June 2009, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the consolidation of variable-interest entities, which required the Fund to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Fund adopted this guidance on January 1, 2010 and has determined that it had to deconsolidate 9800 South Meridian and 18922 Forge Drive. In both of these cases, the Fund determined that its equity interest in the real estate assets represented a variable interest in a VIE, but it lacked the power to direct the activities that most significantly impact the VIE’s economic performance.

The Fund has determined that the activities that most significantly impact the VIEs economic performance include, but are not limited to, decisions related to leasing, budgets, finance and selling. VIEs that have been consolidated have been determined by the Fund to either be under the control of the Fund due to its involvement in significant decisions or the power is shared by a related party and the Fund has the rights to substantially all of the economics of that VIE. VIEs in which the significant decisions require unanimous approval by all members are no longer consolidated despite the Fund having the rights to substantially all of the economics of the VIE, which previously required the Fund to consolidate these VIEs. The Fund’s involvement in its investments in 9800 South Meridian and 18922 Forge Drive includes participating in significant decisions related to leasing, budgets, financing and selling, which began at the time of acquisition of the properties. The Fund’s maximum exposure to loss is equal to, but not greater than, its current equity in the investment since we have no obligation to fund future potential losses of the VIEs which as of June 30, 2010 is approximately $1,415. The Fund’s involvement in its investment in The District at Howell Mill, Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens, Campus Lodge Columbia, The Edge at Lafayette, and Campus Lodge Tampa includes maintaining control over significant decisions, which began at the time of acquisition of the properties. The creditors of the Fund’s VIEs do not have general recourse to us.

As a result of this application, our interests in 9800 South Meridian and 18922 Forge Drive were deconsolidated as of January 1, 2010. The Fund recognized an impairment of approximately $53 to re-measure these investments to their values as of the deconsolidation date as if they had always been accounted for under the equity method of accounting. The write down was reported as a cumulative effect of a change of accounting principle, increasing the beginning accumulated deficit balance as of January 1, 2010, on the Consolidated Statements of Equity. Our adoption on January 1, 2010, resulted in the following impacts in our Consolidated Balance Sheets: (1) assets decreased by $34,198 primarily related to net investment in real estate; (2) liabilities decreased by $34,041 primarily related to mortgage notes payable; and (3) total equity decreased by $157. The Fund’s involvement with our investments in 9800 South Meridian and 18922 Forge Drive has not changed since the deconsolidation of these investments.

Please also see the parenthetical disclosures on our Consolidated Balance Sheet regarding the amounts of variable interest entities’ assets and liabilities that are consolidated.

NOTE 5—UNCONSOLIDATED REAL ESTATE AFFILIATES

We own a 46.5% interest in Legacy Village, an 80% interest in 111 Sutter Street, and 90% interests in each of 9800 South Meridian and 18922 Forge Drive. As discussed in Note 4, 9800 South Meridian and 18922 Forge Drive became unconsolidated affiliates as of January 1, 2010.

The mortgage notes payable associated with 9800 South Meridian and 18922 Forge Drive are non-recourse obligations of the Fund, and are guaranteed by an affiliate of our operating partner in these properties (the “Guarantor”). As of June 30, 2010, the Guarantor had not complied with certain financial reporting requirements of these loan agreements, which has resulted in these mortgage notes payable being in default. As a result of these defaults, the lenders of the mortgage notes payable can call for the immediate payment of the outstanding balances. As of the filing date of this 10-Q, the lenders have not demanded immediate payment.

The following is summarized financial information for our unconsolidated real estate affiliates which for the periods related to 2010 now include 9800 South Meridian and 18922 Forge Drive:

SUMMARIZED COMBINED BALANCE SHEETS—UNCONSOLIDATED REAL ESTATE AFFILIATES

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

     June 30,
2010
   December 31,
2009

ASSETS

     

Investments in real estate, net

   $ 189,700    $ 160,803

Cash and cash equivalents

     5,116      2,551

Other assets, net

     17,950      18,893
             

TOTAL ASSETS

   $ 212,766    $ 182,247
             

LIABILITIES AND MEMBERS’ EQUITY

     

Mortgage notes and other debt payable

   $ 181,730    $ 150,382

Other liabilities

     7,903      9,200
             

TOTAL LIABILITIES

     189,633      159,582

Members’ Equity

     23,133      22,665
             

TOTAL LIABILITIES AND MEMBERS’ EQUITY

   $ 212,766    $ 182,247
             

FUND INVESTMENTS IN UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     June 30,
2010
    December 31,
2009
 

Members’ equity

   $ 23,133      $ 22,665   

Less: other members’ equity

     (6,909     (8,157

Basis differential in investment in unconsolidated real estate affiliates, net (a)

     14,234        15,343   
                

Investments in unconsolidated real estate affiliates

   $ 30,458      $ 29,851   
                

 

(a) The basis differential in investment in the equity of the unconsolidated real estate affiliates is attributable to a difference in the fair value of Legacy Village over its historical cost at acquisition plus the Fund’s own acquisition costs for Legacy Village, 111 Sutter Street, 9800 South Meridian and 18922 Forge Drive. The Fund amortizes the basis differential over the lives of the related assets and liabilities that make up the fair value difference, primarily buildings and improvements. In some instances, the useful lives of these assets and liabilities differ from the useful lives being used to amortize the assets and liabilities by the investee. The basis differential allocated to land is not subject to amortization.

SUMMARIZED COMBINED STATEMENTS OF OPERATIONS—UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     Three Months
Ended
June  30,

2010
    Three Months
Ended
June  30,

2009
    Six Months
Ended
June  30,

2010
    Six Months
Ended
June  30,

2009
 

Total revenues

   $ 8,062      $ 7,062      $ 16,203      $ 14,570   

Total operating expenses

     5,744        5,085        11,983        10,405   
                                

Operating income

     2,318        1,977        4,220        4,165   

Total other expenses

     2,576        2,169        5,187        4,348   
                                

Net loss

   $ (258   $ (192   $ (967   $ (183
                                

FUND EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     Three Months
Ended
June  30,

2010
    Three Months
Ended
June  30,

2009
    Six Months
Ended
June  30,

2010
    Six Months
Ended
June  30,

2009
 

Net loss of unconsolidated real estate affiliates

   $ (258   $ (192   $ (967   $ (183

Other members’ share of net income/loss

     41        (1     390        (11

Depreciation adjustment of basis differential

     27        (178     (12     (211

Other expense from unconsolidated real estate affiliates

     —          (4     (1     (4

Impairment of investment in unconsolidated real estate affiliates

     —          (4,857     —          (4,857
                                

Fund equity in loss of unconsolidated real estate affiliates

   $ (190   $ (5,232   $ (590   $ (5,266
                                

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

SUMMARIZED FINANCIAL INFORMATION—LEGACY VILLAGE

 

     Three Months
Ended
June  30,

2010
   Three Months
Ended
June  30,

2009
   Six Months
Ended
June  30,

2010
    Six Months
Ended
June  30,

2009

Total revenues

   $ 4,572    $ 4,564    $ 9,093      $ 9,506

Operating income

     1,446      1,374      2,460        2,825

Net income (loss)

   $ 115    $ 2    $ (213   $ 71

NOTE 6—MORTGAGE NOTES AND OTHER DEBT PAYABLE

Mortgage notes payable have various maturities through 2027 and consist of the following:

 

               Amount payable as of  

Property

  

Maturity Date

  

Rate

   June 30,
2010
    December 31,
2009
 

Total mortgage notes of held for use properties

   September 1, 2011 - March 1, 2027    5.15% -6.14%    $ 595,985      $ 636,858   

Other debt payable

   August 24, 2011    7.00%      1,050        1,050   

Term loan/line of credit

   February 19, 2012    LIBOR + 3.75%
(1.00% LIBOR
floor)
     10,975        17,500   

Net discount on assumed debt

           (1,429     (1,322
                      

Mortgage notes and other debt payable, net

         $ 606,581      $ 654,086   
                      

Mortgage notes of held for sale properties

         $ —        $ 42,431   
                      

Aggregate principal payments of mortgage notes and other debt payable as of June 30, 2010 are as follows:

 

Year

   Amount

2010

   $ 8,034

2011

     49,226

2012

     19,829

2013

     143,594

2014

     139,990

Thereafter

     247,337
      

Total

   $ 608,010
      

Line of Credit / Term Loan

On February 19, 2010, we replaced our existing line of credit with a $17,000 term loan with a $6,000 letter of credit sub-limit provided by PNC Bank, National Association. The term loan bears interest at LIBOR plus 3.75%, with a LIBOR floor of 1.00%. The term loan requires quarterly principal payments of $2,125 and can be prepaid without penalty. The term loan matures on February 19, 2012. We had $10,975 borrowed at 4.75% at June 30, 2010. As of June 30, 2010, we were in compliance with the terms of our term loan.

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

Our previous $50,000 line of credit agreement, which expired in February 2010, was provided by PNC Bank, National Association, BMO Capital Markets Financing, Inc. and Bank of America, N.A. (“BANA”), an affiliate of the Manager. The line of credit carried an interest rate that approximates LIBOR plus 1.50% to 2.00% based on certain covenant provisions or a base rate which was the greater of (i) the interest rate per annum announced from time to time by the lender, as its prime rate or (ii) the Federal Funds effective rate plus 0.75%. We had $17,500 borrowed at 2.24% at December 31, 2009.

NOTE 7—COMMON STOCK

Stock Subscriptions

We have historically and may in the future sell additional Shares through private placements to accredited investors when and if market conditions permit. All subscriptions are subject to the receipt of cleared funds from the investor prior to the applicable subscription date in the full amount of the subscription. The subscription amount paid by each prospective investor for Shares in the Fund will initially be held in an escrow account at an independent financial institution outside the Fund, for the benefit of the investors until such time as the funds are drawn into the Fund to purchase Shares at the Current Share Price. Subscription funds will be held in the escrow account for no more than 100 days before we are required to issue the subscribed Shares. At June 30, 2010 and December 31, 2009, no subscription commitments were held in escrow. For the six months ended June 30, 2010, we sold no shares. For the year ended December 31, 2009, we sold 63,871 Shares for $5,991 to subscribers whose funds were held in the escrow account. Subscription commitments for the issuance of new Shares held in escrow are not included in our balance sheets.

Tender Offers

Pursuant to our Share Repurchase Program (the “Repurchase Program”), we may provide limited liquidity to our stockholders by conducting tender offers pursuant to which we would offer to repurchase a specific percentage, number or dollar amount of outstanding Shares (“Tender Offer Amount”). The Tender Offer Amount for each tender offer, if any, will depend on a variety of factors, including our available liquidity, available borrowing under our credit facility and the amount of proceeds from our most recent offering of Shares, if any. Such determinations will be made by our board of directors prior to each tender offer and will be communicated to stockholders. We do not guarantee, however, that sufficient cash will be available at any particular time to fund repurchases of our Shares, and we will be under no obligation to conduct such tender offers or to make such cash available. We did not conduct any tender offers during the six months ended June 30, 2010, and, in order to preserve cash given the current market environment, the Fund does not intend to repurchase shares for the immediate future.

Dividend Reinvestment Plan

Stockholders may participate in a dividend reinvestment plan under which all dividends will automatically be reinvested in additional Shares. The number of Shares issued under the dividend reinvestment plan will be determined based on the current share price as of the reinvestment date. For the six months ended June 30, 2010, we did not issue Shares under the dividend reinvestment plan. For the year ended December 31, 2009, we issued 39,201 Shares for approximately $3,446, under the dividend reinvestment plan.

Earnings Per Share (“EPS”)

Basic per Share amounts are based on the weighted average of Shares outstanding of 4,135,635 for the three and six months ended June 30, 2010. Basic per Share amounts are based on the weighted average of Shares outstanding of 4,130,811 and 4,120,823 for the three and six months ended June 30, 2009. We have no dilutive or potentially dilutive securities.

NOTE 8—RELATED PARTY TRANSACTIONS

Under the terms of the Management and Advisory Agreements, we paid each the Manager and Advisor an annual fixed fee equal to 0.75%, respectively, of the Fund’s net asset value (“NAV”), calculated quarterly. Effective January 1, 2010, the Manager’s portion of the fixed fee was reduced from 0.75% of NAV to 0.10% of NAV. The fixed portion of the management and advisory fees for the three and six months ended June 30, 2010 were $485 and $973, respectively. The fixed portion of the management and advisory fees for the three and six months ended June 30, 2009 were $1,209 and $2,654, respectively. Included in Manager and Advisor fees payable at June 30, 2010 and December 31, 2009 was $543 and $1,017, respectively, of fixed fee expense.

Under the terms of the Management and Advisory Agreements, we pay the Manager and Advisor an aggregate annual variable fee equal to 7.50% of the Variable Fee Base Amount, as defined in the Advisory Agreement, calculated quarterly. The Manager will be allocated an increasing proportion of the variable fee as the Fund’s NAV increases, up to a maximum of 1.87% of the 7.50% fee paid to the Manager and the Advisor if the Fund’s NAV is $850,000 or more. Effective January 1, 2010, the Manager waived its

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

participation in the variable fee. The total variable fees for the three and six months ended June 30, 2010 were $372 and $878 respectively. The total variable fees for the three and six months ended June 30, 2009 were $445 and $926, respectively. Included in Manager and Advisor fees payable at June 30, 2010 and December 31, 2009 was $372 and $388, respectively, of variable fee expense.

The Advisor receives an acquisition fee of 0.50% of the acquisition cost of each property acquired for us. There were no acquisition fees for the three and six months ended June 30, 2010 and 2009. There were no acquisition fees included in manager and advisory fees payable at June 30, 2010 or December 31, 2009, respectively. The Advisor may pay certain third-party due diligence costs related to acquisitions or unsuccessful acquisitions, which are reimbursable by us. There were no reimbursed due diligence costs for the three and six months ended June 30, 2010 and 2009. Beginning January 1, 2009, acquisition fees and due diligence costs for acquisitions were expensed as incurred. The Advisor does not receive a disposition fee for selling real estate investments.

On December 23, 2004, we entered into an expense limitation agreement (the “Expense Limitation Agreement”), which limits certain Fund expenses to 0.75% of NAV annually. The expenses subject to the limitation include fees paid to the various professional service providers, auditors, stockholder administrator, legal counsel related to the organization of the Fund or Share offering, printing costs, mailing costs, fees associated with our board of directors, cost of maintaining directors and officers insurance, blue sky fees and all Fund-level organizational costs. Expenses in excess of the limitation will be carried forward for up to three years and may be reimbursed to the Manager in a year that Fund expenses are less than 0.75% of NAV, but only to the extent Fund expenses do not exceed the expense limitation. Fund expenses for the three and six months ended June 30, 2010 were limited to $428 and $859, respectively. Actual Fund level expenses for the six months ended June 30, 2010 exceeded the limitation by $2, therefore, this amount of Fund level expenses paid for by the Manager is being carried forward to future periods. To the extent expenses cannot be allocated to the Fund in future years due to the expense limitation, these expenses will be borne by the Manager. The Expense Limitation Agreement is scheduled to expire on December 31, 2010, after which time we will be responsible for all expenses as incurred. Expenses subject to the Expense Limitation Agreement are included in the Fund level expenses line on the consolidated statements of operations along with certain other Fund level expenses not subject to the Expense Limitation Agreement, such as expenses related to unsuccessful acquisitions and filing fees.

Jones Lang LaSalle Americas, Inc. (“JLL”), an affiliate of LaSalle, is paid for property management services performed at Monument IV at Worldgate, The District at Howell Mill, 4 Research Park Drive and 36 Research Park Drive. For the three and six months ended June 30, 2010, JLL was paid $51 and $86, respectively, for property management services performed. For the three and six months ended June 30, 2009, JLL was paid $46 and $96, respectively, for property management services performed. JLL has been hired to perform leasing services for Canyon Plaza and 111 Sutter on a contingent fee basis. JLL was paid $135 and $167 for leasing services for the three and six months ended June 30, 2010, respectively. JLL was paid $0 for leasing services for the three and six months ended June 30, 2009.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), an affiliate of the Manager, is the placement agent for the Fund. The placement agent receives no compensation from us for its services, but may receive compensation in the form of a placement fee from the purchasing shareholders. MLPF&S is an indirect, wholly-owned subsidiary of Bank of America Corporation (“BAC”).

The Fund has mortgage notes payable to BAC, an affiliate of the Manager, collateralized by Monument IV at Worldgate and Station Nine Apartments. BANA was the lender on up to $7,143 of the Fund’s old line of credit, which expired in February 2010. Interest and fees paid to BAC and BANA related to the loans were $1,007 and $2,005, for the three and six months ended June 30, 2010, respectively. Included in mortgage notes and other debt payable, is debt payable to BAC and BANA, at June 30, 2010 and December 31, 2009 of approximately $72,851 and $75,649, respectively.

NOTE 9—COMMITMENTS AND CONTINGENCIES

The CHW Medical Office Portfolio mortgage debt requires that we deposit an annual amount of $855, up to a cumulative maximum of $1,900, into an escrow account to fund future tenant improvements and leasing commissions. The amount of the escrow funded by each of the fifteen buildings in the portfolio is capped individually pursuant to each loan agreement. At June 30, 2010, we had approximately $1,318 deposited in this escrow, and we expect to fund a net of approximately $582 during the remainder of 2010. Additionally, we are required to deposit approximately $151 per year into an escrow account to fund capital expenditures. At June 30, 2010, our capital account escrow account balance was $404. These escrow accounts allow us to withdraw funds as we incur costs related to tenant improvements, leasing commissions and capital expenditures. Additionally, monthly we are required to fund an escrow account for the future payment of real estate taxes and insurance costs in an amount equal to 1/12th of the estimated insurance premium and real estate taxes. At June 30, 2010, our insurance and real estate tax escrow balance was $396. We expect to fund the escrow requirements with operating cash flows generated by the portfolio.

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

The mortgage loan collateralized by Metropolitan Park North required that on or before April 1, 2009 we post a $3,900 reserve in escrow to cover costs of certain tenant improvements, leasing commissions, rent concessions, and lost rental income in connection with re-leasing space currently occupied by Nordstrom, a major anchor tenant of the building. We satisfied this reserve requirement with a letter of credit which was posted on March 23, 2009. If Nordstrom’s provides written notice of its intent to exercise its lease renewal option by September 30, 2010, pursuant to the loan agreement, the lender is obligated to return the $3,900 letter of credit to us. If Nordstrom’s fails to provide notice of its renewal by September 30, 2010, we are obligated to post an additional $2,800 reserve into the escrow. While we have received no official notice from Nordstrom and they are not obligated to provide us with such notice, we do not expect Nordstrom’s to renew their lease at Metropolitan Park North. The lender will return the reserve to us if the following conditions are met: (1) no default has occurred and remains outstanding; and (2) either Nordstrom’s has exercised its renewal options or the space has been re-leased to a new tenant(s). If required, the Fund plans on satisfying the additional $2,800 reserve requirement with cash on hand.

The mortgage loan collateralized by Monument IV at Worldgate requires that, should the tenant not renew its lease or the space not be leased to a new tenant(s), the Fund must reserve all rental payments received from the tenant at the earlier of September 1, 2010 or upon the tenant delivering a notice of its intent not to renew the lease. The Fund can avoid reserving the rental payments by delivering a letter of credit to the lender of $2,400 on September 1, 2010. The Fund expects to fund the reserve, if required to do so, from the rental payments received from the tenant. The lender will return the reserve to the Fund if the following conditions are met: (1) no default has occurred and remains outstanding; and (2) either the tenant has renewed its lease or the space has been re-leased to a new tenant(s).

The debt associated with five of the Fund’s student-oriented apartment communities requires that we deposit a total of $224 per year into a replacement reserve to fund future furniture replacement costs. As of June 30, 2010, we had deposited approximately $192 into this escrow for 2010 and we expect to fund a net amount of approximately $32 during the remainder of 2010.

As part of the lease with our single tenant at the 4001 North Norfleet Road property, we provided the tenant a right to expand the current building by up to 286,000 square feet of space. If the tenant exercises this right, we will be obligated to construct this expansion space. The tenant has the right to notify us of its desire to expand at any time prior to February 28, 2016, (the end of the ninth year of the lease), or if the lease is extended, until any time prior to the end of the fourth year of any extension. As of June 30, 2010, we have not received an expansion notice from the tenant.

NOTE 10—ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

The FASB’s guidance for fair value measurement and disclosure states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement.

 

   

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

 

   

Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The authoritative guidance requires the disclosure of the fair value of our financial instruments for which it is practicable to estimate that value. The guidance does not apply to all balance sheet items. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. We consider the carrying value of our cash and cash equivalents to approximate their fair value due to the short maturity of these investments. The fair value of our note receivable was approximately $762 higher than the aggregate carrying amount at December 31, 2009. We had no outstanding notes receivable at June 30, 2010. We have estimated the fair value of our mortgage notes and other debt payable reflected in the accompanying Consolidated Balance Sheets at amounts that are based upon an interpretation of available market information

 

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EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$ in thousands, except per share amounts

(Unaudited)

 

and valuation methodologies (including discounted cash flow analyses with regard to fixed rate debt) for similar loans made to borrowers with similar credit ratings and for the same maturities. The fair value of our mortgage notes and other debt payable was approximately $46,845 and $85,067 lower than the aggregate carrying amounts at June 30, 2010 and December 31, 2009, respectively. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of our mortgage notes and other debt payable.

NOTE 11—IMPAIRMENT

Impairment of Investments in Real Estate previously held for sale

In December 2009, we determined that five properties we designated as held for sale were impaired at the date the properties were classified as held for sale. These properties included 25850 S. Ridgeland, Georgia Door Sales Distribution Center, 105 Kendall Park Lane, Havertys Furniture and 4001 North Norfleet Road. In accordance with the authoritative guidance for impairment of long-lived assets held for sale, we determined the carrying values of these investments exceeded their fair value less cost to sell. At March 31, 2010, we reevaluated these assets for further impairment per guidance and determined that 25850 S. Ridgeland, Georgia Door Sales Distribution Center and 4001 North Norfleet Road were further impaired. As such, we recognized additional impairment charges of approximately $1,471. The impairment stemmed from continuing deterioration of real estate market fundamentals. Upon our reevaluation of 105 Kendall Park Lane and Havertys Furniture we determined that the fair values less costs to sell increased since our initial evaluation. As such, we recorded a recovery of previously recorded impairment of approximately $3,574. The additional impairment charges and the recovery of previously recorded impairment related to 25850 S. Ridgeland and Havertys Furniture are included within income from discontinued operations on the consolidated statements of operations and comprehensive loss.

On April 15, 2010, we removed Georgia Door Sales Distribution Center, 105 Kendall Park Lane and 4001 North Norfleet Road from held for sale and placed them into held for use status at their fair value on that date. Upon recording the properties at the fair value on April 15, 2010, the Fund recorded a recovery of previously recorded provision for impairment of approximately $1,039.

Measurement of Fair Value

We were required to assess the value of our impaired assets in accordance with the guidance for long lived assets and equity method investments, respectively. The valuation of these assets is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset as well as the income capitalization approach considering prevailing market capitalization and discount rates. We review each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions included the capitalization rate used in the income capitalization valuation and projected property net operating income and net cash flows. Additionally, the valuation considered bid and ask prices for similar properties. We have determined that the significant inputs used to value the impaired assets fall within Level 3.

The valuation adjustments were calculated based on market conditions and assumptions made by management at the time the valuation adjustments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change in the future.

* * * * * *

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

$ in thousands, except per share amounts

Cautionary Note Regarding Forward-Looking Statements

This Quarterly report on Form 10-Q may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments. Forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, “may,” “should,” “expect,” “anticipate,” “estimate,” “would be,” “believe,” or “continue” or the negative or other variations of comparable terminology. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Factors that could cause us not to realize our plans, intentions or expectations include, but are not limited to, those discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in the Fund’s 2009 Form 10-K and our periodic reports filed with the SEC, including risks related to: (i) the current global financial crisis; (ii) risks related to student-oriented apartment communities; (iii) commercial real estate ownership; (iv) competition for attractive investments; (v) performance of the Manager and the Advisor; (vi) our ability to use leverage; (viii) the loss of key personnel by the Manager or the Advisor; (vii) compliance with the Exchange Act; (ix) our failure to achieve our return objectives; (x) the impact of co-tenancy provisions; (xi) defaults by significant tenants; (xii) compliance with environmental laws; (xiii) the possible development of harmful mold at our properties; (xiv) our ability to sell Shares and the illiquidity of our Shares; (xv) terrorist attacks; (xvi) the adequacy of our insurance; (xvii) the extent to which our investments are diversified; (xviii) our joint investments with third parties; (xix) the structure of the fees payable to the Manager and the Advisor; (xx) our qualification as a “venture capital operating company” under ERISA; (xxi) our ability to remain exempt from the registration requirements of the Investment Company Act, and (xxii) our ability to qualify as a REIT. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.

Management Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements appearing elsewhere in this Form 10-Q. All references to numbered Notes are to specific notes to our Consolidated Financial Statements beginning on page 7 of this Form 10-Q, and the descriptions referred to are incorporated into the applicable portion of this section by reference. References to “base rent” in this Form 10-Q refer to cash payments made under the relevant lease(s), excluding real estate taxes and certain property operating expenses that are paid by us and are recoverable under the relevant lease(s) and exclude adjustments for straight-line rent revenue and above- and below-market lease amortization.

The discussions surrounding our Consolidated Properties refer to our wholly or majority owned and controlled properties, which as of June 30, 2010, were comprised of:

 

   

Monument IV at Worldgate,

 

   

Georgia Door Sales Distribution Center,

 

   

105 Kendall Park Lane,

 

   

Marketplace at Northglenn,

 

   

the CHW Medical Office Portfolio,

 

   

Metropolitan Park North,

 

   

Stirling Slidell Shopping Centre,

 

   

4001 North Norfleet Road,

 

   

Station Nine Apartments,

 

   

4 Research Park Drive,

 

   

36 Research Park Drive,

 

   

The District at Howell Mill,

 

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Canyon Plaza,

 

   

Railway Street Corporate Centre,

 

   

Cabana Beach San Marcos,

 

   

Cabana Beach Gainesville,

 

   

Campus Lodge Athens,

 

   

Campus Lodge Columbia,

 

   

The Edge at Lafayette, and

 

   

Campus Lodge Tampa.

As of June 30, 2009, our Consolidated properties were also comprised of:

 

   

Hagemeyer Distribution Center,

 

   

Waipio Shopping Center,

 

   

9800 South Meridian,

 

   

18922 Forge Drive,

 

   

Havertys Furniture, and

 

   

25850 S. Ridgeland.

Our Unconsolidated Properties, which are owned through joint venture arrangements, consist of Legacy Village, 111 Sutter Street, 9800 South Meridian and 18922 Forge Drive as of June 30, 2010 and Legacy Village and 111 Sutter Street as of June 30, 2009. Inclusion of 9800 South Meridian and 18922 Forge Drive in the Fund’s Unconsolidated Properties in 2010 is a result of the Fund’s adoption of the revised variable interest entity authoritative guidance on January 1, 2010. In our SEC filings prior to 2010, 9800 South Meridian and 18922 Forge Drive were included in the Fund’s Consolidated Properties. Because management’s operating strategies are generally the same whether the properties are consolidated or unconsolidated, we believe that financial information and operating statistics with respect to all properties, both consolidated and unconsolidated, provide important insights into our operating results, including the relative size and significance of these elements to our overall operations. Collectively, we refer to our Consolidated and Unconsolidated Properties as our “Fund Portfolio.”

Our primary business is the ownership and management of a diversified portfolio of retail, office, industrial and apartment properties primarily located in the United States. We hire property management companies to provide the on-site, day-to-day management services for our properties. When selecting a property management company for one of our properties, we look for service providers that have a strong local market or industry presence, create portfolio efficiencies, have the ability to develop new business for us and will provide a strong internal control environment that will comply with our Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) internal control requirements. We currently use a mix of property management service providers that include large national real estate service firms, including an affiliate of the Advisor, and smaller local firms, including in certain cases our joint venture partners. Our property management service providers are generally hired to perform both property management and leasing services for our properties.

We seek to minimize risk and maintain stability of income and principal value through broad diversification across property sectors and geographic markets and by balancing tenant lease expirations and debt maturities across the Fund Portfolio. Our diversification goals also take into account investing in sectors or regions we believe will create returns consistent with our investment objective. Under normal conditions, we intend to pursue investments principally in well-located, well-leased assets within the office, retail, industrial and apartment sectors, which we refer to as the “Primary Sectors”. We will also pursue investments in certain sub-sectors of the Primary Sectors, for example the medical office sub-sector of the office sector or the student-oriented housing sub-sector of the apartment sector. We expect to actively manage the mix of properties and markets over time in response to changing operating fundamentals within each property sector and to changing economies and real estate markets in the geographic areas considered for investment. When consistent with our investment objectives, we will also seek to maximize the tax efficiency of our investments through like-kind exchanges and other tax planning strategies.

A key ratio reviewed by management in our investment decision process is the cash flow generated by the proposed investment, from all sources, compared to the amount of cash investment required (the “Cash on Cash Return”). Generally, we look at the Cash on Cash Returns over the one, five and ten-year time horizons and select investments that we believe meet our objectives. Certain GAAP concepts such as straight-line rent and depreciation and amortization, are not factored into our Cash on Cash Returns.

 

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The following tables summarize our diversification by property sector and geographic region based upon the fair value of our Consolidated and Unconsolidated Properties. These tables provide examples of how the Advisor evaluates the Fund Portfolio when making investment decisions.

Property Sector Diversification

Consolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2010
 

Office

  

Commercial Office

   29

Medical Office

   19

Retail

   19

Industrial

   8

Apartment

   25

Unconsolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2010
 

Office

  

Commercial Office

   54

Medical Office

   —     

Retail

   46

Industrial

   —     

Apartment

   —     

Geographic Region Diversification

Consolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2010
 

East

   14

West

   45

Midwest

   11

South

   25

International

   5

Unconsolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2010
 

East

   —     

West

   54

Midwest

   46

South

   —     

International

   —     

 

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Seasonality

With the exception of our student-oriented apartment communities, our investments are not materially impacted by seasonality, despite certain of our retail tenants being impacted by seasonality. Percentage rents (rents computed as a percentage of tenant sales) that we earn from investments in retail and office properties may, in the future, be impacted by seasonality.

For our six student-oriented apartment communities, the majority of our leases commence mid-August and terminate the last day of July. These dates generally coincide with the commencement of the universities’ fall academic term and the completion of the subsequent summer school session. In certain cases we enter into leases for less than the full academic year, including nine-month or shorter-term semester leases. As a result, we may experience significantly reduced cash flows during the summer months at properties leased under leases having terms shorter than 12 months. We are required to re-lease each property in its entirety each year, resulting in significant turnover in our tenant population from year to year. We have found certain property revenues and operating expenses to be cyclical in nature, and therefore not incurred ratably over the course of the year. Prior to the commencement of each new lease period, mostly during the first two weeks of August, we prepare the units for new incoming tenants. Other than revenue generated by in-place leases for returning tenants, we do not generally recognize lease revenue during this period referred to as “Turn” as we have no leases in place. In addition, during Turn we incur significant expenses making our units ready for occupancy, which we recognize immediately. This lease Turn period results in seasonality in our operating results during the second and third quarter of each year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.

Critical Accounting Policies

The MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes during the six months ended June 30, 2010 to the items that we disclosed as our critical accounting policies and estimates under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2009 Form 10-K.

 

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Table of Contents

Consolidated Properties

Consolidated Properties owned at June 30, 2010 are as follows:

 

Property Name

   Type    Location    Acquisition Date    Ownership
%
    Net Rentable
Square Feet
   Percentage
Leased As of
June 30,
2010
 

Monument IV at Worldgate

   Office    Herndon, VA    August 27, 2004    100   228,000    100

Georgia Door Sales Distribution Center (1)

   Industrial    Austell, GA    February 10, 2005    100   254,000    76

105 Kendall Park Lane (1)

   Industrial    Atlanta, GA    June 30, 2005    100   409,000    100

Marketplace at Northglenn

   Retail    Northglenn, CO    December 21, 2005    100   439,000    90

CHW Medical Office Portfolio

   Office    CA and AZ    December 21, 2005    100   755,000    85

Metropolitan Park North

   Office    Seattle, WA    March 28, 2006    100   187,000    100

Stirling Slidell Shopping Centre

   Retail    Slidell, LA    December 14, 2006    100   139,000    71

4001 North Norfleet Road (1)

   Industrial    Kansas City, MO    February 27, 2007    100   702,000    100

Station Nine Apartments (2)

   Apartment    Durham, NC    April 16, 2007    100   312,000    84

4 Research Park Drive

   Office    St. Charles, MO    June 13, 2007    100   60,000    100

36 Research Park Drive

   Office    St. Charles, MO    June 13, 2007    100   81,000    100

The District at Howell Mill (3)

   Retail    Atlanta, GA    June 15, 2007    87.85   306,000    99

Canyon Plaza

   Office    San Diego, CA    June 26, 2007    100   199,000    100

Railway Street Corporate Centre

   Office    Calgary, Canada    August 30, 2007    100   137,000    100

Cabana Beach San Marcos (2)(4)

   Apartment    San Marcos, TX    November 21, 2007    78   278,000    83

Cabana Beach Gainesville (2)(4)

   Apartment    Gainesville, FL    November 21, 2007    78   545,000    77

Campus Lodge Athens (2)(4)

   Apartment    Athens, GA    November 21, 2007    78   229,000    87

Campus Lodge Columbia (2)(4)

   Apartment    Columbia, MO    November 21, 2007    78   256,000    50

The Edge at Lafayette (2)(4)

   Apartment    Lafayette, LA    January 15, 2008    78   207,000    91

Campus Lodge Tampa (2)(4)

   Apartment    Tampa, FL    February 29, 2008    78   431,000    95

 

(1) On December 15, 2009, this property was designated as held-for-sale and continued its held-for-sale status until the property was subsequently removed from held-for-sale and designated as held-for-use on April 15, 2010.
(2) This apartment property is located near a university and during summer months the occupancy will fluctuate due to leasing efforts before the school year.
(3) We acquired an 87.85% ownership interest in the joint venture that owns a fee interest in this property.
(4) We acquired a 78% ownership interest in the joint venture that owns a fee interest in this property.

Unconsolidated Properties

Unconsolidated Properties acquired since inception are as follows:

 

Property Name

   Type    Location    Acquisition Date    Ownership
%
    Net Rentable
Square Feet
   Percentage
Leased As of
June 30,
2010
 

Legacy Village

   Retail    Lyndhurst, OH    August 25, 2004    46.5   595,000    94

111 Sutter Street

   Office    San Francisco, CA    March 29, 2005    80   286,000    81

9800 South Meridian (1)

   Office    Englewood, CO    December 26, 2006    90   144,000    59

18922 Forge Drive (1)

   Office    Cupertino, CA    February 15, 2007    90   91,000    100

 

(1) The Fund adopted the authoritative guidance for variable interest entities on January 1, 2010 and has concluded that this previously-consolidated property should be deconsolidated. This property was included in the Fund’s Consolidated Properties at December 31, 2009.

Results of Operations

General

Our revenues are primarily received from tenants in the form of fixed minimum base rents and recoveries of operating expenses. Our expenses primarily relate to the costs of operating and financing the properties. Our share of the net income or net loss from Unconsolidated Properties is included in the equity in income of unconsolidated affiliates.

 

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Table of Contents

Results of Operations for the three months ended June 30, 2010 and 2009:

We believe the following analyses of comparable real estate investments provide important information about the operating results of our real estate investments, such as trends in total revenues or operating expenses that may not be as apparent in a period-over-period comparison of the entire Fund. Comparable real estate investments represent properties currently classified as continuing operations and owned by us for the six months ended on June 30, 2010, which were also owned by us during the six months ended on June 30, 2009. Comparable real estate investments at June 30, 2010 include Monument IV at Worldgate, Georgia Door Sales Distribution Center, 105 Kendall Park Lane, Marketplace at Northglenn, the CHW Medical Office Portfolio, Metropolitan Park North, Stirling Slidell Shopping Centre, 4001 North Norfleet Road, Station Nine Apartments, 4 Research Park Drive, 36 Research Park Drive, The District at Howell Mill, Canyon Plaza, Railway Street Corporate Centre, Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens, Campus Lodge Columbia, The Edge at Lafayette and Campus Lodge Tampa.

Revenues

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2010
   Three Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 19,222    $ 19,880    $ (658   (3.3 )% 

Tenant recoveries and other rental income

     4,753      5,235      (482   (9.2 )% 
                        

Total revenues

   $ 23,975    $ 25,115    $ (1,140   (4.5 )% 

Decreases in revenue line items from 2009 to 2010 are primarily attributable to the deconsolidation of 9800 South Meridian and 18922 Forge Drive as of January 1, 2010.

Included in minimum rents, as a net increase, are above- and below-market lease amortization of $475 and $523 for the three months ended June 30, 2010 and 2009, respectively. Also included in minimum rents is straight-line rental income, which caused decreases of $66 and $260 for the three months ended June 30, 2010 and 2009, respectively.

Tenant recoveries relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases.

 

     Comparable Real Estate Investments  
     Three Months
Ended
June 30, 2010
   Three Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 19,222    $ 18,861    $ 361      1.9

Tenant recoveries and other rental income

     4,753      5,039      (286   (5.7 )% 
                        

Total revenues

   $ 23,975    $ 23,900    $ 75      0.3

 

     Total Revenues Reconciliation
     Three Months
Ended
June 30, 2010
   Three Months
Ended
June 30, 2009

Total revenues:

     

Comparable real estate investments

   $ 23,975    $ 23,900

Non-comparable real estate investments

     —        1,215
             

Total revenues

   $ 23,975    $ 25,115

Minimum rents at comparable real estate investments increased by $361 between the three months ended June 30, 2010 and the same period in 2009. The increase resulted from increases in minimum rents of $400 due to an increase in occupancy and rental rates at Cabana Beach Gainesville for the three months ending June 30, 2010 as compared to the three months ending June 30, 2009. Additionally, an increase of $85 due to favorable foreign exchange rates at Railway Street Corporate Center for the three months ending June 30, 2010 as compared to the same period in 2009. The increase is partially offset by a decrease of $118 at the CHW Medical Office Portfolio due to decreases in occupancy during the three months ending June 30, 2010 as compared to the same period in 2009.

 

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Tenant recoveries and other rental income at comparable real estate investments decreased by $286 for the three months ended June 30, 2010 over the same period in 2009. The decrease was primarily due to decreases of $195 at the Marketplace at Northglenn due to a decrease in occupancy and lower recoverable real estate taxes and $122 at Cabana Beach Gainesville related to a prior year agreement with the management company for payments on short term leases. Partially offsetting these variances were increases of $54 at Railway Street Corporate Centre due to favorable exchange rates.

Operating Expenses

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2010
    Three Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Operating expenses:

         

Real estate taxes

   $ 2,958      $ 3,273    $ (315   (9.6 )% 

Property operating

     5,601        5,932      (331   (5.6 )% 

Manager and advisor fees

     857        1,654      (797   (48.2 )% 

Fund level expenses

     523        603      (80   (13.3 )% 

Provision for doubtful accounts

     176        68      108      158.8

General and administrative

     279        361      (82   (22.7 )% 

Net recovery of provision for impairment of real estate

     (1,039     —        (1,039   —     

Loss on extinguishment of debt

     73        —        73      —     

Depreciation and amortization

     7,353        8,627      (1,274   (14.8 )% 
                         

Total operating expenses

   $ 16,781      $ 20,518    $ (3,737   (18.2 )% 

Real estate taxes and property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. The decrease in real estate taxes and property operating expense from 2009 to 2010 is primarily related to the deconsolidation of 9800 South Meridian and 18922 Forge Drive.

Manager and advisor fees relate to the fixed and variable management and advisory fees earned by the Manager and Advisor. Fixed fees increase or decrease based on changes in the NAV. NAV will be impacted by changes in the value of our properties and the related debt. Variable fees are calculated as a formula of cash flow generated from owning and operating the real estate investments and will fluctuate as future cash flows fluctuate. The decrease in Manager and Advisor fees from 2009 to 2010 relates mainly to a decrease in NAV and due to the Manager decreasing its fixed fee from 75 basis points to 10 basis points and electing to waive its portion of the variable fee.

Our Fund level expenses in 2010 and 2009 were subject to the Expense Limitation Agreement with the Manager (See Note 8), which limits certain expenses to 0.75% of NAV. These expenses relate mainly to our compliance, administration related costs and Share offerings. We record Fund level expenses based on a calculation of 0.75% of NAV annually, calculated quarterly, limited to actual costs incurred by the Fund during the current quarter plus reimbursable expenses carried forward from prior periods. Expenses in excess of the 0.75% of NAV annually, calculated quarterly, will be carried forward for up to three years. As of June 30, 2010 and December 31, 2009, $2 and $0, respectively, of Fund level expenses were being carried forward by the Manager. The Expense Limitation Agreement is scheduled to expire on December 31, 2010.

Provision for doubtful accounts relates to receivables deemed as potentially uncollectible due to the age of the receivable or the status of the tenant. Increases in provision for doubtful accounts from 2009 to 2010 relate mainly to tenant bankruptcies and financial difficulties at some of our multi-tenant retail, office and apartment properties.

General and administrative expenses relate mainly to property expenses unrelated to property operations such as bank fees, legal services costs, and franchise taxes.

Net recovery of provision for impairment of real estate relate to the change in fair value of properties previously classified as held for sale which have now been placed in held for use.

Loss on extinguishment of debt relates to any prepayment penalty as well as the writeoff of unamortized financing fees on mortgage loans and other debt payable that were extinguished prior to their maturity date.

Depreciation and amortization expense will be impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation.

 

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Table of Contents
     Comparable Real Estate Investments  
     Three Months
Ended
June 30, 2010
    Three Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Operating expenses:

         

Real estate taxes

   $ 2,958      $ 2,994    $ (36   (1.2 )% 

Property operating

     5,595        5,744      (149   (2.6 )% 

Provision for doubtful accounts

     176        68      108      158.8

General and administrative

     254        326      (72   (22.1 )% 

Net recovery of provision for impairment of real estate

     (1,039     —        (1,039   —     

Loss on extinguishment of debt

     73        —        73      —     

Depreciation and amortization

     7,353        8,128      (775   (9.5 )% 
                         

Total operating expenses

   $ 15,370      $ 17,260    $ (1,890   (11.0 )% 

 

     Operating Expenses Reconciliation
     Three  Months
Ended
June 30, 2010
   Three  Months
Ended
June 30, 2009

Total operating expenses:

     

Comparable real estate investments

   $ 15,370    $ 17,260

Non-comparable real estate investments

     31      1,001

Manager and advisor fees

     857      1,654

Fund level expenses

     523      603
             

Total operating expenses

   $ 16,781    $ 20,518

Real estate tax expense at comparable real estate investments decreased by $36 for the three months ended June 30, 2010 compared to the same period of 2009 mainly due to a decrease of $37 at the Marketplace at Northglenn as a result of the property being reassessed.

Property operating expenses at comparable real estate investments decreased at the CHW Medical Office Portfolio by $184 related to decreases in payroll costs for the property management company and fewer repairs and maintenance projects for the three months ended June 20, 2010 as compared to the same period of 2009. The decrease is also a result of a $61 decrease at Cabana Beach San Marcos due to decreased water usage for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. The decrease was partially offset by an increase of $85 at Cabana Beach Gainesville due to increases in utilities and other operating costs as a result of an increase in occupancy.

The increase in provision for doubtful accounts at comparable real estate investments is mainly related to an increase in uncollectible accounts at the CHW Medical Office Portfolio of $161 due to collection difficulties for expense recoveries and tenant bankruptcies that occurred during the three months ended June 30, 2010 that did not occur in 2009. The increase is partially offset by a decrease of $61 at Campus Lodge Tampa related to a greater collection success rate for the three months ended June 30, 2010 over the same period in 2009.

General and administrative expenses decreased for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 due to decreases of franchise taxes of $50 and $45 at the CHW Medical Office Portfolio and Stirling Slidell Shopping Centre, respectively. The decrease also related to a $59 decrease in legal fees at the CHW Medical Office Portfolio. The decrease was partially offset by increases of $52 at The District at Howell Mill and $20 at Canyon Plaza related to property level legal services for the three months ended June 30, 2010 as compared to the same period in 2009.

Net recovery of provision for impairment of real estate decreased by $1,039 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 due to recovery of previously recorded impairment at 4001 North Norfleet Road, 105 Kendall Park Lane, and Georgia Door Sales Distribution Center. Impairment was recovered when these previously-classified held-for-sale assets were returned to held-for-use status during the three months ended June 30, 2010.

Loss on extinguishment of debt increased by a $73 due to the debt payoff at Georgia Door Sales Distribution Center during the three months ended June 30, 2010 as compared to the same period in 2009.

The decrease in depreciation and amortization expense at comparable real estate investments is primarily related to decreases of $458 at the CHW Medical Office due to in-place lease assets becoming fully amortized during 2009. Additionally contributing to the

 

24


Table of Contents

decrease was Campus Lodge Tampa and Campus Lodge Athens of $160 and $108, respectively, related to personal property becoming fully depreciated during 2009 and early 2010.

Other Income and Expenses

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2010
    Three Months
Ended
June 30, 2009
    $
Change
    %
Change
 

Other income and (expenses):

        

Interest income

   $ 3      $ 4     $ (1   (25.0 )% 

Interest expense

     (8,796     (9,063     267      2.9

Equity in loss of unconsolidated affiliates

     (190     (5,232     5,042      96.4
                          

Total other income and (expenses)

   $ (8,983   $ (14,291   $ 5,308      37.1

Interest income remained relatively flat for the three months ended June 30, 2010 as compared to 2009.

Interest expense decreased from 2009 to 2010 primarily due to lower principal balances on various loans that have amortized and the payoff of the loan on Georgia Door Sales Distribution Center in 2010. Interest expense includes the amortization of deferred finance fees of $154 and $153 for the three months ended June 30, 2010 and 2009, respectively. Also included in interest expense for the three months ended June 30, 2010 and 2009, as a net reduction, is amortization of debt premium and discount associated with the assumption of debt of $54.

Equity in loss of unconsolidated affiliates decreased by $5,042 primarily related to an impairment loss at Legacy Village of $4,857 recorded in 2009. In addition, equity in income at Legacy Village increased by $264 from equity loss of $179 for the three months ended June 30, 2009 to equity income of $85 for the three months ended June 30, 2010. The increase at Legacy Village was a result of the increased occupancy as well as increased percentage rents in 2010 as compared to 2009. Equity in the loss from 111 Sutter Street increased by $335 from equity loss of $195 for the three months ended June 30, 2009 to equity loss of $530 for the three months ended June 30, 2010. The increase in equity loss at 111 Sutter Street was a result of lower minimum rents for newly-signed leases and lower occupancy during the three months ended June 30, 2010. As a result of the adoption of guidance related to variable interest entities, 2010 is the initial period that 9800 South Meridian and 18922 Forge Drive have been accounted for as unconsolidated affiliates. For the three months ending June 30, 2010, the Fund recorded an equity loss of $0 from 9800 South Meridian as we are not required to fund losses in the investment in excess of our initial investment and equity income of $256 from 18922 Forge Drive which represents our allocation of net income from property operations.

Discontinued Operations

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2010
    Three Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Discontinued Operations:

         

(Loss) income from discontinued operations

   $ (501   $ 263    $ (764   (290.5 )% 

Gain on sale of discontinued operations, net

     822        911      (89   (9.8 )% 
                         

Total income from discontinued operations

   $ 321      $ 1,174    $ (853   (72.7 )% 

The decrease of income from discontinued operations is primarily related to the lack of income in the three months ended June 30, 2010 from the properties that were sold after June 30, 2009.

The decrease of $89 in the gain on sale of discontinued operations related to the sale of Havertys and 25850 S. Ridgeland during the three months ended June 30, 2010 as compared to the gain on sale of Hagemeyer Distribution Center in 2009.

Results of Operations for the six months ended June 30, 2010 and 2009:

Revenues

 

25


Table of Contents
     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2010
   Six Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 38,585    $ 40,565    $ (1,980   (4.9 )% 

Tenant recoveries and other rental income

     9,231      10,398      (1,167   (11.2 )% 
                        

Total revenues

   $ 47,816    $ 50,963    $ (3,147   (6.2 )% 

Decreases in revenue line items from 2009 to 2010 are primarily attributable to the deconsolidation of 9800 South Meridian and 18922 Forge Drive as of January 1, 2010.

Included in minimum rents, as a net decrease, are above- and below-market lease amortization of $953 and $1,046 for the six months ended June 30, 2010 and 2009, respectively. Also included in minimum rents is straight-line rental income, which caused a $80 decrease and a $87 increase for the six months ended June 30, 2010 and 2009, respectively.

Tenant recoveries relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases.

 

     Comparable Real Estate Investments  
     Six Months
Ended
June 30, 2010
   Six Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 38,585    $ 38,527    $ 58      0.2

Tenant recoveries and other rental income

     9,231      9,994      (763   (7.6 )% 
                        

Total revenues

   $ 47,816    $ 48,521    $ (705   (1.5 )% 

 

     Total Revenues Reconciliation
     Six Months
Ended
June 30, 2010
   Six Months
Ended
June 30, 2009

Total revenues:

     

Comparable real estate investments

   $ 47,816    $ 48,521

Non-comparable real estate investments

     —        2,442
             

Total revenues

   $ 47,816    $ 50,963

Minimum rents at comparable real estate investments increased by $58 between the six months ended June 30, 2010 and the same period in 2009. The increase is primarily due to increases at Cabana Beach Gainesville of approximately $762 due to an increase in occupancy and Railway Street Corporate Center of $196 related to favorable foreign exchange rates, respectively, during the six months ending June 30, 2010 when compared to the six months ending June 30, 2009. Partially offsetting the increases were decreases in minimum rents due to a decrease in occupancy and rental rates at Campus Lodge Columbia and Cabana Beach San Marcos of approximately $208 and $174, respectively, in the six months ending June 30, 2010 when compared to the six months ending June 30, 2009. Additional decreases also stem from the CHW Medical Office Portfolio and at the Marketplace at Northglenn of approximately $281 and $231, respectively, due to decreases in occupancy during the six months ending June 30, 2010 as compared to the same period in 2009.

Tenant recoveries and other rental income at comparable real estate investments decreased by $763 for the six months ended June 30, 2010 over the same period in 2009. The decrease was primarily due to decreases at the CHW Medical Office Portfolio and at the Marketplace at Northglenn of approximately $456 and $243, respectively, due to decreases in occupancy and recoverable real estate taxes during the six months ending June 30, 2010 as compared to the same period in 2009. Tenant recoveries and other rental income were further reduced by $95 at Cabana Beach Gainesville as a result of a prior year agreement with the management company for payments on short term leases. These decreases are partially offset by an increase of $100 at Railway Street Corporate Center due to favorable foreign exchange rates.

Operating Expenses

 

26


Table of Contents
     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2010
    Six Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Operating expenses:

         

Real estate taxes

   $ 5,262      $ 6,414    $ (1,152   (18.0 )% 

Property operating

     11,277        11,904      (627   (5.3 )% 

Manager and advisor fees

     1,851        3,580      (1,729   (48.3 )% 

Fund level expenses

     1,013        1,214      (201   (16.6 )% 

Provision for doubtful accounts

     410        167      243      145.5

General and administrative

     489        1,007      (518   (51.4 )% 

Net recovery of provision for impairment of real estate

     (1,580     —        (1,580   —     

Loss on extinguishment of debt

     73        —        73      —     

Depreciation and amortization

     14,520        17,262      (2,742   (15.9 )% 
                         

Total operating expenses

   $ 33,315      $ 41,548    $ (8,233   (19.8 )% 

Real estate taxes and property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. The decrease in real estate taxes and property operating expenses from 2009 to 2010 is primarily related to the deconsolidation of 9800 South Meridian and 18922 Forge Drive.

Manager and advisor fees relate to the fixed and variable management and advisory fees earned by the Manager and Advisor. Fixed fees increase or decrease based on changes in the NAV. NAV will be impacted by changes in the value of our properties and the related debt. Variable fees are calculated as a formula of cash flow generated from owning and operating the real estate investments and will fluctuate as future cash flows fluctuate. The decrease in Manager and Advisor fees from 2009 to 2010 relates mainly to a decrease in NAV and due to the Manager decreasing its fixed fee from 75 basis points to 10 basis points and electing to waive its portion of the variable based fee.

Our Fund level expenses in 2010 and 2009 were subject to the Expense Limitation Agreement with the Manager (See Note 8), which limits certain expenses to 0.75% of NAV. These expenses relate mainly to our compliance, administration related costs and Share offerings. We record Fund level expenses based on a calculation of 0.75% of NAV annually, calculated quarterly, limited to actual costs incurred by the Fund during the current quarter plus reimbursable expenses carried forward from prior periods. Expenses in excess of the 0.75% of NAV annually, calculated quarterly, will be carried forward for up to three years. As of June 30, 2010 and December 31, 2009, $2 and $0, respectively, of Fund level expenses were being carried forward by the Manager. The Expense Limitation Agreement is scheduled to expire on December 31, 2010.

Provision for doubtful accounts relates to receivables deemed as potentially uncollectible due to the age of the receivable or the status of the tenant. Increases in provision for doubtful accounts from 2009 to 2010 relate mainly to tenant bankruptcies and financial difficulties at some of our multi-tenant retail, office and apartment properties.

General and administrative expenses relate mainly to property expenses unrelated to property operations. The decrease in general and administrative expenses from 2009 to 2010 is mainly related to expensing preacquisiton costs due to the adoption of the authoritative guidance regarding acquisition costs as well as bank fees, franchise taxes and various property level legal services that occurred in 2009.

Net recovery of provision for impairment of real estate relate to the change in fair value of properties previously classified as held for sale which have now been placed in held for use.

Loss on extinguishment of debt relates to any prepayment penalty as well as the writeoff of unamortized financing fees on mortgage loans and other debt payables that were extinguished prior to their maturity date.

Depreciation and amortization expense will be impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation.

 

27


Table of Contents
     Comparable Real Estate Investments  
     Six Months
Ended
June 30, 2010
    Six Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Operating expenses:

         

Real estate taxes

   $ 5,262      $ 5,952    $ (690   (11.6 )% 

Property operating

     11,271        11,520      (249   (2.2 )% 

Provision for doubtful accounts

     410        167      243      145.5

General and administrative

     489        929      (440   (47.4 )% 

Net recovery of provision for impairment of real estate

     (1,580     —        (1,580   —     

Loss on extinguishment of debt

     73        —        73      —     

Depreciation and amortization

     14,520        16,270      (1,750   (10.8 )% 
                         

Total operating expenses

   $ 30,445      $ 34,838    $ (4,393   (12.6 )% 

 

     Operating Expenses Reconciliation
     Six  Months
Ended
June 30, 2010
   Six  Months
Ended
June 30, 2009

Total operating expenses:

     

Comparable real estate investments

   $ 30,445    $ 34,838

Non-comparable real estate investments

     6      1,916

Manager and advisor fees

     1,851      3,580

Fund level expenses

     1,013      1,214
             

Total operating expenses

   $ 33,315    $ 41,548

Real estate taxes expense at comparable real estate investments decreased by $690 for the six months ended June 30, 2010 compared to the same period of 2009 mainly due to decreases of $422 at the CHW Medical Office Portfolio and $255 at the Marketplace at Northglenn as a result of the properties being reassessed.

Property operating expenses at comparable real estate investments decreased at CHW Medical Office Portfolio by $427 mainly related to decreases in payroll costs for the property management company and less repairs and maintenance projects during the six months ended June 20, 2010 when compared to the six months ended June 30, 2009. The decrease also stems from a decrease at Cabana Beach San Marcos of $80 related to decreased water usage. The decreases are partially offset by an increase of $256 in utilities and other operating costs at Cabana Beach Gainesville due to an increase in occupancy.

The increase in provision for doubtful accounts at comparable real estate investments is mainly related to an increase in uncollectible accounts at the CHW Medical Office Portfolio of $275 due to collection difficulties for expense recoveries and tenant bankruptcies that occurred during the six months ended June 30, 2010 that did not occur in the same period of 2009.

General and administrative expenses at our comparable real estate investments decreased for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 due to the expensing of $324 at of pre-acquisition legal services related to the 2009 adoption of the authoritative guidance regarding acquisition costs, as well as a decrease of $123 at the CHW Medical Office Portfolio for various legal services and franchise taxes. The decreases were partially offset by a $48 increase at the Marketplace at Northglenn related to property level legal services for the six months ended June 30, 2010 as compared to the same period of 2009.

Net recovery of provision for impairment of real estate decreased by $1,580 for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 due to recovery of previously recorded impairment at 4001 North Norfleet Road, 105 Kendall Park Lane, and Georgia Door Sales Distribution Center. Impairment was recovered when these previously-classified held-for-sale assets were returned to held-for-use status during the six months ended June 30, 2010.

Loss on extinguishment of debt increased by a $73 due to the debt payoff at Georgia Door Sales Distribution Center during the six months ended June 30, 2010 as compared to the same period in 2009.

 

28


Table of Contents

The decrease in depreciation and amortization expense at comparable real estate investments for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 primarily relates to decreases of $951, $201, and $216 at the CHW Medical Office Portfolio, Campus Lodge Athens, and Campus Lodge Tampa, respectively, due to in-place lease assets and personal property becoming fully amortized during 2009. Additionally, 4001 North Norfleet Road, 105 Kendall Park Lane, and Georgia Door Sales Distribution Center, had decreases of $165, $73, and $59, respectively, primarily related to decreased amortization of these assets which were written down to fair value in 2009.

Other Income and Expenses

 

     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2010
    Six Months
Ended
June 30, 2009
    $
Change
    %
Change
 

Other income and (expenses):

        

Interest income

   $ 3      $ 89      $ (86   (96.6 )% 

Interest expense

     (17,528     (18,003     475      2.6

Equity in loss of unconsolidated affiliates

     (590     (5,266     4,676      88.8
                          

Total other income and (expenses)

   $ (18,115   $ (23,180   $ 5,065      21.9

Interest income decreased for the six months ended June 30, 2010 over 2009 as a result of significantly lower interest rates in 2010 and the expiration of the Marketplace at Northglenn ESTIP.

Interest expense decreased from 2009 to 2010 primarily due to lower principal balances on various loans that have amortized and the loan payoff of the Georgia Door Distribution Center. Interest expense includes the amortization of deferred finance fees of $307 and $305 for the six months ended June 30, 2010 and 2009, respectively. Also included in interest expense for the six months ended June 30, 2010 and 2009, as a net reduction, is amortization of debt premium and discount associated with the assumption of debt of $107.

Equity in loss of unconsolidated affiliates decreased by $4,676 primarily related to an impairment loss at Legacy Village of $4,857 recorded in 2009. In addition, equity in loss at Legacy Village decreased by $47 from equity loss of $151 for the six months ended June 30, 2009 to equity loss of $104 for the six months ended June 30, 2010. The decreased loss at Legacy Village was a result of increased percentage rents in 2010 as compared to 2009. Equity in the loss from 111 Sutter Street increased by $446 from equity loss of $258 for the six months ended June 30, 2009 to equity loss of $704 for the six months ended June 30, 2010. The increase in equity loss at 111 Sutter Street for six months ended June 30, 2010 was a result of lower minimum rents for newly-signed leases. As a result of the adoption of guidance related to variable interest entities on January 1, 2010, the six months ending June 30, 2010 is the initial period that 9800 South Meridian and 18922 Forge Drive have been accounted for as unconsolidated affiliates. For the six months ending June 30, 2010, the Fund recorded an equity loss of $0 from 9800 South Meridian as we are not required to fund losses in the investment in excess of our initial investment and equity income of $218 from 18922 Forge Drive which represents our allocation of net income from property operations.

Discontinued Operations

 

     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2010
   Six Months
Ended
June 30, 2009
   $
Change
    %
Change
 

Discontinued Operations:

          

Income from discontinued operations

   $ 1,511    $ 765    $ 746      97.5

Gain on sale of discontinued operations, net

     822      911      (89   (9.8 )% 
                        

Total income from discontinued operations

   $ 2,333    $ 1,676    $ 657      39.2

The increase of income from discontinued operations is primarily related to a net $1,562 recovery of previously-recorded impairment taken on properties classified as held for sale as of March 31, 2010. The authoritative guidance states that impairment charges for previously-impaired assets classified as held for sale may be recovered at subsequent measurement dates, not to be written above carrying cost. At March 31, 2010, it was determined that two assets had recovered impairment charges recognized at December 31, 2009.

The decrease of $89 in the gain on sale of discontinued operations related to the sale of Havertys and 25850 S. Ridgeland during the six months ended June 30, 2010 compared to the gain on sale of Hagemeyer Distribution Center in 2009.

 

29


Table of Contents

Current Share Price

The Current Share Price of the Common Stock (the “Current Share Price”) is established quarterly based on the following valuation methodology, which may be modified from time to time by our board of directors.

Net Asset Value Calculation. The NAV of the Fund is determined as of the end of each of the first three quarters of a fiscal year, within 45 calendar days following the end of such quarter. The Fund’s year-end NAV is determined after the completion of our year-end audit. NAV is determined as follows: (i) the aggregate fair value of (A) our interests in real estate investments (“Investments”) plus (B) all other assets of the Fund, minus (ii) the aggregate fair value of our indebtedness and other outstanding obligations as of the determination date.

We retained independent third-party real estate appraisal firms (the “Appraisal Firms”) that appraise each Investment not less than annually beginning one year after acquisition. During the first three quarters after acquisition, the Investment will be carried at capitalized cost and reviewed quarterly for material events at the property or market level that may require an adjustment of the Investment’s valuation.

For each of the three quarters following the independent appraisal of a particular Investment, we are responsible for determining the value of such Investment based on our review of the appraisal and material changes at the property or market level. We are also responsible for determining the value of the indebtedness related to each Investment beginning one year after acquisition of the encumbered property and on a quarterly basis thereafter.

Current Share Price Calculation. The Current Share Price equals the NAV as of the end of each quarter divided by the number of outstanding shares of all classes of common stock of the Fund at the end of such quarter.

The Current Share Price of the Common Stock is $52.17 as of June 30, 2010.

 

30


Table of Contents

Liquidity and Capital Resources

The Fund’s primary uses and sources of cash are as follows:

 

Uses

 

Sources

Short-term liquidity and capital needs such as:

 

•     Interest payments on debt

 

•     Distributions to shareholders

 

•     Fees payable to the Manager and the Advisor

 

•     Minor improvements made to individual properties that are not recoverable through expense recoveries or common area maintenance charges to tenants

 

•     General and administrative costs

 

•     Other Fund level expenses

 

•     Lender escrow accounts for real estate taxes, insurance, and capital expenditures

 

•     Operating cash flow, including the receipt of distributions of our share of cash flow produced by our unconsolidated real estate affiliates

 

•     Proceeds from secured loans collateralized by individual properties

 

•     Proceeds from construction loans

 

•     Sales of our Common Stock

 

•     Sales of real estate investments

 

•     Draws from lender escrow accounts

Longer-term liquidity and capital needs such as:

 

•     Acquisitions of new real estate

 

•     Expansion of existing properties

 

•     Tenant improvements and leasing commissions

 

•     Debt repayment requirements, including both principal and interest

 

•     Repurchases of our Common Stock

 

The sources and uses of cash for the six months ended June 30, 2010 and 2009 were as follows:

 

     Six Months
Ended
June 30, 2010
    Six Months
Ended
June 30, 2009
    $
Change
 

Net cash provided by operating activities

   $ 8,323      $ 9,037      $ (714

Net cash provided by investing activities

     44,813        8,910        35,903   

Net cash used in financing activities

     (57,125     (5,428     (51,697

Our net cash flows provided by operating activities were impacted by a decrease in net loss attributable to Excelsior LaSalle Property Fund, Inc. of $10,808 primarily due to decreases in manager and advisor fees of $1,729, depreciation and amortization expense of $2,742 and equity in loss of unconsolidated affiliates of $4,676. Our working capital, which consists of cash, tenant accounts receivable and prepaid and other assets less accounts payable and accrued expenses, accrued interest and accrued real estate taxes, was impacted between December 31, 2009 and June 30, 2010 by the following items:

 

   

a decrease in accounts payable and accrued expenses of $2,252 mainly due to the timing of payments in addition to a decrease in accrued real estate taxes of $718 due to timing of payments and

 

   

9800 South Meridian and 18922 Forge Drive no longer being consolidated as of January 1, 2010.

Cash provided by investing activities increased as a result of sales proceeds received from Havertys Furniture and 25850 S. Ridgeland of $53,382 offset by an increase in loan escrow funding for the six months ended June 30, 2010 of $4,755. Cash used in financing activities increased for the six months ended June 30, 2010 over the same period in 2009 as a result of (i) an increase in payments on mortgage notes and other debt payable of $38,862, (ii) an increase in net payments on the credit facility of $14,025, and (iii) a decrease in Share issuances of $5,991 offset by a decrease in distributions to shareholders of $7,217.

 

31


Table of Contents

Financing

We have relied primarily on fixed-rate financing, locking in what were favorable spreads between real estate income yields and mortgage interest rates and have tried to maintain a balanced schedule of debt maturities. We attempted to limit overall portfolio leverage to 65% at the time we made our investments (portfolio leverage is calculated as our share of the current property debt balance divided by the fair value of all our real estate investments). Declining commercial property values have caused our portfolio leverage to increase above our target leverage ratio of 65%. Based upon the valuation declines in our portfolio, we estimate our current loan-to-value to be approximately 85%.

The following Consolidated Debt table provides information on the outstanding principal balances and the weighted average interest rate at June 30, 2010 and December 31, 2009 for such debt. The Unconsolidated Debt table provides information on our pro rata share of debt associated with our unconsolidated joint ventures.

Consolidated Debt

 

     June 30, 2010     December 31, 2009  
     Principal
Balance
   Weighted
Average
Interest Rate
    Principal
Balance
   Weighted
Average
Interest Rate
 

Fixed

   $ 597,035    5.58   $ 666,728    5.59

Variable

     10,975    4.75     31,111    2.06
                          

Total

   $ 608,010    5.57   $ 697,839    5.43

Unconsolidated Debt

 

     June 30, 2010     December 31, 2009  
     Principal
Balance
   Weighted
Average
Interest Rate
    Principal
Balance
   Weighted
Average
Interest Rate
 

Fixed

   $ 105,135    5.71   $ 88,688    5.60

Variable

     12,317    3.85     —      —     
                          

Total

   $ 117,452    5.51   $ 88,688    5.60

We have placed mostly fixed-rate financing with maturities through 2027. At June 30, 2010, our term loan with PNC Bank, National Association had a floating rate which bears interest at LIBOR plus 3.75%, with a LIBOR base of 1.00% (4.75% at June 30, 2010). At December 31, 2009, we had one floating rate loan at LIBOR plus 160 basis points (1.83% at December 31, 2009) and a borrowing on our line of credit at 2.24%.

Line of Credit / Term Loan

On February 19, 2010, we replaced our existing line of credit with a $17,000 term loan with a $6,000 letter of credit sub-limit provided by PNC Bank, National Association. The term loan bears interest at LIBOR plus 3.75%, with a LIBOR floor of 1.00%. The term loan requires quarterly principal amortization of $2,125 and can be prepaid without penalty. The term loan matures on February 19, 2012.

We had $10,975 borrowed at 4.75% at June 30, 2010. As of June 30, 2010, we were in compliance with the terms of our term loan.

Our previous $50,000 line of credit agreement, which expired in February 2010, was provided by PNC Bank, National Association BMO Capital Markets Financing, Inc. and Bank of America, N.A. (“BANA”), an affiliate of the Manager. The line of credit carried an interest rate that approximates LIBOR plus 1.50% to 2.00% based on certain covenant provisions or a base rate which was the greater of (i) the interest rate per annum announced from time to time by the lender, as its prime rate or (ii) the Federal Funds effective rate plus 0.75%. We had $17,500 borrowed at 2.24% at December 31, 2009.

The monies borrowed on our term loan will be repaid from two sources:

 

   

cash flow generated by the Fund Portfolio, and

 

   

sales of our real estate investments.

 

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Recent Events and Outlook

Given the uncertain economic climate and extraordinary conditions in the commercial real estate industry, management has made it a priority to implement a cash conservation strategy designed to strengthen our balance sheet and protect the value of the Fund’s assets. Through the establishment of cash reserves, management aims to equip the Fund with sufficient resources to address the portfolio’s fluctuating working capital needs, future capital expenditures, existing loan amortizations, and nearer-term debt maturities until market conditions stabilize. Several actions have been taken toward this objective including reductions in discretionary expenditures, the suspension of dividend payments and the suspension of the redemption of Shares through tender offers, and selected property sales. The combination of suspending dividends and Share redemptions, coupled with the proceeds generated from property sales, has strengthened the Fund’s balance sheet and moved the Fund into an improved cash position: at June 30, 2010, the Fund had accumulated a cash balance of $29,800 and restructured its line of credit into a term loan with a current balance of $10,975, which now expires in February 2012.

For the remainder of 2010, we will continue to monitor the broader economic environment and, as best we can, seek to mitigate the impacts of weakening property fundamentals on our portfolio. The duration and magnitude of the recent recession exceeded expectations and historical precedents causing even the most conservative and defensive investment strategies to underperform. We will continue to be responsive to changes in market conditions that may require us to adopt a more defensive posture in the management of our balance sheet. These defensive tactics may include, but not be limited to, disposition of non-strategic assets, renegotiation of debt and joint venture agreements, establishing cash reserves for future capital needs, continuing the suspension of dividend payments and the suspension of the redemption of Shares through tender offers.

While we historically provided limited liquidity to our stockholders by conducting tender offers, we did not and do not guarantee that sufficient cash will be available at any particular time to fund repurchases of our Shares. In this regard, we did not conduct a tender offer during the year ended December 31, 2009, and, in order to preserve cash in light of the current market environment, we do not intend to repurchase Shares for the immediate future. The timing of future tender offers, if any, will be at the discretion of our board of directors, based on, among other things, the Fund’s need for liquidity.

The Fund is considering additional property dispositions as a means of generating cash. Selective dispositions will be considered in situations where a fair and reasonable value may be achieved and the transaction furthers the Fund’s strategic goals. The Fund will consider a disposition of non-strategic properties when it creates liquidity, deleverages the Fund and reduces risk (debt maturity and tenant lease related risk). The Fund does not intend to participate in distressed asset sales that negatively impact the Fund’s longer-term performance.

The Fund analyzed its options to access additional capital to assist it in reducing leverage, restoring dividends and/or providing an effective liquidity mechanism to investors. However, under current market conditions, management believes it will be difficult to raise capital on terms that are beneficial to existing stockholders.

On February 19, 2010, the Fund obtained a new two year $17,000 amortizing term loan to replace the expiring working capital line of credit. The term loan allows the Fund to retain cash reserves that will be used to fund a portion of our capital expenditures, mortgage principal amortization and other working capital requirements. The current balance on the term loan is $10,975.

On March 12, 2010, the Manager proposed and our board of directors approved a reduction in the annual fixed fee paid to the Manager from 0.75% of NAV to 0.10% of NAV, which will result in a reduction of the total annual fixed fee paid by us to the Advisor and Manager from 1.5% of NAV to 0.85% of NAV. In addition, the Manager will forgo its participation in the variable fee and the aggregate annual variable fee will be reduced by that amount. The fee reductions were retroactive to January 1, 2010 and are for an indefinite period. The Manager, with the prior approval of our board of directors, may discontinue either waiver at any time. Otherwise, the Agreement continues in effect in all material respects.

On April 15, 2010, the Fund sold Havertys Furniture and 25850 S. Ridgeland for a combined sales price of $54,060. In conjunction with the sale of the properties, the Fund paid off the mortgage loans associated with Havertys Furniture, 25850 S. Ridgeland and Georgia Door Sales Distribution Center, which as of the date of sale, totaled approximately $46,924. As a result of these sales and payoffs of the mortgage notes payable the Fund’s cash balance increased by approximately $5,730 and Georgia Door Sales Distribution Center is now owned free and clear of any debt. Also on April 15, 2010, the Fund removed Georgia Door Sales Distribution Center, 105 Kendall Park Lane, and 4001 North Norfleet Road from held for sale status.

Contractual Cash Obligations and Commitments

The CHW Medical Office Portfolio mortgage debt requires that we deposit an annual amount of $855, up to a cumulative maximum of $1,900, into an escrow account to fund future tenant improvements and leasing commissions. The amount of the escrow funded by each of the fifteen buildings in the portfolio is capped individually pursuant to each loan agreement. At June 30, 2010, we had approximately $1,318 deposited in this escrow, and we expect to fund a net of approximately $582 during the remainder of 2010. Additionally, we are required to deposit approximately $151 per year into an escrow account to fund capital expenditures. At June 30, 2010, our capital account escrow account balance was $404. These escrow accounts allow us to withdraw funds as we incur costs

 

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related to tenant improvements, leasing commissions and capital expenditures. Additionally, monthly we are required to fund an escrow account for the future payment of real estate taxes and insurance costs in an amount equal to 1/12th of the estimated insurance premium and real estate taxes. At June 30, 2010, our insurance and real estate tax escrow balance was $396. We expect to fund the escrow requirements with operating cash flows generated by the portfolio.

The mortgage loan collateralized by Metropolitan Park North required that on or before April 1, 2009 we post a $3,900 reserve in escrow to cover costs of certain tenant improvements, leasing commissions, rent concessions, and lost rental income in connection with re-leasing space currently occupied by Nordstrom, a major anchor tenant of the building. We satisfied this reserve requirement with a letter of credit which was posted on March 23, 2009. If Nordstrom’s provides written notice of its intent to exercise its lease renewal option by September 30, 2010, pursuant to the loan agreement, the lender is obligated to return the $3,900 letter of credit to us. If Nordstrom’s fails to provide notice of its renewal by September 30, 2010, we are obligated to post an additional $2,800 reserve into the escrow. While we have received no official notice from Nordstrom and they are not obligated to provide us with such notice, we do not expect Nordstrom’s to renew their lease at Metropolitan Park North. The lender will return the reserve to us if the following conditions are met: (1) no default has occurred and remains outstanding; and (2) either Nordstrom’s has exercised its renewal options or the space has been re-leased to a new tenant(s). If required, the Fund plans on satisfying the additional $2,800 reserve requirement with cash on hand.

The mortgage loan collateralized by Monument IV at Worldgate requires that, should the tenant not renew its lease or the space not be leased to a new tenant(s), the Fund must reserve all rental payments received from the tenant at the earlier of September 1, 2010 or upon the tenant delivering a notice of its intent not to renew the lease. The Fund can avoid reserving the rental payments by delivering a letter of credit to the lender of $2,400 on September 1, 2010. The Fund expects to fund the reserve, if required to do so, from the rental payments received from the tenant. The lender will return the reserve to the Fund if the following conditions are met: (1) no default has occurred and remains outstanding; and (2) either the tenant has renewed its lease or the space has been re-leased to a new tenant(s).

The debt associated with five of the Fund’s student-oriented apartment communities requires that we deposit a total of $224 per year into a replacement reserve to fund future furniture replacement costs. As of June 30, 2010, we had deposited approximately $192 into this escrow for 2010 and we expect to fund a net amount of approximately $32 during the remainder of 2010.

As part of the lease with our single tenant at the 4001 North Norfleet Road property, we provided the tenant a right to expand the current building by up to 286,000 square feet of space. If the tenant exercises this right, we will be obligated to construct this expansion space. The tenant has the right to notify us of its desire to expand at any time prior to February 28, 2016, (the end of the ninth year of the lease), or if the lease is extended, until any time prior to the end of the fourth year of any extension. As of June 30, 2010, we have not received an expansion notice from the tenant.

Off Balance Sheet Arrangements

Letters of credit are issued in most cases as collateral for mortgage debt on properties we own. At June 30, 2010 and December 31, 2009, we had approximately $5,580 in outstanding letters of credit which were not recognized on our consolidated balance sheets. We have no other off balance sheet arrangements.

REIT Requirements

To remain qualified as a real estate investment trust for federal income tax purposes, we must distribute to shareholders or pay tax on 100% of our capital gains and at least 90% of ordinary taxable income.

The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of our board of directors regarding distributions:

 

   

scheduled increases in base rents of existing leases;

 

   

changes in minimum base rents and/or overage rents attributable to replacement of existing leases with new or renewal leases;

 

   

changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties;

 

   

necessary capital improvement expenditures or debt repayments at existing properties; and

 

   

our share of distributions of operating cash flow generated by the unconsolidated real estate affiliates, less management costs and debt service on additional loans that have been or will be incurred.

We anticipate that operating cash flow, sales of real estate investments, potential new debt or equity from our future equity offerings, or refinancings will provide adequate liquidity to conduct our operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to our stockholders in accordance with the requirements of the Internal Revenue Code.

 

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Item 3. Qualitative and Quantitative Disclosures about Market Risk.

We are subject to market risk associated with changes in interest rates both in terms of our variable-rate debt and the price of new fixed-rate debt for acquisitions or refinancing of existing debt. As of June 30, 2010, we had consolidated debt of $608,010, which included $10,975 of variable-rate debt. Including the $1,429 net discount on the assumption of debt, we had consolidated debt of $606,581 at June 30, 2010. None of the variable-rate debt was subject to interest rate cap agreements. A 25 basis point movement in the interest rate on the $10,975 of variable-rate debt would have resulted in an approximately $27 annualized increase or decrease in consolidated interest expense and cash flow from operating activities.

As of December 31, 2009, we had consolidated debt of $697,839, which included $31,111 of variable-rate debt. Including the $1,322 net discount on the assumption of debt, we had consolidated debt of $696,517 at December 31, 2009. None of the variable-rate debt was subject to interest rate cap agreements. A 25 basis point movement in the interest rate on the $31,111 of variable-rate debt would have resulted in an approximately $78 annualized increase or decrease in consolidated interest expense and cash flow from operating activities.

As of June 30, 2010, we had unconsolidated debt of $117,452, which included $12,317 of variable-rate debt. As of December 31, 2009 all of our Unconsolidated Properties were financed with fixed-rate debt. A 25 basis point movement in the interest rate on the $12,317 of variable-rate debt would have resulted in an approximately $31 annualized increase or decrease in equity in loss of unconsolidated affiliates and cash flow from operating activities.

We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will impact the fair value of our fixed-rate financing. To determine fair market value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates, assuming the debt is outstanding through maturity and considering the collateral. At June 30, 2010, the fair value of our mortgage notes payable and other debt payable was estimated to be approximately $46,845 lower than the carrying value of $606,581. If treasury rates were 25 basis points higher at June 30, 2010, the fair value of our mortgage notes payable and other debt payable would have been approximately $52,283 lower their the carrying value.

At December 31, 2009, the fair value of our mortgage notes payable and other debt payable was estimated to be approximately $85,067 lower than the carrying value of $696,517. If treasury rates were 25 basis points higher at December 31, 2009, the fair value of our mortgage notes payable and other debt payable would have been approximately $91,240 lower than their carrying value.

In August 2007, we purchased Railway Street Corporate Centre located in Calgary, Canada. For this investment, we use the Canadian dollar as the functional currency. When preparing consolidated financial statements, assets and liabilities of foreign entities are translated at the exchange rates at the balance sheet date, while income and expense items are translated at weighted average rates for the period. Foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheet and foreign currency translation adjustment on the Consolidated Statement of Operations and Comprehensive Income (Loss).

As a result of our Canadian investment, we are subject to market risk associated with changes in foreign currency exchange rates. These risks include the translation of local currency balances of our Canadian investment and transactions denominated in Canadian dollars. Our objective is to control our exposure to these risks through our normal operating activities. For the six months ended June 30, 2010, we recognized a foreign currency translation loss of $154. At June 30, 2010, a 10% unfavorable exchange rate movement would have increased our foreign currency translation loss by approximately $1,639 to a foreign currency translation loss of approximately $1,793.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on management’s evaluation as of June 30, 2010, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings.

We are involved in various matters of litigation arising in the normal course of business. While we are unable to predict with any certainty the amounts involved, management is of the opinion that, when such litigation is resolved, our resulting net liability, if any, will not have a significant effect on our consolidated financial position or results of operations.

 

Item 1A. Risk Factors.

The most significant risk factors applicable to the Fund are described in Item 1A of our 2009 Form 10-K. There have been no material changes from those previously-disclosed risk factors, other than the addition of the following risk factor:

The mortgage notes associated with 9800 South Meridian and 18922 Forge Drive are in default, and the lenders could call for the immediate payment of the outstanding balances on those notes.

As of June 30, 2010, there were mortgage notes payable on the 9800 South Meridian and 18922 Forge Drive in the amounts of $13,686 and $18,993, respectively. We have a 90% interest in each of these Unconsolidated Properties. The mortgage notes payable associated with 9800 South Meridian and 18922 Forge Drive are non-recourse obligations of the Fund but are guaranteed by an affiliate of our operating partner in these properties (the “Guarantor”). As of June 30, 2010, the Guarantor had not complied with certain financial reporting requirements of these loan agreements, which has resulted in these mortgage notes payable being in default. As a result of these defaults, the lenders on these properties can call for the immediate payment of the outstanding balances. If the lenders on these properties did call for the immediate payment of the outstanding balances on these properties, we may not have sufficient liquidity to pay the outstanding balances or may elect not to pay the outstanding balances on these loans, which could result in the lender foreclosing on these properties. If this were to occur, we could lose our entire investment in those properties which as of June 30, 2010, is $1,415. As of the filing date of this 10-Q, the lenders have not demanded immediate payment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

 

Item 3. Defaults Upon Senior Securities.

Not Applicable.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

Not Applicable.

 

Item 6. Exhibits.

The Exhibit Index that immediately follows the signature page to this Form 10-Q is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements 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.

 

    EXCELSIOR LASALLE PROPERTY FUND, INC.
Date: August 5, 2010     By:   /s/    JAMES D. BOWDEN        
        James D. Bowden
        President and Chief Executive Officer
Date: August 5, 2010     By:   /s/    STEVEN SUSS        
        Steven Suss
        Chief Financial Officer (principal financial officer)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

  3.1(1)   Amended and Restated Articles of Incorporation of Excelsior LaSalle Property Fund, Inc.
  3.2(1)   Amended and Restated Bylaws of Excelsior LaSalle Property Fund, Inc.
  4.1(1)   Form of Subscription Agreement for Excelsior LaSalle Property Fund, Inc.
31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1) Incorporated by reference to the same numbered exhibit previously filed with the Fund’s Registration Statement on Form 10 filed with the SEC on April 28, 2006 (SEC File No. 0-51948).

 

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