WELLS MID-HORIZON VALUE-ADDED FUND I LLC - FORM 10-Q

Attached files

file	filename
EX-10.1 - SIXTH CONSOLIDATED AMENDATORY AGREEMENT - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex101.htm
EX-10.3 - FOURTH AMENDMENT TO OPEN-END MORTGAGE - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex103.htm
EX-31.1 - SECTION 302 PEO CERTIFICATION - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex311.htm
EX-32.1 - SECTION 906 PEO & PFO CERTIFICATIONS - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex321.htm
EX-31.2 - SECTION 302 PFO CERTIFICATION - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex312.htm
EX-10.2 - FOURTH AMENDMENT TO MORTGAGE - WELLS MID-HORIZON VALUE-ADDED FUND I LLC	dex102.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2010

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 000-53626

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

(Exact name of registrant as specified in its charter)


Georgia		20-3192853
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6200 The Corners Pkwy., Norcross, Georgia		30092-3365
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code		(770) 449-7800

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [Not yet applicable to registrant.] Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated file,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

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

As of July 31, 2010, there were 51,854 shares of investor member interests outstanding.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Wells Mid-Horizon Value-Added Fund I, LLC (“Wells VAF I,” “we,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Specifically, we consider, among others, statements concerning future operating results and cash flows, our ability to meet future obligations, and the amount and timing of any future distributions to investor members to be forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to members, and maintain the value of our real estate properties, may be significantly hindered.

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•

We have utilized debt financing from third parties to acquire properties and fund re-leasing costs and capital expenditures. Thus, our cash from operations will be needed to make debt service payments and, as a result, cash available for engaging in value-enhancing strategies will be reduced. Restrictive covenants under certain loan documents currently preclude us from declaring or paying dividends or other distributions to our investor members. In addition, restrictive covenants under certain loan documents require that net proceeds from the sale of certain properties be applied against the outstanding balance of the respective loan prior to funding any capital requirements or operating needs of the portfolio. Further, all of our properties serve as collateral for such loans. If we are unable to make any loan payments and are found to be in default under the terms of such loans, the lender could foreclose on any such properties and seek to obtain a judgment against us for any amount still owing to the lender under such loans after the foreclosure and sale by the lender of such properties. Any such default, foreclosure, or judgment would have a material adverse effect on our financial condition and results of operations.

•

The constriction in the U.S. credit markets could impact our ability to refinance our existing debt and the terms that we are able to achieve in doing so. A decline in our borrowing capacity could negatively impact (i) our ability to offer allowances or other concessions to prospective tenants at prevailing market rates as we seek to lease currently vacant space and/or to renew existing leases and (ii) our ability to fund the operations of the portfolio. Further, if we are unable to refinance our existing debt, we may have to accelerate the disposition of one or more of our properties at a pricing level less than originally envisioned.

•

The current economic conditions and their impact on office market conditions may require that we hold individual assets longer than originally projected in order to achieve the best disposition pricing for our investor members.

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•

Real estate investments are subject to general downturns in the economy as well as downturns in specific geographic areas. We cannot predict what the occupancy level will be in a particular building or that any tenant will remain solvent. We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our current and future tenants.

•

The management and other key personnel of our manager, whose services are essential to Wells VAF I, will face a conflict in allocating their time and other resources between Wells VAF I and the other Wells real estate programs and activities in which they are involved. Failure of our manager to devote sufficient time or resources to our operations could result in reduced returns to our members.

•

We will pay certain prescribed fees to our manager and its affiliates regardless of the quality of services provided.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

TABLE OF CONTENTS


			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements	5

		Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009	6

		Statements of Operations for the Three Months and Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	7

		Statements of Members’ Capital for the Year Ended December 31, 2009 and the Six Months Ended June 30, 2010 (unaudited)	8

		Statements of Cash Flows for the Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	9

		Condensed Notes to Financial Statements (unaudited)	10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

	Item 4T.	Controls and Procedures	27

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	27

	Item 1A.	Risk Factors	27

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 3.	Defaults Upon Senior Securities	28

	Item 4.	(Removed and Reserved)	28

	Item 5.	Other Information	28

	Item 6.	Exhibits	28

Page 4

PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

The information furnished in Wells VAF I’s accompanying balance sheets and consolidated statements of operations, members’ capital, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements. The accompanying financial statements should be read in conjunction with the notes to Wells VAF I’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and in Wells VAF I’s Annual Report on Form 10-K for the year ended December 31, 2009. Wells VAF I’s results of operations for the three months and six months ended June 30, 2010 are not necessarily indicative of the operating results expected for the full year.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

BALANCE SHEETS

ASSETS


	(Unaudited) June 30, 2010		December 31, 2009
REAL ESTATE, AT COST:
Land	$	9,597,022	$	9,597,022
Building and improvements, less accumulated depreciation of $3,656,954 and $2,876,314 as of June 30, 2010 and December 31, 2009, respectively		46,125,435		44,287,103
Intangible lease assets, less accumulated amortization of $1,328,508 and $5,745,732 as of June 30, 2010 and December 31, 2009, respectively		1,963,845		2,539,615
Construction in progress		106,500		206,605

Total real estate assets		57,792,802		56,630,345

Cash and cash equivalents		2,434,302		2,843,397
Tenant receivables		1,173,364		355,152
Other assets		3,253,028		210,418
Deferred financing costs, less accumulated amortization of $68,943 and $17,262 as of June 30, 2010 and December 31, 2009, respectively		498,501		153,572
Intangible lease origination costs, less accumulated amortization of $1,135,250 and $2,485,636 as of June 30, 2010 and December 31, 2009, respectively		1,484,059		1,838,588
Deferred leasing costs, less accumulated amortization of $369,403 and $215,291 as of June 30, 2010 and December 31, 2009, respectively		3,461,944		2,876,867

Total assets	$	70,098,000	$	64,908,339

LIABILITIES AND MEMBERS’ CAPITAL
LIABILITIES:
Notes payable	$	30,175,622	$	23,467,934
Accounts payable, accrued expenses and accrued capital expenditures		1,857,162		1,640,109
Due to affiliates		198,550		34,528
Deferred income		425,637		638,827
Intangible lease liabilities, less accumulated amortization of $162,623 and $415,181 as of June 30, 2010 and December 31, 2009, respectively		223,849		278,897

Total liabilities		32,880,820		26,060,295

Commitments and Contingencies

MEMBERS’ CAPITAL:
Member Shares, $1,000 par value; 150,000 shares authorized; 51,854 shares issued and outstanding		37,217,180		38,848,044

Total liabilities and members’ capital	$	70,098,000	$	64,908,339

See accompanying notes.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

STATEMENTS OF OPERATIONS


	(Unaudited) Three Months Ended June 30,				(Unaudited) Six Months Ended June 30,
	2010		2009		2010		2009
REVENUES:
Rental income	$1,422,148		$1,369,133		$2,819,873		$2,712,569
Tenant reimbursements	528,486		335,365		951,930		719,726

Total revenues	1,950,634		1,704,498		3,771,803		3,432,295

EXPENSES:
Property operating costs	1,080,930		743,639		1,914,459		1,574,722
Asset and property management fees:
Related-party	130,572		129,619		258,145		259,238
Other	27,893		26,504		58,303		60,058
Depreciation	413,328		334,674		780,640		668,012
Amortization	392,451		699,794		1,005,497		1,518,099
General and administrative expenses	200,493		197,193		429,815		436,360

Total expenses	2,245,667		2,131,423		4,446,859		4,516,489

REAL ESTATE OPERATING LOSS	(295,033	)	(426,925	)	(675,056	)	(1,084,194	)

OTHER INCOME (EXPENSE):
Interest and other income	103		0		132		0
Interest expense	(545,935	)	(212,346	)	(955,940	)	(415,463	)

TOTAL OTHER INCOME (EXPENSE)	(545,832	)	(212,346	)	(955,808	)	(415,463	)

NET LOSS	$(840,865	)	$(639,271	)	$(1,630,864	)	$(1,499,657	)

NET LOSS PER WEIGHTED-AVERAGE SHARE OF MEMBERS’ INTERESTS	$(16.22	)	$(12.33	)	$(31.45	)	$(28.92	)


WEIGHTED-AVERAGE SHARES OF MEMBERS’ INTERESTS OUTSTANDING	51,854		51,854		51,854		51,854

See accompanying notes.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

STATEMENTS OF MEMBERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2009

AND THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)


	Sponsoring Member		Investor Members’ Interests				Total Members’ Capital
	Sponsoring Member		Shares	Amount			Total Members’ Capital
Members’ Capital as of December 31, 2008	$	959,727	51,854	$	40,760,400		$	41,720,127

Net loss		0	0		(2,872,083	)		(2,872,083	)

Members’ Capital as of December 31, 2009		959,727	51,854		37,888,317			38,848,044

Net loss		0	0		(1,630,864	)		(1,630,864	)

Members’ Capital as of June 30, 2010	$	959,727	51,854	$	36,257,453		$	37,217,180

See accompanying notes.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

STATEMENTS OF CASH FLOWS


	(Unaudited) Six Months Ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,630,864	)	$	(1,499,657	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		780,640			668,012
Amortization of deferred financing costs		155,311			121,293
Other amortization		1,029,363			1,516,647
Changes in assets and liabilities:
Increase in tenant receivables		(818,212	)		(56,796	)
(Increase) decrease in other assets		(1,310,261	)		40,116
(Decrease) increase in accounts payable and accrued expenses		(199,598	)		181,421
Increase (decrease) in due to affiliates		152,584			(6,836	)
Decrease in deferred income		(213,190	)		(101,744	)

Net cash (used in) provided by operating activities		(2,054,227	)		862,456

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate		(160,555	)		(230,479	)
Investment in real estate related deposits		(4,297,216	)		0
Payment of deferred leasing costs		(97,340	)		(94,746	)

Net cash used in investing activities		(4,555,111	)		(325,225	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs paid		(507,445	)		(24,535	)
Proceeds from notes payable		8,150,000			2,500,000
Repayments of notes payable		(1,442,312	)		(400,000	)

Net cash provided by financing activities		6,200,243			2,075,465

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(409,095	)		2,612,696

CASH AND CASH EQUIVALENTS, beginning of period		2,843,397			1,104,340

CASH AND CASH EQUIVALENTS, end of period	$	2,434,302		$	3,717,036


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Investment in real estate funded with deposit accounts included in other assets	$	1,944,135		$	0

Payment of deferred leasing costs funded with deposit accounts included in other assets	$	620,732		$	0

Accrued capital expenditures	$	489,139		$	10,609

Accrued deferred leasing costs	$	65,963		$	184,983

See accompanying notes.

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WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

CONDENSED NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2010 (unaudited)

1.	ORGANIZATION AND BUSINESS

Wells Mid-Horizon Value-Added Fund I, LLC (“Wells VAF I”) was organized as a Georgia limited liability company on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties, and liquidating such investments over a period of three to five years following acquisition. While Wells VAF I believes that it can complete its leasing efforts and sell the assets in the portfolio within the projected time frame, Wells VAF I acknowledges that the current economic conditions and their impact on office market conditions may require that it hold assets longer than originally projected in order to achieve the best disposition pricing for the investor members. The term of Wells VAF I shall continue until the earlier of December 31, 2020, or the filing of a Certificate of Termination.

Wells Management Company, Inc. (“Wells Management”) is the sponsoring member of Wells VAF I and has the exclusive authority to conduct the day-to-day and overall direction and supervision of the business and affairs of Wells VAF I pursuant to an operating agreement. Wells Management has contributed $1,000,000 to Wells VAF I for a subordinated interest therein. Wells Investment Management Company, Inc. (“WIM”), a wholly owned subsidiary of Wells Management, has been appointed by Wells Management to serve as the manager of Wells VAF I. In addition, Wells VAF I and WIM have entered into an agreement (the “Advisory Agreement”), under which WIM performs certain key functions on behalf of Wells VAF I, including, but not limited to, the investment of capital proceeds and management of day-to-day operations.

On September 15, 2005, Wells VAF I commenced an offering of up to 150,000 shares of investor member interests under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act. Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. Its offering terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests resulting in gross offering proceeds of approximately $51,854,000. After deductions for payments of acquisition fees of approximately $1,037,000; selling commissions, discounts, and dealer-manager fees of approximately $2,852,000; and other offering expenses of approximately $259,000; Wells VAF I received net offering proceeds of approximately $47,706,000. As of December 31, 2009, all equity proceeds raised from the sale of investor member interests had been utilized to fund property acquisitions and capital expenditures. No public market exists for the shares of investor member interests and none is expected to develop.

Wells VAF I’s investment policy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above market rates, and/or benefiting from favorable market conditions.

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During the periods presented, Wells VAF I owned direct interests in the following properties:


	% Leased as of June 30, 2010
1. Nathan Lane Building (Acquired September 20, 2006) A five-story office building located in Plymouth, Minnesota	45	%

2. Park Lane Building (Acquired January 5, 2007) A five-story office building and an eight-acre parcel of land containing a parking lot located in Pittsburgh, Pennsylvania	100	%

3. Commerce Street Building (Acquired December 14, 2007) A four-story office building and two floors of a parking deck located in Nashville, Tennessee	76	%

4. Parkway at Oak Hill Buildings (Acquired October 15, 2008) Two separate two-story office buildings located in Austin, Texas	64	%

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of Wells VAF I have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of WIM, Wells VAF I’s manager, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly and consistently present the results for these periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in Wells VAF I’s Annual Report on Form 10-K for the year ended December 31, 2009.

Fair Value Measurements

Wells VAF I estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures, which became effective for financial assets and liabilities on January 1, 2008 and for non-financial and nonrecurring assets and liabilities on January 1, 2009. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:

Level 1 –

Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.

Level 2 –

Assets and liabilities valued based on observable market data for similar instruments.

Level 3 –

Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would consider.

As of June 30, 2010 and December 31, 2009, the carrying value of the Bank of America Loan and A10 Loans (see Note 3 where defined) approximated their fair value. In connection with negotiating the terms of the A10

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Loans executed on February 24, 2010 and the amended terms of the Bank of America Loan for the amendment executed on May 24, 2010, Wells VAF I ensured that the contractual terms of these facilities were consistent with those currently offered for similar facilities with similar collateral bases. See Note 3 regarding specific terms of the Bank of America Loan and A10 Loans.

Other Assets

Other assets are primarily comprised of escrow accounts held by lenders to fund tenant improvement projects and pay future real estate taxes, prepaid taxes, prepaid insurance, and nontenant receivables. Prepaid expenses and other assets will be expensed as incurred. Management assesses the collectability of other assets on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. No such allowances have been recorded as of June 30, 2010 and December 31, 2009.

Income Taxes

Wells VAF I is not subject to federal or state income taxes; therefore, none have been provided for in the accompanying financial statements. The members are required to include their respective shares of profits and losses in their individual income tax returns, regardless of whether any cash distributions were made during the respective period.

Allocation of Profits and Losses

Wells VAF I allocates profits or losses for each allocation period to the investor members in proportion to their respective percentage interests in an amount not to create a deficit capital balance.

Distribution of Net Cash Flow

Net cash flow, as defined in the operating agreement, is distributed to the members in the order and priority that follows:

•

First, to pay the following returns on capital:

•

First, to the investor members up to a 10% per annum compounded return on their capital contributions during the offering period;

•

Second, to the investor members in proportion to their percentage interests, as defined, until each investor member receives a 10% per annum compounded return on their capital contributions for the period following the offering period;

•

Third, to Wells Management up to a 10% per annum compounded return on its capital contribution;

•

Second, to the investor members in proportion to their percentage interests until each investor member has received $1,000 per share;

•

Third, to Wells Management until it has received its capital contribution; and

•

Fourth,

•

To Wells Management in the amount of 20% of all distributable proceeds, less any disposition fees previously paid to Wells Management, of which Wells Management has agreed to pay up to 50% of any such amount received to broker/dealers who participated in its private placement offering; and

•

The remainder to the investor members in accordance with their percentage interests.

Recent Accounting Pronouncement

In January 2010, the Financial Accounting Standards Board (the “FASB”) clarified previously issued GAAP and issued new requirements related to Accounting Standards Codification Topic Fair Value Measurements and Disclosures (“ASU 2010-6”). The clarification component includes disclosures about inputs and valuation

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techniques used in determining fair value, and providing fair value measurement information for each class of assets and liabilities. The new requirements relate to disclosures of transfers between the levels in the fair value hierarchy, as well as the individual components in the rollforward of the lowest level (Level 3) in the fair value hierarchy. This change in GAAP became effective for Wells VAF I beginning January 1, 2010, except for the provision concerning the rollforward of activity of the Level 3 fair value measurement, which will become effective for Wells VAF I on January 1, 2011. The adoption of ASU 2010-6 did not have a material impact on Wells VAF I’s financial statements or disclosures.

3.	NOTES PAYABLE

Bank of America Loan

Wells VAF I is party to a $23.5 million term loan with Bank of America National Association (“Bank of America”), which had an outstanding balance of approximately $22.0 million as of June 30, 2010 and is scheduled to mature on November 30, 2010 (the “Bank of America Loan”). The Nathan Lane Building and Park Lane Building have been pledged as collateral against the Bank of America Loan. On May 24, 2010, Wells VAF I entered into the Sixth Consolidated Amendatory Agreement (the “Sixth Amendment”) with Bank of America, which extended the maturity date from May 30, 2010 to November 30, 2010 and reduced the required monthly principal payment from $16,033 to $15,048. The Bank of America Loan contains restrictive covenants that prohibit Wells VAF I from declaring or paying dividends or other distributions to its investor members while the Bank of America Loan is outstanding. In addition, all net cash flows from the collateralized properties must be used to service the Bank of America Loan, which includes monthly principal payments in the amount of $15,048 and monthly interest payments at a rate of one-month London Interbank Offered Rate (“LIBOR”), plus a margin of 4.50%. All remaining cash flow from the collateralized properties will be applied as a principal payment against the Bank of America Loan and may not be utilized to fund the operations or capital requirements of the other properties in the portfolio. Further, net proceeds from the sale of the collateralized properties must be applied against the outstanding balance of the Bank of America Loan prior to funding any capital requirements or operating needs of the portfolio.

As of June 30, 2010 and 2009, the Bank of America Loan incurred interest at a rate of approximately 4.9% and 2.6%, respectively, per annum. Wells VAF I paid cash for interest expense of approximately $267,000 and $152,000 during the three months ended June 30, 2010 and 2009, respectively, and approximately $537,000 and $294,000 during the six months ended June 30, 2010 and 2009, respectively. During the periods presented, Wells VAF I did not capitalize any interest expense related to the Bank of America Loan.

A10 Loans

On February 24, 2010, Wells VAF I entered into two loan agreements with A10 Capital, LLC (“A10 Capital”): one for up to $6.9 million, secured by the Parkway at Oak Hill Buildings (the “Parkway Loan”) and the other for up to $5.0 million, secured by the Commerce Street Building (the “Commerce Street Loan”) (collectively, the “A10 Loans”). As of June 30, 2010, the outstanding balances on the Parkway Loan and the Commerce Street Loan were $4.4 million and $3.75 million, respectively. The A10 Loans mature on March 1, 2013, and incur interest at a rate of one-month LIBOR, plus a margin of 8.875%. Monthly installments on the A10 Loans are interest-only, and the entire principal balance is due at maturity, assuming no prior principal prepayment. The A10 Loans are cross-defaulted and cross-collateralized with each other. Wells VAF I, as guarantor, has guaranteed payment of the A10 Loans pursuant to the Conditional Terminating Guaranty (the “Guaranty”). The Guaranty will terminate upon the occurrence of an event of default provided that Wells VAF I has taken certain steps to protect the collateral securing the A10 Loans, that there is no voluntary or involuntary bankruptcy relating to the borrower, and that the collateral is transferred via deed in lieu of foreclosure if requested by the Lender, as described in the Guaranty.

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As of June 30, 2010, the A10 Loans incurred interest at a rate of approximately 9.2% per annum. During the three months ended June 30, 2010 and 2009, Wells VAF I paid cash for interest expense of approximately $190,000 and $0, respectively, and approximately $200,000 and $0 for the six months ended June 30, 2010 and 2009, respectively. During the periods presented, Wells VAF I did not capitalize any interest expense related to the A10 Loans.

4.	MEMBERS’ EQUITY

Sponsoring Member Interest

On September 27, 2005, Wells VAF I received a $1,000,000 contribution from Wells Management. During the start-up period, proceeds from this contribution were held as working capital and used primarily to fund initial operating costs. Following the start-up period, the residual proceeds were distributed to investor members. Wells Management has a subordinated interest to investor members in earnings allocations and distributions from Wells VAF I.

Investor Member Interests

Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. The offering was terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests. Investor members have a priority interest over the sponsoring member in earnings allocations and distributions from Wells VAF I.

5.	RELATED-PARTY TRANSACTIONS

Advisory Agreement

On September 15, 2005, Wells VAF I entered into the Advisory Agreement with WIM. Pursuant to the Advisory Agreement, WIM is entitled to specified fees for certain services, including, but not limited to, the investment of offering proceeds in real estate projects, sales of properties, and management of day-to-day operations. The Advisory Agreement has a one-year term and is subject to an unlimited number of successive one-year renewals upon the consent of the parties. Wells VAF I may terminate the Advisory Agreement upon 60 days’ written notice without cause or penalty. If Wells VAF I terminates the Advisory Agreement, Wells VAF I will pay WIM all unpaid reimbursements of expenses and all earned but unpaid fees. The negotiations of the Advisory Agreement were not at arm’s length, and Wells VAF I will pay certain prescribed fees to WIM and its affiliates regardless of the quality of its services.

Under the terms of the Advisory Agreement and Wells VAF I’s private placement memorandum, Wells VAF I incurs the following fees and reimbursements payable to WIM:

•

During Wells VAF I’s private placement offering of investor member interests, Wells VAF I reimbursed WIM for organization and offering costs paid on its behalf equal to 0.5% of gross offering proceeds raised under the offering. Organization and offering costs were incurred by WIM on behalf of Wells VAF I and are not a direct liability of Wells VAF I. Such costs included legal and accounting fees, printing costs, and other offering expenses, and specifically excluded sales or underwriting commissions. When incurred by Wells VAF I, organization costs were expensed and offering costs were recorded as charges to members’ capital.

•

During Wells VAF I’s private placement offering of investor member interests, Wells VAF I paid WIM acquisition fees in an amount equal to 2.0% of gross offering proceeds raised under the offering. These acquisition fees serve as compensation for services WIM renders in connection with the investigation, selection, and acquisition of properties. Wells VAF I paid the acquisition fees upon its receipt of gross offering proceeds from the sale of shares, however WIM is obligated to reimburse Wells VAF I for any unearned acquisition fees upon termination of the Advisory Agreement. Wells VAF I may also reimburse WIM for expenses it pays to third parties in connection with acquisitions or potential acquisitions.

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•

Monthly asset management fees equal to one-twelfth of 0.75% of the gross value of Wells VAF I’s real estate assets, as determined and approved in good faith and consistent with applicable fiduciary duties by the investment committee of Wells VAF I. Any portion of the asset management fee may be deferred upon WIM’s request and paid in a subsequent month or year.

•

Reimbursement for all costs and expenses WIM incurs in fulfilling its duties as the asset portfolio manager. These costs and expenses may include wages and salaries and other employee-related expenses of WIM’s employees engaged in management, administration, operations, and marketing functions. Employee-related expenses include taxes, insurance, and benefits relating to such employees, and legal, travel, and other out-of-pocket expenses that are directly related to the services they provide. WIM allocates its reimbursable costs of providing these services among Wells VAF I and the various affiliated public real estate investment programs based on time spent on each entity by individual personnel.

•

For any property sold by Wells VAF I, a disposition fee equal to 0.25% of the sales price, if WIM provides a substantial amount of services in connection with the sale.

Property Management Agreement

On February 20, 2010, Wells VAF I executed an initial management agreement with Wells Real Estate Services, LLC (“WRES”) to manage the operations of the Parkway at Oak Hill Buildings. On May 14, 2010, the initial management agreement was terminated and replaced with a revised management agreement (“Management Agreement”) which was effective retroactive to February 20, 2010. Pursuant to the Management Agreement, WRES is entitled to a monthly management fee equal to the greater of (i) $1,500 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES is entitled to reimbursement for all costs and expenses WRES incurs in fulfilling its duties as the property manager up to approximately $151,000. These costs and expenses may include wages and salaries and other employee-related expenses of WRES’ employees engaged in management, administration, operations, and marketing functions. Further, WRES is entitled to reimbursement for construction management services rendered equal to 5% for construction costs up to $150,000 and 3% for any construction costs over $150,000 on a per construction project basis. The Management Agreement has a one-year term, unless terminated pursuant to the terms of the agreement, and is automatically extended for successive one-year terms. Wells VAF I may terminate the Management Agreement upon 30 days’ written notice prior to the expiration of the initial or subsequent extended term.

Dealer-Manager Agreement

Wells VAF I executed a dealer-manager agreement with WIS on September 15, 2005, whereby WIS performed the dealer-manager function for Wells VAF I in its private placement offering. For these services, Wells VAF I incurred sales commissions and dealer-manager fees on the gross offering proceeds raised from the sale of shares of investor member interests of up to 4.0% and 1.5%, respectively, at the time the shares were sold. Under the dealer-manager agreement, a portion of dealer-manger fees, in an aggregate amount of up to 0.75% of gross offering proceeds, was re-allowed to participating broker/dealers as marketing fees. The dealer-manager agreement terminated on September 15, 2008, upon completion of Wells VAF I’s offering; however, certain provisions, including those regarding indemnification, survive termination.

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Related-Party Costs

Pursuant to the terms of the agreements described above, Wells VAF I incurred the following related-party costs for the three months and six months ended June 30, 2010 and 2009:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Asset management fees ⁽¹⁾	$	125,643	$	129,619	$	251,287	$	259,238
Administrative reimbursements ⁽¹⁾		106,215		66,472		190,563		133,547
Construction management fees ⁽²⁾		11,438		0		11,438		0
Property management fees ⁽¹⁾		4,929		0		6,857		0

Total	$	248,225	$	196,091	$	460,145	$	392,785

⁽¹⁾

Asset management fees, administrative reimbursements, and property management fees are expensed as incurred.

⁽²⁾

Construction management fees are capitalized to real estate assets as incurred.

Due to Affiliates

As of June 30, 2010 and December 31, 2009, due to affiliates was comprised of the following items:


	June 30, 2010		December 31, 2009
Administrative reimbursements and bill-backs	$	101,849	$	34,528
Asset management fees		83,763		0
Construction management fees		11,438		0
Property management fees		1,500		0

	$	198,550	$	34,528

WIM’s affiliates pay for certain expenses of Wells VAF I directly and invoice Wells VAF I for reimbursement thereof on a quarterly basis. Amounts for these reimbursements are included in the aforementioned administrative reimbursements.

In consideration of the vacancy at the Nathan Lane Building, the free rent concessions at the Parkway at Oak Hill Buildings, and the current debt structure and covenants, WIM agreed to defer its asset management fees and administrative reimbursements effective April 2010. As a result, subsequent to quarter end, WIM refunded April 2010 asset management fees to Wells VAF I. Wells VAF I anticipates that this deferral will only persist until the portfolio’s operations stabilize.

Economic Dependency

Wells VAF I has engaged WIM and Wells Management to provide certain services essential to Wells VAF I, including asset management services, supervision of the management of properties, asset acquisition and disposition services, as well as other administrative responsibilities for Wells VAF I, including accounting services, investor member communications, and investor relations. As a result of these relationships, Wells VAF I is dependent upon WIM and Wells Management.

WIM and Wells Management are owned and controlled by Wells Real Estate Funds, Inc. (“WREF”). Accordingly, Wells VAF I focuses on the financial condition of WREF when assessing the financial condition of WIM and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells VAF I might be required to find alternative service providers.

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Future net income generated by WREF is largely dependent upon the amount of fees earned by affiliates of WIM and Wells Management based on, among other things, the level of investor proceeds raised from the sale of common stock for certain WREF-sponsored programs and the volume of future acquisitions and dispositions of real estate assets by WREF-sponsored programs, as well as distribution income earned from equity interests in another REIT. As of June 30, 2010, Wells VAF I has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash flow from operations, cash on hand and other investments, necessary to meet its current and future obligations as they become due.

Wells VAF I is also dependent upon the ability of its current tenants to pay their contractual base rent amounts as they become due. In particular, four tenants at its properties account for approximately 99% of its contractual base rental revenue for the six months ended June 30, 2010 as follows: Country Music Television, Inc. (“CMT”), 41%; Connecticut General Life Insurance Company (“CGLIC”), 30%; Brocade Communications Systems, Inc. (“Brocade”), 16%; and Stanley Convergent Security Solutions, Inc. (“Stanley”), 12%. The inability of any of these tenants to pay future rental amounts would have a negative impact on Wells VAF I’s results of operations. Wells VAF I is not aware of any reason why its current tenants will not be able to pay their contractual rental amounts as they become due in all material respects. Situations preventing Wells VAF I’s tenants from paying contractual rents could result in a material adverse impact on its results of operations.

Assertion of Legal Action Against Related-Parties

On March 12, 2007, a stockholder of Piedmont REIT filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment Trust, Inc. Securities Litigation, in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III; Wells Capital, Inc. (“Wells Capital”); Wells Management, our sponsoring member; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007.

The complaint alleged, among other things, violations of the federal proxy rules and breaches of fiduciary duty arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint sought, among other things, unspecified monetary damages and nullification of the Piedmont REIT internalization transaction.

On June 27, 2007, the plaintiff filed an amended complaint, which attempted to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy statement filed with the SEC on February 26, 2007, and derivative claims on behalf of Piedmont REIT.

On March 31, 2008, the Court granted in part the defendants’ motion to dismiss the amended complaint. The Court dismissed five of the seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleges violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint seeks, among other things, unspecified monetary damages, to nullify and rescind the internalization transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint.

On June 23, 2008, the plaintiff filed a motion for class certification. On September 16, 2009, the Court granted the plaintiff’s motion for class certification. On September 20, 2009, the defendants filed a petition for permission to appeal immediately the Court’s order granting the motion for class certification with the Eleventh Circuit Court of Appeals. The petition for permission to appeal was denied on October 30, 2009. On April 13, 2009, the plaintiff moved for leave to amend the second amended complaint to add additional defendants. The court denied the plaintiff’s motion for leave to amend on June 23, 2009.

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On December 4, 2009, the parties filed motions for summary judgment. On August 2, 2010, the Court entered an order denying the defendants’ motion for summary judgment and granting, in part, the plaintiff’s motion for partial summary judgment. The Court ruled that the question of whether certain expressions of interest in acquiring Piedmont REIT constituted “material” information required to be disclosed in the proxy statement to obtain approval for the Piedmont REIT internalization transaction raises questions of fact that must be determined at trial. A trial date has not been set.

Mr. Wells, Wells Capital, and Wells Management believe that the allegations contained in the complaint are without merit and intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or their affiliates could hinder their ability to successfully manage Wells VAF I’s operations and portfolio of investments.

6.	COMMITMENTS AND CONTINGENCIES

Wells VAF I is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against Wells VAF I.

Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells VAF I to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant. The table below includes future contingent obligations under Wells VAF I’s existing leases as of June 30, 2010.


Building	Tenant	Contingent Tenant Allowance Obligations as of June 30, 2010
Park Lane Building	Connecticut General Life Insurance Company	$1.5 million
Nathan Lane Building	Brocade Communications Systems, Inc.	$0.7 million⁽¹⁾
Parkway at Oak Hill Buildings	Surveying and Mapping, Inc.	$0.5 million⁽²⁾
Parkway at Oak Hill Buildings	Wells Fargo Bank, N.A.	$0.2 million⁽¹⁾

⁽¹⁾

Certain deposit accounts, which are included in other assets as of June 30, 2010, have been established to fund the residual balances of these contingent tenant allowance obligations.

⁽²⁾

In July 2010, Wells VAF I entered into a lease amendment with Surveying and Mapping, Inc. at the Parkway at Oak Hill Buildings, which includes a contingent tenant allowance obligation of approximately $0.5 million. Wells VAF I intends to utilize a portion of the available balance on the Parkway Loan to fund this tenant allowance obligation.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

We were formed on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties. Our investment strategy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above-market rates and/or benefiting from favorable market conditions. We are externally advised and managed by WIM. In June 2006, we commenced active operations upon receiving the minimum proceeds in our private placement offering of investor member interests, which offering raised approximately $51,854,000 in gross proceeds prior to its termination in September 2008.

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Portfolio Overview

Our portfolio currently consists of the following four properties:

•

The Nathan Lane Building is a five-story office building located in Plymouth, Minnesota, that was acquired in September 2006 and is currently approximately 45% leased to two tenants, Brocade and Stanley. Effective May 1, 2010, Brocade reduced its square footage leased from approximately 81% to 24% of the building and extended the lease term through July 2017. The Stanley lease expires in May 2016.

•

The Park Lane Building is a five-story office building and an eight-acre parcel of land containing a parking lot located in Pittsburgh, Pennsylvania, that was acquired in January 2007 and is currently 100% leased to CGLIC through January 2020. We are currently marketing this property for disposition.

•

The Commerce Street Building is a four-story office building and two floors of a parking deck located in Nashville, Tennessee, that was acquired in December 2007 and is approximately 76% leased to CMT through May 2013.

•

The Parkway at Oak Hill Buildings are two separate two-story office buildings located in Austin, Texas, that were acquired vacant in October 2008 and are currently approximately 74% leased to seven tenants following the execution of (i) the third amendment to the Surveying and Mapping, Inc. lease for additional space of approximately 10% of the property on July 14, 2010, which extends through August 2017 and (ii) the Communication Workers of America lease for approximately 4% of the property on April 12, 2010, which extends through March 2018.

Liquidity and Capital Resources

Overview

During the period from September 2005 through September 2008, we raised funds through the sale of shares of investor member interests under our private placement offering, and we used substantially all offering proceeds, net of offering costs, and other expenses, to acquire real properties and to fund certain re-leasing costs and capital improvements. We expect that our primary source of future cash flows will be cash generated from the operations of our properties, proceeds from third-party borrowings, and, eventually, net proceeds from the sale of our properties.

Our operating strategy entails funding expenditures related to the recurring operations of the properties with operating cash flows, assessing the amount of operating cash flows and proceeds from third-party borrowings that will be required to fund future re-leasing costs and other capital improvements, and distributing residual operating cash flows to our investor members. We continue to carefully monitor our cash flows and market conditions and their impact on our earnings and future distributions to investor members.

Short-Term Liquidity and Capital Resources

During the six months ended June 30, 2010, we generated net operating cash flows of approximately $(2.1 million), primarily due to establishing an escrow account to fund future real estate taxes, insurance, and interest expense, as required by the A10 Loans. Operating cash inflows reflect receipts of rental payments, tenant reimbursements, and interest and other income, less payments for property operating costs, interest expense, asset and property management fees, and general and administrative expenses. Further, we continued to withhold distributions to the investor members in 2010 to make additional cash resources available to fund future capital expenditures and re-leasing costs for our properties.

During the six months ended June 30, 2010, we obtained proceeds from third party borrowings of approximately $8.2 million and used such proceeds to (i) establish a $4.3 million escrow account to fund re-leasing costs and capital expenditures for the Nathan Lane Building and the Parkway at Oak Hill Buildings, (ii) pay down the Bank

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of America Loan by $1.1 million, and (iii) fund loan costs related to the Bank of America and A10 Loans of $0.5 million. The remaining proceeds from third party borrowings will primarily be used to fund portfolio and property operating costs during the transitional lease-up period at the Parkway at Oak Hill Buildings. We anticipate funding future capital expenditures and re-leasing costs with additional third-party borrowings and, in the event of a property disposition, from net proceeds from the sale of properties unless restricted by the terms of our existing borrowing arrangements, as further described below.

As further described below, the Bank of America Loan contains restrictive covenants that prohibit Wells VAF I from declaring or paying dividends or other distributions to its investor members while the Bank of America Loan is outstanding. We expect to utilize the residual cash balance on hand as of June 30, 2010 of approximately $2.4 million and future third party borrowings to satisfy current liabilities and to fund anticipated re-leasing costs and capital expenditures.

Bank of America Loan

We are party to a $23.5 million term loan with Bank of America, which had an outstanding balance of approximately $22.0 million as of June 30, 2010 and is scheduled to mature on November 30, 2010 (the “Bank of America Loan”). The Nathan Lane Building and Park Lane Building have been pledged as collateral against the Bank of America Loan. The Bank of America Loan contains restrictive covenants that prohibit us from declaring or paying dividends or other distributions to our investor members while the Bank of America Loan is outstanding. In addition, all net cash flows from the collateralized properties are required to be used to service the Bank of America Loan, which includes monthly principal payments in the amount of $15,048 and monthly interest payments at a rate of one-month LIBOR, plus a margin of 4.50%. All remaining cash flow from the collateralized properties will be applied as a principal payment against the Bank of America Loan and may not be utilized to fund the operations or capital requirements of the other properties in the portfolio. Further, net proceeds from the sale of the collateralized properties must be applied against the outstanding balance of the Bank of America Loan prior to funding any capital requirements or operating needs of the portfolio. If we are unable to make any loan payments and are found to be in default under the terms of the Bank of America Loan, Bank of America could foreclose on the Nathan Lane Building and Park Lane Building, which serve as collateral for the loan pursuant to a mortgage agreement, and seek to obtain a judgment against us for any amount still owing to Bank of America under the credit facility after the foreclosure and sale of the properties. Any such default, foreclosure, or judgment would have a material adverse effect on our financial condition and results of operations.

Wells VAF I is currently pursuing alternative financing options to replace the Bank of America Loan, including a secured credit facility collateralized by the properties in the Wells VAF I portfolio and individual property-specific mortgage loans. Wells VAF I believes that it will be able to secure financing to meet its debt obligations at current-market terms, which terms would likely be less favorable than those under the Bank of America Loan. However, Wells VAF I acknowledges that the U.S. credit markets remain volatile and, as such, it can make no assurances that replacement financing will be available at terms favorable or desirable to it.

The Bank of America Loan contains, among others, the following restrictive covenants:

•

limits our ratio of total debt under the Bank of America Loan to the total current “as is” appraised value of the collateralized properties, to be 70% or less determined as of the last day of each fiscal quarter;

•

limits our ratio of net operating income from the collateralized properties to interest expense incurred under the Bank of America Loan to be greater than 1.5:1 determined as of the last day of each fiscal quarter; and

•

prohibits us from securing any additional debt with the collateralized properties.

As of June 30, 2010, we were in compliance with all restrictive covenants under the Bank of America Loan agreement.

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A10 Loans

On February 24, 2010, we entered into two loan agreements with A10 Capital, LLC; one for up to $6.9 million, secured by the Parkway at Oak Hill Buildings and the other for up to $5.0 million, secured by the Commerce Street Building. As of June 30, 2010, the outstanding balances on the Parkway Loan and the Commerce Street Loan were $4.4 million and $3.75 million, respectively. The A10 Loans mature on March 1, 2013, and incur interest at a rate of one-month LIBOR, plus a margin of 8.875%. Monthly installments on the A10 Loans are interest-only and the entire principal balance is due at maturity, assuming no prior principal prepayment. The A10 Loans are cross-defaulted and cross-collateralized with each other.

Long-Term Liquidity and Capital Resources

Our offering of investor member interests terminated on September 15, 2008. Substantially all equity proceeds raised from the sale of investor member interests were used to fund property acquisitions. As such, we expect that our primary sources of capital over the long term will include proceeds from net cash flows from operations, third-party borrowings, and, eventually, net proceeds received from the sale of properties. We expect that our primary uses of capital will be for tenant and capital improvements, re-leasing costs, operating expenses, including interest expense on any outstanding indebtedness, and repayment of outstanding borrowings.

In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect that substantially all future net operating cash flows will be used for reserves for certain capital expenditures such as re-leasing costs and capital improvements and repayment of outstanding third-party borrowings. In May 2010, Brocade, the majority tenant at the Nathan Lane Building, reduced its square footage leased from 81% to 24% of the Nathan Lane Building. Accordingly, our net income will be reduced to the extent we are unable to re-lease the vacant space and we may have to expend substantial funds to re-lease the vacant space. In addition, to the extent the Parkway at Oak Hill Buildings and the Commerce Street Building continue to remain partially vacant, increased property operating expenses and asset and property management fees relating to those properties may reduce our cash flow from operating activities. We expect that substantially all future debt proceeds will be used to fund certain re-leasing costs and capital expenditures for our existing properties.

Contractual Commitments and Contingencies

We are contractually committed to repay the Bank of America Loan in full along with any accrued and unpaid interest by November 30, 2010. We are contractually committed to repay the A10 Loans in full along with any accrued and unpaid interest by March 1, 2013. As of June 30, 2010, we owed $22.0 million and $8.2 million on the Bank of America Loan and the A10 Loans, respectively.

Results of Operations

Comparison of the three months ended June 30, 2009 versus the three months ended June 30, 2010

Rental income increased slightly from $1,369,133 for the three months ended June 30, 2009 to $1,422,148 for the three months ended June 30, 2010 due to an increase in occupancy at the Parkway at Oak Hill Buildings, partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building. We expect future rental income to increase slightly due to the commencement of two leases at the Parkway at Oak Hill Buildings on May 1, 2010, partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building effective April 30, 2010.

Tenant reimbursements increased from $335,365 for the three months ended June 30, 2009 to $528,486 for the three months ended June 30, 2010 due to Brocade and Stanley beginning to reimburse their pro rata share of property operating costs at the Nathan Lane Building effective May 1, 2010 due to a change in the lease and management structure at the Nathan Lane Building associated with the Brocade lease amendment. Through

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April 30, 2010, Brocade self-managed the Nathan Lane Building and paid the majority of the property operating costs directly in exchange for a reduced rental rate. We expect future tenant reimbursements to increase slightly as Brocade and Stanley reimburse their pro rata share of property operating costs at the Nathan Lane Building for a full period.

Property operating costs increased from $743,639 for the three months ended June 30, 2009 to $1,080,930 for the three months ended June 30, 2010 due to the change in the lease and management structure at the Nathan Lane Building effective May 1, 2010 associated with the Brocade lease amendment described above and an increase in occupancy at the Parkway at Oak Hill Buildings. We expect future property operating costs to increase due to the change in the lease and management structure at the Nathan Lane Building being effective for a full period.

Asset and property management fees remained relatively stable at $156,123 for the three months ended June 30, 2009 and $158,465 for the three months ended June 30, 2010. We anticipate asset and property management fees to remain at similar levels in the future.

Depreciation expense increased from $334,674 for the three months ended June 30, 2009 to $413,328 for the three months ended June 30, 2010 primarily as a result of tenant improvements completed in connection with executing leases for approximately 49% of the Parkway at Oak Hill Buildings since October 2009. We expect an additional increase as a result of incurring depreciation expense for a full period on the tenant improvement projects completed in the second quarter of 2010 at the Parkway at Oak Hill Buildings.

Amortization expense decreased from $699,794 for the three months ended June 30, 2009 to $392,451 for the three months ended June 30, 2010, primarily as a result of recognizing less amortization of intangible lease assets and intangible lease origination costs in the second quarter of 2010 following the expiration of the lease in place at the time of the acquisition of the Nathan Lane Building. We expect future amortization expense to increase, as compared to the second quarter of 2010, due to the amortization of the leasing costs incurred in connection with recently executed leases at the Parkway at Oak Hill Buildings.

General and administrative expenses remained relatively stable at $197,193 for the three months ended June 30, 2009 and $200,493 for the three months ended June 30, 2010. We anticipate that changes in the future levels of our general and administrative expenses will vary primarily dependent upon future changes in our reporting and regulatory requirements.

Interest expense increased from $212,346 for the three months ended June 30, 2009 to $545,935 for the three months ended June 30, 2010, primarily due to an increase in the average borrowing rate on the Bank of America Loan and the execution of the A10 Loans in February 2010, which included an initial funding of $8.15 million. The annualized borrowing rate incurred on the Bank of America Loan increased from one-month LIBOR, plus 2.25%, to one-month LIBOR, plus 4.50%, effective June 30, 2009. We anticipate interest expense to increase upon utilizing the additional availability on the A10 Loans to lease the vacant space at the Parkway at Oak Hill Buildings and the Commerce Street Building.

Comparison of the six months ended June 30, 2009 versus the six months ended June 30, 2010

Rental income increased slightly from $2,712,569 for the six months ended June 30, 2009 to $2,819,873 for the six months ended June 30, 2010 due to an increase in occupancy at the Parkway at Oak Hill Buildings partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building. We expect future rental income to increase slightly due to the commencement of two leases at the Parkway at Oak Hill Buildings on May 1, 2010, partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building effective April 30, 2010.

Tenant reimbursements increased from $719,726 for the six months ended June 30, 2009 to $951,930 for the six months ended June 30, 2010 due to (i) Brocade and Stanley beginning to reimburse their pro rata share of property operating costs at the Nathan Lane Building effective May 1, 2010 due to a change in the lease and

Page 22

management structure at the Nathan Lane Building associated with the Brocade lease amendment and (ii) an increase in occupancy at the Parkway at Oak Hill Buildings. Through April 30, 2010, Brocade self-managed the Nathan Lane Building and paid the majority of the property operating costs directly in exchange for a reduced rental rate. We expect future tenant reimbursements to increase slightly as Brocade and Stanley reimburse their pro rata share of property operating costs at the Nathan Lane Building for a full period.

Property operating costs increased from $1,574,722 for the six months ended June 30, 2009 to $1,914,459 for the six months ended June 30, 2010 due to the change in the lease and management structure at the Nathan Lane Building effective May 2010 associated with the Brocade lease amendment described above and an increase in occupancy at the Parkway at Oak Hill Buildings. We expect future property operating costs to increase due to the change in the lease and management structure at the Nathan Lane Building being effective for a full period and increased occupancy at the Parkway at Oak Hill Buildings.

Asset and property management fees remained relatively stable at $319,296 for the six months ended June 30, 2009 and $316,448 for the six months ended June 30, 2010. We anticipate asset and property management fees to remain at similar levels in the future.

Depreciation expense increased from $668,012 for the six months ended June 30, 2009 to $780,640 for the six months ended June 30, 2010 primarily as a result of tenant improvements completed in connection with executing leases for approximately 49% of the Parkway at Oak Hill Buildings since October 2009. We expect an additional increase in the future as a result of incurring depreciation expense for a full period on the tenant improvement projects completed in the second quarter of 2010 at the Parkway at Oak Hill Buildings.

Amortization expense decreased from $1,518,099 for the six months ended June 30, 2009 to $1,005,497 for the six months ended June 30, 2010, primarily as a result of recognizing less amortization of intangible lease assets and intangible lease origination costs in 2010 following the expiration of the leases in place at the time of the acquisition of the Park Lane Building and the Nathan Lane Building. We expect future amortization expense to increase due to the amortization of the leasing costs incurred in connection with recently executed leases at the Parkway at Oak Hill Buildings.

General and administrative expenses remained relatively stable at $436,360 for the six months ended June 30, 2009 and $429,815 for the six months ended June 30, 2010. We anticipate that changes in the future levels of our general and administrative expenses will vary primarily dependent upon future changes in our reporting and regulatory requirements.

Interest expense increased from $415,463 for the six months ended June 30, 2009 to $955,940 for the six months ended June 30, 2010, primarily due to an increase in the average borrowing rate on the Bank of America Loan and the execution of the A10 Loans in February 2010, which included an initial funding of $8.15 million. The annualized borrowing rate incurred on the Bank of America Loan increased from one-month LIBOR, plus 2.25%, to one-month LIBOR, plus 4.50%, effective June 30, 2009. We anticipate interest expense to increase upon utilizing the additional availability on the A10 Loans to lease the vacant space at the Parkway at Oak Hill Buildings and the Commerce Street Building.

Inflation

We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of our leases, the leases may not readjust their reimbursement rates frequently enough to cover inflation.

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Application of Critical Accounting Policies

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions are different, it is possible that different accounting policies would be applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

Below is a discussion of the accounting policies used by Wells VAF I, which are considered critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Real Estate Assets

Investment in Real Estate Assets

We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net loss. The estimated useful lives of our assets by class are as follows:


Buildings		40 years
Building improvements		5-25 years
Site improvements		10 years
Tenant improvements		Shorter of lease term or economic life
Intangible lease assets		Lease term

Evaluating the Recoverability of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets and related intangible assets which Wells VAF I owns may not be recoverable. When indicators of potential impairment are present which suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, we assess the recoverability of the real estate assets and related intangible assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In the event that such expected undiscounted future cash flows for assets held for use or the estimated fair values, less costs to sell, for assets held for sale do not exceed the carrying values, we adjust the carrying value of real estate assets and related intangible assets to the estimated fair values, pursuant to the provisions of the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are determined based on the following information, dependent upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value. We have determined that there has been no impairment in the carrying value of any of Wells VAF I’s real estate assets and related intangible assets as of June 30, 2010.

Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s ultimate fair value and could result in the misstatement of the carrying value of our real estate and related intangible assets and net loss.

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Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, we allocated the purchase price of properties to the acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, based in each case on our estimate of their fair values. As further described below, in-place leases with Wells VAF I as the lessor may have values related to: direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, tenant relationships, and effective contractual rental rates that are above or below market rates:

•

Direct costs associated with obtaining a new tenant, including commissions, tenant improvements, and other direct costs, are estimated based on our consideration of current market costs to execute a similar lease. Such direct costs are included in intangible lease origination costs in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.

•

The value of opportunity costs associated with lost rentals avoided by acquiring an in-place lease is calculated based on the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Such opportunity costs are included in intangible lease assets in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.

•

The value of tenant relationships is calculated based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. Values associated with tenant relationships are included in intangible lease assets in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.

•

The value of effective rental rates of in-place leases that are above or below the market rates of comparable leases is calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.

During the three months ended June 30, 2010 and 2009, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities:


	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
For the three months ended June 30:	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
2010	$	13,613	$	188,064	$	137,615	$	20,370

2009	$	22,325	$	449,316	$	216,913	$	34,677

During the six months ended June 30, 2010 and 2009, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities:


	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
For the six months ended June 30:	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
2010	$	35,938	$	539,832	$	354,529	$	55,048

2009	$	67,903	$	1,009,569	$	441,402	$	69,355

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As of June 30, 2010 and December 31, 2009, Wells VAF I had the following gross intangible in-place lease assets and liabilities:


	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs
June 30, 2010	$	357,971	$	2,934,382	$	2,619,308	$	386,472

December 31, 2009	$	545,261	$	7,740,086	$	4,324,224	$	694,078

The remaining net intangible assets and liabilities balances will be amortized as follows:


	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
For the year ending December 31,	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs
2010	$	18,516	$	212,424	$	195,932	$	26,433
2011		37,032		424,848		391,864		52,866
2012		37,032		424,848		391,864		52,866
2013		37,032		269,233		229,612		35,573
2014		37,032		158,067		113,705		23,218
Thereafter		52,459		255,322		161,082		32,893

	$	219,103	$	1,744,742	$	1,484,059	$	223,849

Weighted-Average Amortization Period		6 years		5 years		4 years		5 years

Evaluating the Recoverability of Intangible Assets and Liabilities

The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities become impaired and Wells VAF I is required to expense the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including but not limited to lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In the event that the discounted cash flows of the original in-place lease stream do not exceed the discounted modified in-place lease stream, Wells VAF I adjusts the carrying value of the intangible lease assets to the discounted cash flows and recognizes an impairment loss. For in-place lease extensions that are executed more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term.

Related-Party Transactions and Agreements

We have entered into agreements with WIM, Wells Management, and WIS whereby we pay certain fees and expense reimbursements to WIM, Wells Management, and WIS for selling commissions; dealer-manager fees; acquisition and advisory fees; reimbursements for acquisition expenses; reimbursements for organizational and offering expenses; asset management fees; administrative services relating to accounting, portfolio management, and other general and administrative, and incur the related expenses. See Note 5 to our financial statements included in this report for a description of these fees and reimbursements and amounts incurred.

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Commitments and Contingencies

Wells VAF I is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against Wells VAF I.


Building	Tenant	Contingent Tenant Allowance Obligations as of June 30, 2010
Park Lane Building	Connecticut General Life Insurance Company	$1.5 million
Nathan Lane Building	Brocade Communications Systems, Inc.	$0.7 million⁽¹⁾
Parkway at Oak Hill Buildings	Surveying and Mapping, Inc.	$0.5 million⁽²⁾
Parkway at Oak Hill Buildings	Wells Fargo Bank, N.A.	$0.2 million⁽¹⁾

⁽¹⁾

Certain deposit accounts, which are included in other assets as of June 30, 2010, have been established to fund the residual balances of these contingent tenant allowance obligations.

⁽²⁾

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Wells VAF I has omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, it is not required to provide such information.

ITEM 4T.

CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of management of WIM, our manager, including the Principal Executive Officer and the Principal Financial Officer of WIM, of the effectiveness of the design and operation of Wells VAF I’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the quarterly period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer of WIM concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer of WIM, as appropriate, to allow timely decisions regarding required disclosure.

PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are from time to time a party to legal proceedings which arise in the ordinary course of our business. We are not currently involved in any litigation for which the outcome would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such litigation threatened against us.

ITEM 1A.

RISK FACTORS

Wells VAF I has omitted a discussion of risk factors because as a smaller reporting company, it is not required to provide such information.

Page 27

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)	We did not sell any equity securities that were not registered under the Securities Act of 1933 during the quarter ended June 30, 2010.

(b)	Not applicable.

(c)	We did not redeem any securities during the quarter ended June 30, 2010.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

(a)	There have been no defaults with respect to any of our indebtedness.

(b)	Not applicable.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION

(a)	During the quarter ended June 30, 2010, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

(b)	Not applicable.

ITEM 6.

EXHIBITS

The Exhibits to this report are set forth on the Exhibit Index to Second Quarter Form 10-Q attached hereto.

Page 28

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.


	WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
	(Registrant)

	By:	WELLS INVESTMENT MANAGEMENT COMPANY, INC.
		(Manager)

August 12, 2010	/s/ LEO F. WELLS, III
	Leo F. Wells, III Principal Executive Officer of Wells Investment Management Company, Inc.

August 12, 2010	/s/ DOUGLAS P. WILLIAMS
	Douglas P. Williams Principal Financial Officer of Wells Investment Management Company, Inc.

Page 29

EXHIBIT INDEX

TO SECOND QUARTER FORM 10-Q

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC


Exhibit No.		Description of Document

3.1		Amended and Restated Articles of Organization, dated as of September 1, 2005, incorporated by reference to Exhibit 3.1 to the Form 10 filed April 15, 2009

4.1		Operating Agreement among Wells Management Company, Inc., Wells Investment Management Company, LLC and the Several Investor Members, dated as of September 1, 2005, and subsequently amended, incorporated by reference to Exhibit 4.1 to the Form 10 filed April 15, 2009

10.1	*	Sixth Consolidated Amendatory Agreement between Wells Mid-Horizon Value-Added Fund I, LLC and Bank of America National Association, dated as of May 24, 2010

10.2	*	Fourth Amendment to Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (related to the Nathan Lane Building) made by Wells VAF – 6000 Nathan Lane, LLC to and for the benefit of Bank of America National Association, dated as of May 24, 2010

10.3	*	Fourth Amendment to Open-end Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing (related to the Park Lane Building) by Wells VAF – 3000 Park Lane, LLC to and for the benefit of Bank of America National Association, dated as of May 24, 2010

31.1	*	Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	*	Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	*	Certification of the Principal Executive Officer and Principal Financial Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith.

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WELLS MID-HORIZON VALUE-ADDED FUND I LLC Reports

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