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EX-32.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Gramercy Property Trustdex322.htm
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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

 

¨

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: 000-53200

 

 

CB RICHARD ELLIS REALTY TRUST

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   56-2466617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

47 Hulfish Street, Suite 210, Princeton, New Jersey 08542

(Address of principal executive offices) (Zip Code)

(609) 683-4900

(Registrant’s telephone number, including area code)

 

 

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).    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 filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨

  

Accelerated Filer  ¨

 

Non-accelerated filer  x

  

Smaller reporting company   ¨

   (do not check if a 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 outstanding of the registrant’s common shares, $0.01 par value, was 143,457,935 as of August 6, 2010.

 

 

 


Table of Contents

CB RICHARD ELLIS REALTY TRUST

INDEX

 

10-Q PART AND ITEM NO.

  

PART I. FINANCIAL INFORMATION

  

1.

 

Condensed Consolidated Financial Statements (unaudited)

   1
 

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

   1
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

   2
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

   3
 

Condensed Consolidated Statements of Shareholders’ Equity and Non-Controlling Interest for the Six Months Ended June 30, 2010 and 2009

   4
 

Notes to the Condensed Consolidated Financial Statements for the Three and Six Months Ended June 30, 2010 and 2009

   5

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   42

3.

 

Quantitative and Qualitative Disclosures About Market Risk

   75

4.

 

Controls and Procedures

   75

4T.

 

Controls and Procedures

   75

PART II. OTHER INFORMATION

  

1.

 

Legal Proceedings

   76

1A.

 

Risk Factors

   76

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   77

3.

 

Defaults Upon Senior Securities

   77

4.

 

(Removed and Reserved)

   77

5.

 

Other Information

   77

6.

 

Exhibits

   78

SIGNATURES

   79


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Balance Sheets

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

(In Thousands, Except Share Data)

 

     June 30,
2010
    December 31,
2009
 

ASSETS

    

Investments in Real Estate:

    

Land

   $ 157,697      $ 140,892   

Site Improvements

     46,069        45,859   

Buildings and Improvements

     534,812        456,285   

Tenant Improvements

     34,195        28,095   
                
     772,773        671,131   

Less: Accumulated Depreciation and Amortization

     (39,781 )     (31,558 )
                

Net Investments in Real Estate

     732,992        639,573   

Investments in Unconsolidated Entities

     316,485        214,097   

Cash and Cash Equivalents

     166,019        112,631   

Restricted Cash

     1,983        1,923   

Accounts and Other Receivables, Net of Allowance of $237 and $183, respectively

     3,424        4,246   

Deferred Rent

     5,646        3,570   

Acquired Above-Market Leases, Net of Accumulated Amortization of $7,383 and $5,886, respectively

     18,461        17,996   

Acquired In-Place Lease Value, Net of Accumulated Amortization of $30,145 and $25,566, respectively

     72,123        61,375   

Deferred Financing Costs, Net of Accumulated Amortization of $1,864 and $1,380, respectively

     3,956        2,342   

Lease Commissions, Net of Accumulated Amortization of $367 and $263, respectively

     1,499        889   

Other Assets

     2,254        377   
                

Total Assets

   $ 1,324,842      $ 1,059,019   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Notes Payable, Less Discount of $4,157 and $4,615, Plus Premium of $602 and $0, respectively

   $ 217,299      $ 203,451   

Note Payable at Fair Value

     8,374        8,974   

Loan Payable

     15,000        _   

Security Deposits

     585        593   

Accounts Payable and Accrued Expenses

     11,619        11,000   

Accrued Offering Costs Payable to Related Parties

     1,192        1,114   

Acquired Below-Market Leases, Net of Accumulated Amortization of $8,069 and $6,687, respectively

     14,001        14,108   

Property Management Fee Payable to Related Party

     109        106   

Investment Management Fee Payable to Related Party

     950        757   

Distributions Payable

     19,266        14,750   

Interest Rate Swaps at Fair Value—Non-Qualifying Hedges

     1,802        1,410   

Interest Rate Swaps at Fair Value—Qualifying Hedges

     1,516        293   
                

Total Liabilities

     291,713        256,556   

COMMITMENTS AND CONTINGENCIES (NOTE 17)

    

NON-CONTROLLING INTEREST

    

Operating Partnership Units

     2,464        2,464   

SHAREHOLDERS’ EQUITY

    

Common Shares of Beneficial Interest, $0.01 par value, 990,000,000 shares authorized; 137,215,254 and 106,465,683 issued and outstanding as of June 30, 2010 and December 31, 2009, respectively

     1,373        1,065   

Additional Paid-in-Capital

     1,207,842        933,088   

Accumulated Deficit

     (162,015 )     (121,832 )

Accumulated Other Comprehensive Loss

     (16,535 )     (12,322 )
                

Total Shareholders’ Equity

     1,030,665        799,999   
                

Total Liabilities and Shareholders’ Equity

   $ 1,324,842      $ 1,059,019   
                

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

(In Thousands, Except Share Data)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  

REVENUES

       

Rental

  $ 14,634        9,847      $ 29,636      $ 20,189   

Tenant Reimbursements

    2,817        2,038        5,735        3,984   
                               

Total Revenues

    17,451        11,885        35,371        24,173   
                               

EXPENSES

       

Operating and Maintenance

    1,411        1,145        2,986        2,372   

Property Taxes

    2,551        1,698        5,172        3,364   

Interest

    3,238        2,638        6,333        5,445   

General and Administrative

    1,839        885        2,678        1,928   

Property Management Fee to Related Party

    176        112        340        254   

Investment Management Fee to Related Party

    2,687        1,783        5,118        3,486   

Acquisition Expenses

    4,841        998       5,219        998   

Depreciation and Amortization

    6,717        6,148        13,960        11,870   
                               

Total Expenses

    23,460        15,407        41,806        29,717   
                               

OTHER INCOME AND EXPENSES

       

Interest and Other Income

    91        140        689        261   

Net Settlement Payments on Interest Rate Swaps

    (230     (152     (444     (233

(Loss) Gain on Interest Rate Swaps and Cap

    (115     525        (503     357   

Loss on Note Payable at Fair Value

    (5     (128     (78     (693

Loss on Early Extinguishment of Debt

    —          —          (73     —     
                               

Total Other Income and (Expenses)

    (259     385        (409     (308
                               

LOSS BEFORE PROVISION FOR INCOME TAXES AND EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED ENTITIES

    (6,268     (3,137     (6,844     (5,852

PROVISION FOR INCOME TAXES

    (70     (58     (85     (87

EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED ENTITIES

    2,109        (1,051     2,846        (1,849
                               

NET LOSS

    (4,229     (4,246     (4,083     (7,788
                               

Net Loss Attributable to Non-Controlling Operating Partnership Units

    8        8        7        21   
                               

NET LOSS ATTRIBUTABLE TO CB RICHARD ELLIS REALTY TRUST SHAREHOLDERS

  $ (4,221   $ (4,238   $ (4,076 )   $ (7,767
                               

Basic and Diluted Net Income (Loss) Per Share—Attributable CB Richard Ellis Realty Trust Shareholders

  $ (0.03   $ (0.06   $ (0.03 )   $ (0.11
                               

Weighted Average Common Shares Outstanding—Basic and Diluted

    128,444,105        74,543,506        120,399,165        70,844,927   

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2010 and 2009 (unaudited)

(In Thousands)

 

     Six Months Ended June 30,  
           2010                 2009        

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Loss

   $ (4,083   $ (7,788 )

Adjustments to Reconcile Net Loss to Net Cash Flows Provided by Operating Activities:

    

Equity in (Income) Loss of Unconsolidated Entities

     (2,846     1,849   

Distributions from Unconsolidated Entities

     13,406       4,135   

Loss on Interest Rate Swaps and Cap

     503        (357 )

Loss on Note Payable at Fair Value

     78        693   

Loss on Early Extinguishment of Debt

     53        —     

Gain on Transfer of Real Estate

     (154     —     

Depreciation and Amortization of Building and Improvements

     8,694        6,725   

Amortization of Deferred Financing Costs

     431        302   

Amortization of Acquired In-Place Lease Value

     5,162        5,070   

Amortization of Above and Below Market Leases

     115        397   

Amortization of Lease Commissions

     105        75   

Amortization of Discount on Notes Payable

     460        367   

Share Based Compensation

     240        —     

Changes in Assets and Liabilities:

    

Accounts and Other Receivables

     822        779   

Deferred Rent

     (2,076     (320 )

Other Assets

     (377     731   

Accounts Payable and Accrued Expenses

     (191     (1,774 )

Investment and Property Management Fees Payable to Related Party

     196        (26 )
                

Net Cash Flows Provided By Operating Activities

     20,538        10,858   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Acquisitions of Real Estate Property

     (140,523 )     (15,753 )

Investments in Unconsolidated Entities

     (74,953     (37,332 )

Distributions from Unconsolidated Entities

     5,737        230   

Purchase Deposits

     (1,500     (3,627

Restricted Cash

     (60     66   

Lease Commissions

     (715     (110 )

Improvements to Investments in Real Estate

     (639     (289 )
                

Net Cash Flows Used in Investing Activities

     (212,653     (56,815 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from Common Shares—Public Offering

     301        151   

Proceeds from Additional Paid-in-Capital—Public Offering

     295,140        148,809   

Redemption of Common Shares

     (7,672     (6,519 )

Payment of Offering Costs

     (26,318     (16,691 )

Payment of Distributions

     (18,076     (11,271 )

Distribution to Non-Controlling Interest

     (74     (74 )

Borrowing on Loan Payable

     15,000        —     

Principal Payments on Notes Payable

     (10,763     (2,132 )

Deferred Financing Costs

     (2,143     (6

Security Deposits

     (9     46   
                

Net Cash Flows Provided by Financing Activities

     245,386        112,313   
                

EFFECT OF FOREIGN CURRENCY TRANSLATION

     117        568   
                

Net Increase in Cash and Cash Equivalents

     53,388        66,924   

Cash and Cash Equivalents, Beginning of the Period

     112,631        30,330   
                

Cash and Cash Equivalents, End of the Period

   $ 166,019      $ 97,254   
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Cash Paid During the Period for Interest

   $ 5,422      $ 4,870   

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Distributions Declared and Payable

   $ 19,266      $ 11,181   

Proceeds from Dividend Reinvestment Program

   $ 13,515      $ 7,784   

Accrued Acquisition Costs Related to Real Property

   $ 86      $ 19   

Accrued Acquisition Costs Related to Investment in Unconsolidated Entities Due to Related Party

   $ 659      $ —     

Deconsolidation of Real Estate Transferred to Duke joint venture

   $ (41,888 )   $ —     

Notes Payable Assumed on Acquisitions of Real Estate

   $ 26,766      $ —     

Increase in Investment in Duke joint venture from Transfer of Consolidated Real Estate

   $ 42,042      $ —     

Share Awards Increase in APIC

   $ 240      $ —     

Accrued Offering Costs

   $ 1,340      $ 3,883   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Shareholders’ Equity and Non-Controlling Interest

For the Six Months Ended June 30, 2010 and 2009 (unaudited)

(In Thousands, Except Share Data)

 

   

 

Common Shares

    Additional
Paid-in-
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholder’s
Equity
    Temporary
Equity
Non-Controlling
Interest
Operating
Partnership

Units
    Total
Shareholder’s
and
Temporary

Equity
 
    Shares     Amount              

Balance at January 1, 2010

  106,465,683      $ 1,065      $ 933,088      $ (121,832   $ (12,322   $ 799,999      $ 2,464      $ 802,463   

Net Income

  —          —          —          (4,076     —          (4,076     (7     (4,083 )

Foreign Currency Translation Loss

  —          —          —          —          (2,992     (2,992     (6 )     (2,998 )

Swaps Fair Value Adjustment

  —          —          —          —          (1,221     (1,221     (3 )     (1,224 )
                                                             

Total Comprehensive Loss

  —          —          —          (4,076     (4,213     (8,289     (16 )     (8,305 )
                                                             

Net Contributions From Public Offering of Common Shares, $0.01 Par Value

  31,570,748        316        308,730        —          —          309,046        —          309,046   

Trustee Common Shares

  24,000        —          240        —          —          240        —          240   

Costs Associated with Public Offering

  —          —          (26,462 )     —          —          (26,462     —          (26,462 )

Redemption of Common Shares

  (845,177 )     (8 )     (7,664 )     —          —          (7,672     —          (7,672 )

Adjustment to Record Non-Controlling Interest at Redemption Value

  —          —          (90 )     —          —          (90     90        —     

Distributions

  —          —          —          (36,107     —          (36,107     (74 )     (36,181 )
                                                             

Balance at June 30, 2010

  137,215,254      $ 1,373      $ 1,207,842      $ (162,015   $ (16,535   $ 1,030,665      $ 2,464      $ 1,033,129   
                                                             
   

 

Common Stock

    Additional
Paid-in-
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Permanent
Shareholders’
Equity
    Temporary
Equity
Non-controlling
Interest
Operating
Partnership

Units
    Total
Shareholder’s
and
Temporary
Equity
 
    Shares     Amount              

Balance at January 1, 2009

  64,490,068      $ 645      $ 560,110      $ (54,221 )   $ (19,327 )   $ 487,207      $ 2,464      $ 489,671   

Net Loss

      —          —          (7,767 )     —          (7,767 )     (21 )     (7,788 )

Foreign Currency Translation Loss

  —          —          —          —          9,312        9,312        30        9,342   
                                                             

Total Comprehensive Loss

  —          —          —          (7,767 )     9,312        1,545        9        1,554   
                                                             

Net Contributions From Public Offering of Common Shares, $0.01 Par Value

  15,948,990        159        156,586        —          —          156,745        —          156,745   

Costs Associated with Public Offering

  —          —          (16,049     —          —          (16,049 )     —          (16,049 )

Redemption of Common Shares

  (732,311     (7 )     (6,512     —          —          (6,519 )     —          (6,519 )

Adjustment to Record Non-controlling Interest at Redemption Value

  —          —          (65     —          —          (65 )     65        —     

Distributions

  —          —          —          (21,246 )     —          (21,246 )     (74 )     (21,320 )
                                                             

Balance at June 30, 2009

  79,706,747      $ 797      $ 694,070      $ (83,234 )   $ (10,015 )   $ 601,618      $ 2,464      $ 604,082   
                                                             

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

1. Organization and Nature of Business

CB Richard Ellis Realty Trust (the “Company”) was formed on March 30, 2004 under the laws of the state of Maryland. CBRE Operating Partnership, L.P. (“CBRE OP”) was formed in Delaware on March 30, 2004, with the Company as the sole general partner (the “General Partner”). The Company has elected to be taxed as a real estate investment trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable period ended December 31, 2004. The Company was formed to raise capital and acquire ownership interests in high quality real estate properties, including office, retail, industrial, and multi-family residential properties, as well as other real estate-related assets.

On July 1, 2004, the Company commenced operations and issued 6,844,313 common shares of beneficial interest in connection with the initial capitalization of the Company. For each common share the Company issued, one limited partnership unit in CBRE OP was issued to the Company in exchange for the cash proceeds from the issuance of the common shares. In addition, CBRE REIT Holdings, LLC (“REIT Holdings”) an affiliate of CBRE Advisors LLC (the “Investment Advisor”), purchased 29,937 limited partnership units in CBRE OP as a limited partner. During October 2004, the Company issued an additional 123,449 common shares of beneficial interest to an unrelated third-party investor. On July 2, 2007, in conjunction with the Carolina Portfolio acquisition, the Company formed a taxable REIT subsidiary, CBRE RT Carolina TRS, Inc., (“Carolina TRS”), to hold certain real estate assets designated by management as held for sale which represent non-qualified REIT assets. On September 30, 2008, the real estate assets held by Carolina TRS were reclassified as held for investment and were transferred to CBRE OP.

The registration statement relating to our initial public offering was declared effective by the Securities Exchange Commission (the “SEC”) on October 24, 2006. CNL Securities Corp. acted as the dealer manager of this offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. During the period October 24, 2006 through January 29, 2009, the Company issued 60,808,967 additional common shares of beneficial interest. We terminated the initial public offering effective as of the close of business on January 29, 2009.

The registration statement relating to our follow-on public offering was declared effective by the SEC on January 30, 2009. CNL Securities Corp. is the dealer manager (the “Dealer Manager”) of this offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through June 30, 2010, the Company received gross offering proceeds of approximately $728,540,691 from the sale of 72,998,556 shares.

The Company operates in an umbrella partnership REIT structure in which its majority-owned subsidiary, CBRE OP, owns, directly or indirectly, substantially all of the properties acquired on behalf of the Company. As of June 30, 2010, the Company, as the sole general partner of CBRE OP, owned approximately 99.82% of the common partnership units therein. REIT Holdings, an affiliate of the Investment Advisor, holds the remaining interest through 246,361 limited partnership units representing approximately a 0.18% ownership interest in the total limited partnership units. In exchange for services provided to the Company relating to its formation and future services, REIT Holdings also owns a Class B limited partnership interest (“Class B interest”). The Investment Advisor is affiliated with the Company in that the two entities have common officers and trustees, some of whom also own equity interests in the Investment Advisor and the Company. All business activities of the Company are managed by the Investment Advisor.

Unless the context otherwise requires or indicates, references to “CBRE REIT,” “we,” “the Company” “our,” and “us” refer to the activities of and the assets and liabilities of the business and operations of CB Richard Ellis Realty Trust and its subsidiaries.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“U.S. GAAP”) and the rules applicable to Form 10-Q and reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Certain information and footnotes required for annual financial statement presentation have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our interim financial statements do not include all of the information and disclosures required under U.S. GAAP for complete financial statements. The condensed consolidated financial statements and notes thereto should be read in conjunction with our current Annual Report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2009.

In the opinion of management, all adjustments of a normal recurring nature considered necessary in all material respects to present fairly our financial position, results of our operations and cash flows as of and for the three and six months and ended June 30, 2010 have been made. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results of operations to be expected for the entire year. We have evaluated subsequent events for recognition or disclosure through August 13, 2010, which was the date we filed this Form 10-Q with the SEC.

Principles of Consolidation

Because we are the sole general partner and majority owner of CBRE OP and have majority control over their management and major operating decisions, the accounts of CBRE OP are consolidated in our financial statements. The interests of REIT Holdings are reflected in non-controlling interest in the accompanying consolidated financial statements. All significant inter-company accounts and transactions are eliminated in consolidation. CB Richard Ellis Investors, LLC (“CBRE Investors”), an affiliate of the Investment Advisor, also owns an interest in us through its ownership of 243,229 common shares of beneficial interest at June 30, 2010 and December 31, 2009.

Investments in Unconsolidated Entities

Our determination of the appropriate accounting method with respect to our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. (“CBRE Strategic Partners Asia”), which is not considered a Variable Interest Entity (“VIE”), is partially based on CBRE Strategic Partners Asia’s sufficiency of equity investment at risk which was triggered by a substantial paydown during 2009 of its subscription line of credit backed by investor capital commitments to fund its operations. We account for this investment under the equity method of accounting.

We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we consolidate the entity as the primary beneficiary. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not we consolidate such entity.

With respect to our majority limited membership interest in the Duke/Hulfish, LLC joint venture (the “Duke joint venture”), the Afton Ridge Joint Venture, LLC (“Afton Ridge”), the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”) and the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”) we considered the Codification Topic “Consolidation” (“FASB ASC 810”) in determining that we did not have control over the financial and operating decisions of such entities due to the existence of substantive participating rights held by the minority limited members who are also the managing members of the Duke joint venture and Afton Ridge, and the investment advisors/managers of the UK JV and the European JV, respectively.

We carry our investments in CBRE Strategic Partners Asia, the Duke joint venture, Afton Ridge, the UK JV and the European JV on the equity method of accounting because we have the ability to exercise significant influence (but not control) over operating and financial policies of each such entity.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

We eliminate transactions with such equity method entities to the extent of our ownership in each such entity. Accordingly, our share of net income (loss) of these equity method entities is included in consolidated net income (loss). CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis applied by CBRE Strategic Partners Asia under the investment company guide, is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 15 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segment Information

We currently operate in two geographic areas, the United States and the United Kingdom. We view our operations as three reportable segments, a Domestic Industrial segment, a Domestic Office segment and an International Office/Retail segment, which participate in the acquisition, development, ownership, and operation of high quality real estate in their respective segments.

Cash Equivalents

We consider short-term investments with maturities of three months or less when purchased to be cash equivalents. As of June 30, 2010 and December 31, 2009, cash equivalents consisted primarily of investments in money market funds.

Restricted Cash

Restricted cash represents those cash accounts for which the use of funds is restricted by loan covenants. As of June 30, 2010 and December 31, 2009, our restricted cash balance was $1,983,000 and $1,923,000, respectively, which represents amounts set aside as impounds for future property tax payments, property insurance payments and tenant improvement payments as required by our agreements with our lenders.

Discontinued Operations and Real Estate Held for Sale

In a period in which a property has been disposed of or is classified as held for sale, the statements of operations for current and prior periods report the results of operations of the property as discontinued operations.

At such time as a property is deemed held for sale, such property is carried at the lower of: (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as property held for sale in the period in which all of the following criteria are met:

 

  ¡  

management, having the authority to approve the action, commits to a plan to sell the asset;

 

  ¡  

the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

 

  ¡  

an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

 

  ¡  

the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

 

  ¡  

the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

 

  ¡  

given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

As of June 30, 2010 and December 31, 2009, we did not have any properties held for sale.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Accounting for Derivative Financial Instruments and Hedging Activities

All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.

We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within these footnotes to enable financial statement users to locate important information about derivative instruments (see Note 14 “Derivative Instruments” and Note 15 “Fair Value of Financial Instruments and Investments” for a further discussion of our derivative financial instruments).

Investments in Real Estate

Our investments in real estate are stated at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

 

Buildings and Improvements

   39 years

Site Improvements

   15 and 25 years

Tenant Improvements

   Shorter of the useful lives or the terms of the related leases

Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred. As of June 30, 2010 and December 31, 2009, we owned, on a consolidated basis, 62 and 60 real estate investments, respectively.

On March 31, 2010, we completed the transfer of our wholly-owned Miramar I and II properties into the Duke joint venture.

On April 8, 2010, we acquired 5160 Hacienda Drive, a single tenant corporate headquarters and research and development building located in Dublin, CA, in the eastern portion of the San Francisco Bay area. The purchase price was $38,500,000.

On May 7, 2010, we acquired 10450 Pacific Center Court, a single tenant office building located in San Diego, CA. The purchase price was $32,750,000.

On June 21, 2010, we acquired 225 Summit Avenue, a single tenant corporate headquarters office building located in Montvale, NJ, in the New York metropolitan area. The purchase price was $40,600,000.

On June 24, 2010, we acquired One Wayside Road, a single tenant corporate headquarters office building located in Burlington, MA, a suburb of Boston. The purchase price was $55,525,000.

We adopted the provisions of Accounting Standard Codification Topic “Business Combinations” (“FASB ASC 805”) which required us to expense the related acquisition costs of acquisitions made during the years following December 31, 2008. The adoption of the provisions of FASB ASC 805 affects our consolidated financial statements, results of operations and cash flows from operations. We expensed $4,841,000 and $998,000, $5,219,000 and $998,000 of acquisition costs during the three and six months ended June 30, 2010 and 2009, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Other Assets

Other assets include the following as of June 30, 2010 and December 31, 2009 (in thousands):

 

     June 30,
2010
   December 31,
2009

Purchase deposits

   $ 1,500    $ —  

Prepaid insurance

     612      260

Prepaid real estate taxes

     —        76

Interest rate cap at fair value

     —        1

Other

     142      40
             

Total

   $ 2,254    $ 377
             

Concentration of Credit Risk

Our properties are located throughout the United States and in the United Kingdom. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory, and social factors affecting the communities in which the tenants operate. Our credit risk relates primarily to cash, restricted cash, and interest rate swap and cap agreements. Cash accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2013.

We have not experienced any losses to date on our invested cash and restricted cash. The interest rate cap and swap agreements create credit risk. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of their contracts. Our risk management policies define parameters of acceptable market risk and limit exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities, and other relevant factors. We do not anticipate nonperformance by any of our counterparties.

Non-Controlling Interest

We owned a 99.82%, 99.77%, and 99.69% partnership interest in CBRE OP as of June 30, 2010, December 31, 2009 and June 30, 2009, respectively. The remaining 0.18%, 0.23% and 0.31% partnership interest as of June 30, 2010, December 31, 2009 and June 30, 2009, respectively, was owned by REIT Holdings in the form of 246,361 non-controlling operating partnership units which were exchangeable on a one for one basis for common shares of CBRE REIT, with an estimated aggregate redemption value of $2,464,000.

Impairment of Long-Lived Assets

We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. In spite of intensive leasing efforts and preliminary interest exhibited by a variety of tenants since our acquisition in 2008, the Kings Mountain III property remains vacant. Due to the challenging economic environment, we recognized an impairment of our consolidated investment in Kings Mountain III in the amount of $9,160,000 during the year ended December 31, 2009 which reduced our carrying value of the property to $15,300,000. Based on the adjusted basis in the Kings Mountain III property no further impairment was recognized during the three and six months ended June 30, 2010. No impairment of consolidated investments was recognized during the three and six months ended June 30, 2010 and 2009.

Purchase Accounting for Acquisition of Investments in Real Estate

We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the purchase consideration of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases; and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the real estate acquired as such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and swap fair value adjustments for qualifying hedges.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable period ended December 31, 2004. To qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) adjusted taxable income, as defined in the Code, to our shareholders and satisfy certain other organizational and operating requirements. We generally will not be subject to U.S. federal income taxes if we distribute 100% of our taxable income for each year to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to U.S. federal income taxes and excise taxes on our undistributed taxable income. Except as discussed below, we believe that we have met all of the REIT distribution and technical requirements for the six months ended June 30, 2010 and the year ended December 31, 2009. Management intends to continue to adhere to these requirements and maintain our REIT qualification.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

In order for distributions to be deductible for U.S. federal income tax purposes and count towards our distribution requirement, they must not be “preferential dividends.” A distribution will not be treated as preferential if it is pro rata among all outstanding shares of stock within a particular class. IRS guidance, however, allows a REIT to offer shareholders participating in its dividend reinvestment program (“DRIP”) up to a 5% discount on shares purchased through the DRIP without treating such reinvested dividends as preferential. Our DRIP offers a 5% discount. In 2007, 2008 and the first two quarters of 2009, common shares issued pursuant to our DRIP were treated as issued as of the first day following the close of the quarter for which the distributions were declared, and not on the date that the cash distributions were paid to shareholders not participating in our DRIP. Because we declare dividends on a daily basis, including with respect to common shares issued pursuant to our DRIP, the IRS could take the position that distributions paid by us during these periods were preferential on the grounds that the discount provided to DRIP participants effectively exceeded the authorized 5% discount or, alternatively, that the overall distributions were not pro rata among all shareholders. In addition, in the years 2007 through 2009 we paid certain individual retirement account (“IRA”) custodial fees in respect of IRA accounts that invested in our common shares. The payment of certain of such amounts could be treated as dividend distributions to the IRAs, and therefore as preferential dividends as such amounts were not paid in respect of our other outstanding common shares. Although we believe that the effect of the operation of our DRIP and the payment of such fees was immaterial, the REIT rules do not provide an exception for de minimis preferential dividends.

Accordingly, we submitted a request to the IRS for a closing agreement under which the IRS would grant us relief for preferential dividends that may have been paid as a result of the manner in which we operated our DRIP and in respect of our payment of certain of such custodial fees. There can be no assurance that the IRS will accept our proposal for a closing agreement. Even if the IRS accepts the proposal, we may be required to pay a fine if the IRS were to view the prior operation of our DRIP or the payment of such fees as preferential dividends. We cannot predict whether such a penalty would be imposed or, if so, the amount of the penalty. If the IRS does not agree to our proposal for a closing agreement and treats the foregoing amounts as preferential dividends, we may be able to rectify its failure to meet the REIT distribution requirements for a year by paying “deficiency dividends,” which would be paid in respect of all of its common shares pro rata and which would be included in our deduction for dividends paid in the prior years. If required, such deficiency dividends could be as much as approximately $22 million. In such a case, we would be able to avoid losing our qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, we would be required to pay an interest-like penalty based on the amount of its deficiency dividends. Amounts paid as deficiency dividends should generally be treated as taxable income for U.S. federal income tax purposes.

Revenue Recognition and Valuation of Receivables

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $6,535,000 and $6,785,000 as security for such leases at June 30, 2010 and December 31, 2009, respectively.

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.

Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $237,000 and $183,000 as of June 30, 2010 and December 31, 2009, respectively. During the six months ended June 30, 2010, we wrote off $310,000 of the uncollectible rent receivables for the tenant Randal C. Espey at the Deerfield Commons I property, tenants Cell Arch Technologies, Inc. and Keogh Consulting, Inc. at the Lakeside Office Center, and the tenant Romeo Rim, Inc. at the Cherokee Corporate Park. $363,000 of allowance for doubtful accounts was recognized during the six months ended June 30, 2010. In addition, the unamortized tangible and intangible asset balances totaling $27,000 were also written off during the six months ended June 30, 2010, of which ($10,000), $5,000, $8,000 and $24,000 are related to above/below market leases, lease commissions, tenant improvements and in place lease value, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Offering Costs

Offering costs totaling $26,462,000 and $16,049,000 were incurred during the six months ended June 30, 2010 and 2009, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Offering costs incurred through June 30, 2010 totaled $118,964,000. Of the total amount, $106,504,000 was incurred to CNL Securities Corp., as Dealer Manager; $3,969,000 was incurred to CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor; $442,000 was incurred to the Investment Advisor for reimbursable marketing costs and $8,049,000 was incurred to other service providers. Each party will be paid the amount incurred from proceeds of the public offering. As of June 30, 2010 and December 31, 2009, the accrued offering costs payable to related parties included in our consolidated balance sheets were $1,192,000 and $1,114,000, respectively. Offering costs payable to unrelated parties of $148,000 and $83,000 at June 30, 2010 and December 31, 2009, respectively, were included in accounts payable and accrued expenses.

Deferred Financing Costs and Discounts on Notes Payable

Direct costs incurred in connection with obtaining financing are amortized over the respective term of the loan on a straight-line basis, which approximates the effective interest method.

Discounts or premiums on notes payable are amortized to interest expense based on the effective interest method.

Translation of Non-U.S. Currency Amounts

The financial statements and transactions of our United Kingdom and European real estate operations are recorded in its functional currency, namely the Great Britain Pound (“GBP”) and the Euro (“EUR”) and are then translated into U.S. dollars (“USD”).

Assets and liabilities of this operation are denominated in the functional currency and are then translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the reporting period. Translation adjustments are reported in “Accumulated Other Comprehensive Loss,” a component of Shareholders’ Equity.

The carrying value of our United Kingdom assets and liabilities fluctuate due to changes in the exchange rate between the USD and the GBP. The exchange rate of the USD to the GBP was $1.4940 and $1.6156 at June 30, 2010 and December 31, 2009, respectively.

The profit and loss weighted average exchange rate of the USD to the GBP was approximately $1.4911 and $1.5775, and $1.5380 and $1.4762, respectively, for the three and six months ended June 30, 2010 and 2009.

The carrying value of our European assets and liabilities fluctuate due to changes in the exchange rate between the USD and the EUR. The exchange rate of the USD to the EUR was $1.2228 at June 30, 2010. We acquired our first property in Europe on June 10, 2010.

The profit and loss weighted average exchange rate of the USD to the EUR was approximately $1.2301 for the period ended June 30, 2010. We acquired our first property in Europe on June 10, 2010.

Class B Interest—Related Party

Effective July 1, 2004, REIT Holdings, an affiliate of the Investment Advisor, was granted a Class B interest in CBRE OP. The Class B interest is an equity instrument issued to non-employees in exchange for services. As modified by the second amended and restated agreement of limited partnership of CBRE OP entered into on January 30, 2009 (the “Second Amended Partnership Agreement”), the holder is entitled to receive distributions made by CBRE OP in an amount equal to 15% of all net sales proceeds on dispositions of properties or other assets (including by liquidation, merger or otherwise) after the other partners including us, have received in the aggregate, cumulative distributions from property income, sales proceeds or other services equal to (i) the total capital contributions made to CBRE OP and (ii) a 7% annual, uncompounded return on such capital contributions. The terms of the termination provision relating to the Class B interest requires its forfeiture in the event the Advisor unilaterally terminates the agreement between the Company, CBRE OP and the Investment Advisor (the “Advisory Agreement”). As a result future changes in the fair value of the Class B interest will be deferred from recognition in the financial statements until a listing of the common shares on a national securities exchange or a change in control transaction takes place.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Earnings Per Share Attributable to CB Richard Ellis Realty Trust Shareholders

Basic net income (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during each period. The computation of diluted net income (loss) further assumes the dilutive effect of stock options, stock warrants and contingently issuable shares, if any. No stock options, stock warrants or contingently issuable shares have been issued since the inception of the REIT and through June 30, 2010 that are not fully vested. As a result, there is no difference in basic and diluted shares.

Fair Value of Financial Instruments and Investments

We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Note 15 “Fair Value of Financial Instruments and Investments” and Note 16 “Fair Value Option-Note Payable.”

We generally determine or calculate the fair value of financial instruments using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the two interest rate swaps, one interest rate cap, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act), and one mortgage note payable that is economically hedged by one of the interest rate swaps.

The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.

We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact to our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:

 

  ¡  

Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination;

 

  ¡  

Long-lived assets measured at fair value due to an impairment assessment; and

 

  ¡  

Asset retirement obligations initially measured under the Codification Topic “Asset Retirement and Environmental Obligations” (“FASB ASC 410”).

Non-controlling (Minority) Interests in the Operating Partnership

Effective January 1, 2009, we adopted FASB ASC 810. The new accounting provisions require that amounts formerly reported as minority interests in our consolidated financial statements be reported as non-controlling interests. In connection with the issuance of this adoption, certain revisions were also made to the Codification Topic “Distinguishing Liabilities from Equity” (“FASB ASC 480-10-S99-3A”). These revisions clarify that non-controlling interests with redemption provisions outside of the control of the issuer and non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer are subject to evaluation to determine the appropriate balance sheet classification and measurement of such instruments.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

With respect to the operating partnership units, FASB ASC 480-10-S99-3A requires non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer to be further evaluated under the Codification Sub-Topic “Derivatives and Hedging—Conditions Necessary for Equity Classification” (“FASB ASC 815-40-25-10”) (Paragraphs 815-40-25-39 through 815-40-25-42) to determine whether permanent equity or temporary equity classification on the balance sheet is appropriate. Since the operating partnership units contain such a provision, the Company evaluated this guidance and determined that the operating partnership units do not meet the requirements to qualify for equity presentation. As a result, upon the adoption of FASB ASC 810 and the related revisions to FASB ASC 480-10-S99-3A, the operating partnership units are presented in the temporary equity section of the consolidated balance sheets and reported at the higher of their proportionate share of the net assets of CBRE OP or fair value, with period to period changes in value reported as an adjustment to shareholder’s equity. Under the terms of the Second Amended Partnership Agreement the fair value of the operating partnership units is determined as an amount equal to the redemption value as defined therein.

Subsequent Events

Effective for the second quarter of 2009, we adopted the provisions of FASB ASC 855-10—Subsequent Events (“FASB ASC 855-10”), as amended by Accounting Standard Update 2010-09. ASC 855-10 establishes principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. The adoption of ASC 855-10 did not have a material impact on our financial statements.

In preparing our accompanying financial statements, management has evaluated subsequent events through the financial statement issuance date.

Adoption of Accounting Standards

Consolidations

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” which incorporates Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009. The amendments in ASU 2009–17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in VIEs, which enhances the information provided to users of financial statements. We adopted ASU 2009-17 effective January 1, 2010. As a result of the fact that we have no variable interests in VIEs, the adoption of ASU 2009-17 did not have a material impact on our financial statements.

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06 which was an update to the Fair Value Measurements and Disclosure topic of the FASB Accounting Standards Codification (the “Codification”). ASU 2010-06 clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities. These requirements of ASU 2010-06 are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009. The adoption of these requirements of the ASU did not have a material impact on our financial statements.

New Accounting Standards

ASU 2010-06 also requires additional disclosures regarding the transfers of classifications among the fair value classification levels as well as the reasons for those changes and a separate presentation of purchases, sales, issuances and settlements in the presentation of the roll-forward of Level 3 assets and liabilities. Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 is not expected to have a material impact on our financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

3. Acquisition and Transfer of Real Estate

The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, site improvements, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above and below-market leases and the value of in-place leases and tenant relationships, if any, based in each case on their respective fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate. Acquisition costs are expensed as incurred.

Acquisition related expenses of $3,567,000 and $3,576,000 associated with the acquisition of consolidated real estate were expensed during the three and six months ended June 30, 2010. The purchase allocation to the assets and liabilities are preliminary and subject to revision based on the finalization of the valuations of the assets and liabilities acquired.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for the above noted acquisitions during the six months ended June 30, 2010 (in thousands):

 

Property

  Land   Site
Improvements
  Building
Improvements
  Tenant
Improvements
  Acquired In-
Place Lease
Value
  Above
Market
Lease
Value
  Below
Market
Lease
Value
    Preminum
on Notes
    Purchase
Price
  Notes
Payable
Assumed
    Net
Assets
Acquired

5160 Hacienda Drive

  $ 8,100   $ 554   $ 20,564   $ 1,775   $ 5,768   $ 1,739   $ —        $ —        $ 38,500   $ —        $ 38,500

10450 Pacific Center Court

    5,000     497     20,145     1,171     4,193     1,744     —          —          32,750     —          32,750

225 Summit Avenue

    7,100     964     24,679     2,207     6,704     —       (1,054     —          40,600     —          40,600

One Wayside Road

    7,000     491     38,138     2,317     7,718     803     (340     (602     55,525     (26,766     28,759
                                                                       
  $ 27,200   $ 2,506   $ 103,526   $ 7,470   $ 24,383   $ 4,286   $ (1,394   $ (602 )   $ 167,375   $ (26,766   $ 140,609
                                                                       

Building Improvements are depreciated over 39 years; Site Improvements are depreciated over 15 and 25 years; Tenant Improvements, Acquired In-Place Lease Value, Above Market Lease Value and Below Market Lease Value are amortized over the remaining lease terms at the time of acquisition.

The following table summarizes the net assets transferred to the Duke joint venture on March 31, 2010 relating to the contribution of our 100% ownership interests in the Miramar I and Miramar II properties (in thousands):

 

Property

   Land    Site
Improvements
    Building
Improvements
    Tenant
Improvements
    Acquired In-
Place Lease
Value
    Above
Market
Lease
Value
    Net
Assets
Transferred
 

Miramar I

   $ 3,347    $ 1,000      $ 7,607      $ 716      $ 3,380      $ 950      $ 17,000   

Miramar II

     4,477      1,142        13,110        827        4,550        1,373        25,479   
                                                       

Total Assets

     7,824      2,142        20,717        1,543        7,930        2,323        42,479   
                                                       

Accumulated Depreciation and Amortization

     —        (36 )     (133     (55     (284     (83     (591
                                                       

Net Assets

   $ 7,824    $ 2,106      $ 20,584      $ 1,488      $ 7,646      $ 2,240      $ 41,888   
                                                       

The contribution resulted in the deconsolidation of the Miramar I and Miramar II properties from our balance sheet on March 31, 2010 based on the contribution from consolidated subsidiaries to an unconsolidated investee entity, the Duke joint venture. As a result of the contribution, our investment in the Duke joint venture increased by $42,378,000 (inclusive of proration credits of $281,000 transferred to the Duke joint venture). We recorded a gain on the contribution of $154,000. Included in operations for the three months ended March 31, 2010, were revenues of $1,348,000 and operating expenses of $817,000. There were no comparable amounts of operations during the six months ended June 30, 2010 as the two contributed properties were not acquired until December 31, 2009.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Unaudited pro forma results, assuming the above noted acquisitions had occurred as of January 1, 2010 and January 1, 2009, for the purpose of the 2010 and 2009 pro forma disclosures, respectively, are presented below.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Revenue

   $ 20,207      $ 19,578     $ 42,538      $ 39,559   

Operating Loss

     (5,197     (5,042     (3,795     (4,862

Net Loss

     (3,410     (5,751     (1,442     (7,082

Basic and Diluted Loss Per Share

   $ (0.03   $ (0.08   $ (0.01   $ (0.10

Weighted Average Shares Outstanding for Basic and Diluted Loss

     128,444,105        74,543,506        120,399,165        70,844,927   

4. Investments in Unconsolidated Entities

Investments in unconsolidated entities at June 30, 2010 and December 31, 2009 consist of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

CBRE Strategic Partners Asia

   $ 5,432    $ 8,142

Duke Joint Venture

     236,710      185,088

Afton Ridge Joint Venture

     20,249      20,867

UK JV

     26,835      —  

European JV

     27,259      —  
             
   $ 316,485    $ 214,097
             

The following is a summary of the investments in unconsolidated entities for the six months ended June 30, 2010 and for the year ended December 31, 2009 (in thousands):

 

     For the Six Months
Ended June 30,
2010
    For the Year Ended
December  31,

2009
 

Investment Balance, January 1

   $ 214,097      $ 131,703   

Contributions

     117,989        91,536   

REIT Basis Adjustments

     (617 )     43   

Company’s Equity in Net Income (including adjustments for basis differences)

     2,846        2,743   

Other Comprehensive Income (Loss) of Unconsolidated Entities

     1,314        (142

Distributions

     (19,144 )     (11,786 )
                

Investment Balance, End of Period

   $ 316,485      $ 214,097   
                

CBRE Strategic Partners Asia

We have agreed to a capital commitment of $20,000,000 in CBRE Strategic Partners Asia, which extends for 36 months (to January 31, 2011) after the close of the final capital commitment. The investment commitment period was extended in January 2010 for a one year period from January 31, 2010 through January 31, 2011. As of June 30, 2010, we have contributed $12,097,000 of our capital commitment which was funded using net proceeds from our public offerings. CBRE Investors, our sponsor, formed CBRE Strategic Partners Asia to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in Asia, including China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. The initial closing date of CBRE Strategic Partners Asia was in July 2007, with additional commitments being accepted through January 2008. CBRE Strategic Partners Asia closed on January 31, 2008, with aggregate capital commitments of $394,200,000. CBRE Strategic Partners Asia has an eight year term, which may be extended for up to two one-year periods with the approval of two-thirds of the limited partners.

As of June 30, 2010, CBRE Strategic Partners Asia, with its parallel fund, CB Richard Ellis Strategic Partners Asia II, L.P., had aggregate investor commitments of approximately $394,200,000 from institutional investors including CBRE Investors. We own an ownership

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

interest of approximately 5.07% in CBRE Strategic Partners Asia. As of June 30, 2010, CBRE Strategic Partners Asia had acquired ownership interests in 10 properties, five in China and five in Japan and had sold two properties in China; one residential property and one mixed—use property. Our capital commitment is currently being pledged as collateral for borrowings of CBRE Strategic Partners Asia of which our pro-rata portion of such borrowing was approximately $2,562,000 and $5,208,000, based on our 5.07% ownership interest at June 30, 2010 and December 31, 2009, respectively.

On March 4, 2010, we received a distribution of net sales proceeds from CBRE Strategic Partners Asia totaling $2,435,000 from the February 23, 2010 sale of a residential property located in Beijing, China. The cash distributions in connection with the Beijing residential property sale are subject to recall and reinvestment into appropriate investments until the expiration of the CBRE Strategic Partners Asia commitment period on January 31, 2011.

On May 26, 2010, we received a distribution of net sales proceeds from CBRE Strategic Partners Asia totaling $3,146,000 from the sale of a joint venture interest in a mixed use project located in Tianjin, China. The cash distributions from this transaction are not subject to recall.

We carry our investment in CBRE Strategic Partners Asia on the equity method of accounting. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities (including certain entities where we have less than 20% ownership) are accounted for using the equity method. Accordingly, our share of the income or loss of these equity method entities is included in consolidated net income or loss. CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis applied by CBRE Strategic Partners Asia under the investment company guide, is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 15 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

Consolidated Balance Sheets of CBRE Strategic Partners Asia as of June 30, 2010 (unaudited) and December 31, 2009 (in thousands):

 

     June 30,
2010
   December 31,
2009

Assets

     

Real Estate

   $ 200,873    $ 332,712

Other Assets

     10,719      11,224
             

Total Assets

   $ 211,592    $ 343,936
             

Liabilities and Equity

     

Notes Payable

   $ 40,082    $ 68,686

Loan Payable

     50,535      102,716

Other Liabilities

     11,872      10,509
             

Total Liabilities

     102,489      181,911
             

Company’s Equity

     5,432      8,142

Other Investors’ Equity

     103,671      153,883
             

Total Liabilities and Equity

   $ 211,592    $ 343,936
             

Consolidated Statements of Operations of CBRE Strategic Partners Asia for the three and six months ended June 30, 2010 and 2009 (unaudited) (in thousands):

 

     Three
Months Ended
June 30,
    Six
Months Ended
June 30,
 
     2010    2009     2010     2009  

Total Revenues and Appreciation (Depreciation)

   $ 6,611    $ 12,001      $ 5,997      $ 12,295   

Total Expenses

     5,865      39,991        8,531        60,165   
                               

Net Income (Loss)

     746      (27,990     (2,534     (47,870
                               

Company’s Equity in Net Income (Loss)

   $ 28    $ (1,430   $ (148   $ (2,449
                               

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Duke Joint Venture

On May 5, 2008, we entered into a contribution agreement with Duke Realty Limited Partnership (“Duke”), a subsidiary of Duke Realty Corporation (NYSE: DRE), to form the Duke joint venture to acquire $248,900,500 in industrial real property assets (the “Industrial Portfolio”). The Industrial Portfolio consists of six bulk industrial built-to-suit, fully leased properties. On September 12, 2008, we entered into an amendment to the contribution agreement to acquire a fully leased office building for $37,111,000 and to increase and revise the total purchase commitment to $282,400,000. We own an 80% interest and Duke owns a 20% interest in the Duke joint venture.

On June 12, 2008, September 30, 2008 and December 10, 2008, the Duke joint venture acquired fee interests in seven properties pursuant to the contribution agreement. All of the properties acquired were new built-to-suit, 100% leased, single-tenant buildings that did not have an operating history. The Duke joint venture obtained financing from 40/86 Mortgage Capital, Inc. for each of the seven properties. The financings, totaling $150,000,000, carry an interest rate of 5.58%, a term of five years and are cross-collateralized among the properties. The seven buildings were completed in 2008.

On May 13, 2009, the Duke joint venture acquired each of (i) 22535 Colonial Pkwy., located at 22535 Colonial Pkwy., Katy, TX, a suburb of Houston, (ii) Celebration Office Center III, located at 1390 Celebration Blvd., Celebration, FL, a suburb of Orlando, and (iii) Fairfield Distribution Ctr. IX located 4543-4561 Oak Fair Blvd., Tampa FL. The Duke joint venture acquired 22535 Colonial Pkwy. for approximately $14,700,000, Celebration Office Center III for approximately $17,050,000 and Fairfield Distribution Ctr. IX for approximately $9,300,000, exclusive of customary closing costs which were both expensed as incurred. We made cash contributions totaling approximately $32,840,000 to the Duke joint venture in connection with these acquisitions, using the net proceeds from our current public offering.

On October 15, 2009, the Duke joint venture acquired Northpoint III, located at 3300 Exchange Place, Lake Mary, FL, a suburb of Orlando, for approximately $18,240,000, exclusive of customary closing costs and acquisition fees which were both expensed, as incurred. We made cash contributions totaling approximately $14,592,000 to the Duke joint venture in connection with the acquisition.

On December 7, 2009, the Duke joint venture acquired Goodyear Crossing Ind. Park II, located at 16920 W. Commerce Drive, Goodyear, AZ, a suburb of Phoenix, for approximately $45,645,000, exclusive of customary closing costs and acquisition fees which were both expensed as incurred. We made cash contributions of approximately $36,516,000 to the Duke joint venture in connection with the acquisition.

On March 31, 2010, the Duke joint venture acquired 3900 North Paramount Parkway, 3900 South Paramount Parkway and 1400 Perimeter Park Drive in Morrisville, NC, a suburb of Raleigh, for approximately $35,250,000, exclusive of customary closing costs and acquisition fees which are both expensed as incurred. We made contributions of approximately of $28,125,000 ($19,649,000 was made in cash and $8,476,000 in-kind as discussed below) to the Duke joint venture in connection with the acquisition.

On March 31, 2010, we contributed our Miramar I and Miramar II properties, located at 2300 and 2200 SW 145th Avenue in Miramar, FL, a suburb of Miami, to the Duke joint venture for approximately our cost of $42,650,000. Our cost of $42,650,000, of which $8,476,000 was considered an in-kind contribution by us to the Duke joint venture representing our 20% divestiture of the Miramar I and Miramar II properties, was part of a structured transaction as an offset to the $28,125,000 owed by us for our 80% share of the Duke joint venture’s purchase of 3900 North Paramount Parkway, 3900 South Paramount Parkway and 1400 Perimeter Park Drive.

As of June 30, 2010, the Duke joint venture has purchased approximately $465,766,000 of assets, exclusive of acquisition fees and closing costs, and holds interests in 17 properties, six located in Florida, three located in North Carolina, two located in Indiana, two located in Texas, two located in Arizona and one in each of Ohio and Tennessee.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

The following table provides further detailed information concerning the properties held in the Duke joint venture at June 30, 2010:

 

Property and Market

  Property
Type
  Net
Rentable
Square
Feet
 

Tenant

  Lease
Expiration
  Approximate
Purchase
Price(1)
  Pro Rata
Share of
Approximate
Purchase
Price(2)
  Approximate
Debt
Financing
  Acquisition
Fee(3)

Buckeye Logistics Center / Phoenix, AZ

  Warehouse/

Distribution

  604,678   Amazon.com(4)   06/2018   $ 43,601,000   $ 34,880,800   $ 20,000,000   $ 349,000

201 Sunridge Blvd. / Dallas, TX

  Warehouse/

Distribution

  822,550   Unilever(5)   09/2018     31,626,000     25,300,800     19,400,000     253,000

12200 President’s Court /
Jacksonville, FL

  Warehouse/

Distribution

  772,210   Unilever(5)   09/2018     36,956,000     29,564,800     21,600,000     296,000

AllPoints at Anson Bldg. 1 / Indianapolis, IN

  Warehouse/

Distribution

  630,573   Amazon.com(4)   07/2018     33,401,000     26,720,800     17,000,000     267,000

Aspen Corporate Center 500 / Nashville, TN

  Office   180,147  

Verizon

Wireless(6)

  10/2018     37,111,000     29,688,800     21,200,000     297,000

125 Enterprise Parkway /
Columbus, OH

  Warehouse/

Distribution

  1,142,400   Kellogg’s   03/2019     47,905,000     38,324,000     26,800,000     383,000

AllPoints Midwest Bldg. 1 / Indianapolis, IN

  Warehouse/

Distribution

  1,200,420  

Prime

Distribution

  05/2019     51,800,000     41,440,000     24,000,000     414,000

22535 Colonial Pkwy. / Houston, TX

  Office   89,750  

Det Norske

Veritas

  06/2019     14,700,000     11,760,000     —       176,000

Celebration Office Center III /
Orlando, FL

  Office   100,924  

Disney Vacation

Development

  04/2016     17,050,000     13,640,000     —       205,000

Fairfield Distribution Ctr. IX / Tampa, FL

  Warehouse/

Distribution

  136,212   Iron Mountain   08/2025     9,300,000     7,440,000     —       112,000

Northpoint III / Orlando, FL

  Office   108,499   Florida Power   10/2021     18,240,000     14,592,000     —       219,000

Goodyear Crossing Ind. Park II / Phoenix, AZ

  Warehouse/

Distribution

  820,384   Amazon.com(4)   09/2019     45,645,000     36,516,000     —       548,000

3900 N. Paramount Pkwy. / Raleigh, NC

  Office   100,987   PPD Development   11/2023     13,970,000     11,176,000     —       168,000

3900 S. Paramount Pkwy. / Raleigh, NC

  Office   119,170  

PPD Development/

LSSI

  11/2023
10/2012
    16,319,000     13,055,200     —       196,000

1400 Perimeter Park Drive /
Raleigh, NC

  Office   44,916   PPD Development   11/2023     4,962,000     3,969,600     —       60,000

Miramar I/ Miami, FL(7)

  Office   94,060   DeVry   11/2017     17,056,000     13,644,800     —       —  

Miramar II/ Miami, FL(7)

  Office   128,540   Royal Caribbean   05/2016     26,124,000     20,899,200     —       —  
                                 
    7,096,420       $ 465,766,000   $ 372,612,800   $ 150,000,000   $ 3,943,000
                                 

 

(1)

Approximate total purchase price, exclusive of closing costs, paid by the Duke joint venture for each of these properties.

 

(2)

Pro rata share of approximate purchase price is at our pro rata share of effective ownership for each of these properties, which was funded using net proceeds of our public offerings.

 

(3)

Acquisition fees paid to our Investment Advisor are included in the total acquisition cost for the properties acquired prior to January 1, 2009, but are included as acquisition expenses for properties acquired subsequent to December 31, 2008.

 

(4)

Our tenants Amazon.com.indc, LLC, Amazon.com.axdc, Inc. and Amazon.com.azdc, Inc. are wholly-owned subsidiaries of Amazon.com. AllPoints at Anson Bldg. 1, Buckeye Logistics Center and Goodyear Crossing Ind. Park II are among Amazon’s largest fulfillment centers in North America by square footage.

 

(5)

Our tenant CONOPCO, Inc. is a wholly-owned subsidiary of Unilever United States, Inc., which is wholly-owned by Unilever N.V. and Unilever PLC, together Unilever.

 

(6)

Our tenant Cellco Partnership does business as Verizon Wireless.

 

(7)

Consolidated properties acquired on December 31, 2009 and contributed to the Duke joint venture on March 31, 2010.

We entered into an operating agreement for the Duke joint venture with Duke on June 12, 2008. Duke acts as the managing member of the Duke joint venture and is entitled to receive fees in connection with the services it provides to the Duke joint venture, including asset management, construction, development, leasing and property management services. Duke is also entitled to a promoted interest in the Duke joint venture. We have joint approval rights over all major decisions.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

For a period of three years from the date of the operating agreement, the Duke joint venture will have the right of first offer to acquire additional newly developed bulk industrial built-to-suit properties from Duke if such properties satisfy certain specified conditions. We will retain the right to approve the acquisition and purchase price of each such property. The total amount of properties (inclusive of the Industrial Portfolio) that may be contributed to the Duke joint venture over this period may be up to $800,000,000. As of June 30, 2010, we have no further required capital commitments to fund the Duke joint venture, but may continue to participate in future available properties at our discretion.

We carry our investment in the Duke joint venture on the equity method of accounting because it is an entity under common control with Duke. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity method subsidiaries to the extent of our ownership in such entities.

Consolidated Balance Sheet of the Duke joint venture as of June 30, 2010 (unaudited) (in thousands):

 

     June 30,
2010
   REIT  Basis
Adjustments(1)
   Total

Assets

        

Real Estate Net

   $ 396,312    $ 2,228    $ 398,540

Other Assets

     52,454      —        52,454
                    

Total Assets

   $ 448,766    $ 2,228    $ 450,994
                    

Liabilities and Equity

        

Notes Payable

   $ 150,000      —      $ 150,000

Other Liabilities

     5,663      —        5,663
                    

Total Liabilities

     155,663      —        155,663
                    

Company’s Equity

     234,482      2,228      236,710

Other Investor’s Equity

     58,621      —        58,621
                    

Total Liabilities and Equity

   $ 448,766    $ 2,228    $ 450,994
                    

 

(1)

REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired through the Duke joint venture including acquisition fees paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred.

Consolidated Balance Sheet of the Duke joint venture as of December 31, 2009 (in thousands):

 

     December 31,
2009
   REIT  Basis
Adjustments(1)
   Total

Assets

        

Real Estate Net

   $ 339,746    $ 2,906    $ 342,652

Other Assets

     41,979      —        41,979
                    

Total Assets

   $ 381,725    $ 2,906    $ 384,631
                    

Liabilities and Equity

        

Notes Payable

   $ 150,000      —      $ 150,000

Other Liabilities

     4,295      —        4,295
                    

Total Liabilities

     154,295      —        154,295
                    

Company’s Equity

     182,182      2,906      185,088

Other Investor’s Equity

     45,248      —        45,248
                    

Total Liabilities and Equity

   $ 381,725    $ 2,906    $ 384,631
                    

 

(1)

REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired through the Duke joint venture including acquisition fees paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Consolidated Statement of Operations of the Duke joint venture for the three and six months ended June 30, 2010 and 2009, (unaudited) (in thousands);

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009         2010     2009  

Total Revenues

   $ 12,467      $ 6,819      $ 22,427      $ 13,030   

Operating Expenses

     2,704        1,316        5,082        2,477   

Interest

     2,144        2,144        4,288        4,288   

Depreciation and Amortization

     4,932        3,047        9,018        5,836   
                                

Net Income

   $ 2,687      $ 312      $ 4,039      $ 429   
                                

Company’s Share in Net Income

   $ 2,149      $ 312      $ 2,993      $ 429   

Adjustments for Company Basis

     (29 )     (22     (61 )     (54 )
                                

Company’s Equity in Net Income

   $ 2,120      $ 290      $ 2,932      $ 375   
                                

Afton Ridge Joint Venture

On September 18, 2008, we acquired a 90% ownership interest in Afton Ridge, the owner of Afton Ridge Shopping Center, from unrelated third parties. CK Afton Ridge Shopping Center, LLC, a subsidiary of Childress Klein Properties, Inc. (“CK Afton Ridge”), retained a 10% ownership interest in Afton Ridge and continues to manage Afton Ridge Shopping Center. CK Afton Ridge acts as the managing member of Afton Ridge and is entitled to receive fees, including management, construction management and property management fees. We have joint approval rights over all major policy decisions.

Afton Ridge Shopping Center is located at the intersection of I-85 and Kannapolis Parkway, in Kannapolis, North Carolina. We acquired our ownership interest in Afton Ridge for approximately $45,000,000, exclusive of customary closing costs, which was funded using net proceeds from our initial public offering. Upon closing, we paid our Investment Advisor an acquisition fee of approximately $450,000. This acquisition fee is not included in the $45,000,000 total acquisition cost of Afton Ridge, but is included as additional cost basis at our wholly-owned investment subsidiary.

The purchase agreement with the seller contained a two year master lease agreement whereby rental revenues were guaranteed by the seller on the 9% unoccupied space at the date of the acquisition up to a maximum of $1,102,000. In addition, leasing commissions and tenant improvement allowances were to be reimbursed under the purchase agreement up to $934,000 over the same two year period for leasing activities incurred by Afton Ridge to lease this unoccupied space. As of June 30, 2010, $691,000 in rental revenue guarantee payments and $521,000 in leasing commission and tenant reimbursement payments, respectively, have been received by Afton Ridge and treated as purchase price adjustments in the period when the contingency was resolved on the Afton Ridge standalone financial statements. Our pro rata share of such purchase price adjustments have been treated as a reduction of our investment in Afton Ridge.

Afton Ridge Shopping Center is a 470,288 square foot regional shopping center, completed in 2006, in which Afton Ridge owns 296,388 rentable square feet that is currently 95% leased. One of the shopping center’s anchors, a 173,900 square foot SuperTarget, is not owned by us. Additional anchor tenants in Afton Ridge Shopping Center are Best Buy, Marshalls, PetSmart, Dick’s Sporting Goods, Stein Mart and Ashley Furniture. Afton Ridge Shopping Center is the retail component of a 260 acre master planned mixed-use development.

On October 15, 2008, Afton Ridge obtained a $25,500,000 loan from the Metropolitan Life Insurance Company, secured by the Afton Ridge Shopping Center originally acquired on September 18, 2008. The loan is for a term of five years, plus a 12 month extension option, and bears interest at a fixed rate of 5.70%. Interest payments only are due monthly for the term of the loan with principal due at maturity.

We carry our investment in Afton Ridge on the equity method of accounting because it is an entity under common control with CK Afton Ridge. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity investees to the extent of our ownership in such entities.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Consolidated Balance Sheet of Afton Ridge as of June 30, 2010 (unaudited) (in thousands):

 

     June 30,
2010
   REIT  Basis
Adjustments(1)
   Total

Assets

        

Real Estate Net

   $ 46,978    $ 613    $ 47,591

Other Assets

     4,221      —        4,221
                    

Total Assets

   $ 51,199    $ 613    $ 51,812
                    

Liabilities and Equity

        

Note Payable

   $ 25,500      —      $ 25,500

Other Liabilities

     3,882      —        3,882
                    

Total Liabilities

     29,382      —        29,382
                    

Company’s Equity

     19,636      613      20,249

Other Investor’s Equity

     2,181      —        2,181
                    

Total Liabilities and Equity

   $ 51,199    $ 613    $ 51,812
                    

 

(1)

REIT Basis Adjustments include those costs incurred by the Company outside of Afton Ridge that are directly capitalizable to its investment in real estate assets acquired through Afton Ridge including acquisition fees paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisitions fees were expensed as incurred.

Consolidated Balance Sheet of Afton Ridge as of December 31, 2009 (in thousands):

 

     December 31,
2009
   REIT  Basis
Adjustments(1)
   Total

Assets

        

Real Estate Net

   $ 47,743    $ 623    $ 48,366

Other Assets

     4,073      —        4,073
                    

Total Assets

   $ 51,816    $ 623    $ 52,439
                    

Liabilities and Equity

        

Note Payable

   $ 25,500      —      $ 25,500

Other Liabilities

     3,822      —        3,822
                    

Total Liabilities

     29,322      —        29,322
                    

Company’s Equity

     20,244      623      20,867

Other Investor’s Equity

     2,250      —        2,250
                    

Total Liabilities and Equity

   $ 51,816    $ 623    $ 52,439
                    

 

(1)

REIT Basis Adjustments include those costs incurred by the Company outside of Afton Ridge that are directly capitalizable to its investment in real estate assets acquired through Afton Ridge including acquisition fees paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisitions fees were expensed as incurred.

Consolidated Statements of Operations of Afton Ridge for the three and six months ended June 30, 2010 and 2009 (unaudited) (in thousands);

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Total Revenues

   $ 1,265      $ 1,272      $ 2,565      $ 2,555   

Operating Expenses

     299        338        650        639   

Interest

     376        376        752        752   

Depreciation and Amortization

     450        456        902        906   
                                

Net Income

   $ 140      $ 102      $ 261      $ 258   
                                

Company’s Share in Net Income

   $ 126      $ 92      $ 235      $ 233   

Adjustments for REIT Basis

     (3 )     (5 )     (10 )     (10 )
                                

Company’s Equity in Net Income

   $ 123      $ 87      $ 225      $ 223   
                                

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

UK JV and European JV

On June 10, 2010, we entered into two joint ventures with subsidiaries of the Goodman Group (ASX: GMG), or Goodman, one of which will seek to invest in logistics focused warehouse/distribution properties in the United Kingdom, or the UK JV, and the other which will seek to invest in logistics focused warehouse/distribution properties in France, Belgium, the Netherlands, Luxembourg and Germany, or the European JV. We own an 80% interest in each joint venture and Goodman owns a 20% interest in each joint venture. The terms of each joint venture are described in more detail below.

UK JV

The shareholders’ agreement pertaining to the UK JV is by and among RT Princeton UK Holdings, LLC (our wholly-owned subsidiary), Goodman Jersey Holding Trust and Goodman Princeton Holdings (Jersey) Limited, the UK JV, for the purpose of acquiring and holding, either directly or indirectly, up to £400,000,000 in logistics focused warehouse/distribution properties. On June 10, 2010, we initially funded the UK J.V. with capital contributions of $26,180,000. The UK JV has acquired an initial portfolio of two properties, as described further in the table below, which were previously owned by a subsidiary of Goodman and which were purchased by the UK JV simultaneously with the closing of the UK JV.

 

Property and Market

  Year
Built
 

Property Type

 

Tenant

  Net Rentable
Sq. Feet
  Percentage
Leased
    Lease
Expiration
  Approximate
Total
Acquisition Cost
(in thousands)

Amber Park, South Normanton, UK

  1990  

Warehouse/Distribution

 

UniDrug Distribution Group

  208,423   100   3/2017   $ 15,642

Brackmills, Northampton, UK

  1984  

Warehouse/Distribution

  GE Lighting Operations Limited   186,618   100   3/2017   $ 16,759

The initial investment term of the UK JV is three years. A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the UK JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.

During the investment period, the UK JV has a right of first offer, with respect to certain logistics development or logistics investment assets considered for investment in the UK by Goodman or us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the UK JV may exercise a buy-sell option.

The UK JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the UK JV, including but not limited to investment advisory, development management and property management services. Goodman may also be entitled to a promoted interest in the UK JV.

Consolidated Balance Sheet of UK JV as of June 30, 2010 (unaudited) (in thousands):

 

     June 30,
2010

Assets

  

Real Estate Net

   $ 33,391

Other Assets

     966
      

Total Assets

   $ 34,357
      

Liabilities and Equity

  

Other Liabilities

   $ 813
      

Total Liabilities

     813
      

Company’s Equity

     26,835

Other Investor’s Equity

     6,709
      

Total Liabilities and Equity

   $ 34,357
      

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Consolidated Statements of Operations of UK JV for the period June 10, 2010 through June 30, 2010 (unaudited) (in thousands); there were no activities for the three and six months ended June 30, 2009:

 

     For the Period June 10,
2010 Through June 30,
2010
 

Total Revenues

   $ 162   

Operating Expenses

     338   
        

Net Loss

   $ (176 )
        

Company’s Equity in Net Loss

   $ (141 )
        

European JV

The shareholders’ agreement pertaining to the European JV is by and among RT Princeton CE Holdings, LLC (our wholly-owned subsidiary), Goodman Europe Development Trust acting by its trustee Goodman Europe Development Pty Ltd. and Goodman Princeton Holdings (LUX) S.À.R.L., the European JV, for the purpose of acquiring and holding, either directly or indirectly, up to 400,000,000 in logistics focused warehouse/ distribution properties. On June 10, 2010, we initially funded the European JV with capital contributions of $26,802,000. The European JV has acquired an initial portfolio of two properties, as described further in the table below, which were previously owned by a subsidiary of Goodman and which were purchased by the European JV simultaneously with the closing of the European JV and expects to acquire a third property upon its completion, which is expected to be in the third quarter of 2010.

 

Property and Market

  Year
Built
 

Property Type

 

Tenant

  Net
Rentable

Sq. Feet
  Percentage
Leased
    Lease
Expiration
  Approximate
Total
Acquisition Cost
(in thousands)

Düren, Düren Germany

  2008  

Warehouse/Distribution

 

Metsä Tissue GmbH

  391,494   100   01/2013   $ 16,435

Shönberg, Shönberg, Germany

  2009  

Warehouse/Distribution

 

LK Logistik GmbH

  443,215   100   04/2015   $ 17,274

Langenbach, Munich, Germany(1)

  N/A  

Warehouse/Distribution

  DSV Stuttgart GmbH & Co. KG   225,106   100   07/2015     —  

 

(1)

The European JV expects to acquire Langenbach upon its completion which is expected to occur during the third quarter of 2010. This acquisition is subject to certain contingencies and there can be no assurance that this acquisition will occur.

The initial investment term of the European JV is three years. A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the European JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.

During the investment period, the European JV has a right of second offer (after another investment vehicle managed by Goodman) with respect to certain logistics development or logistics investment assets considered for investment by Goodman, and has a right of first offer with respect to certain logistics development or logistics investment assets considered for investment by us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the European JV may exercise a buy-sell option. The European JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the European JV, including but not limited to investment advisory, development management and property management services. Certain Goodman subsidiaries may also be entitled to a promoted interest in the European JV.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Consolidated Balance Sheet of European JV as of June 30, 2010 (unaudited) (in thousands):

 

     June 30,
2010

Assets

  

Real Estate Net

   $ 34,361

Other Assets

     2,856
      

Total Assets

   $ 37,217
      

Liabilities and Equity

  

Other Liabilities

   $ 3,144
      

Total Liabilities

     3,144
      

Company’s Equity

     27,259

Other Investor’s Equity

     6,814
      

Total Liabilities and Equity

   $ 37,217
      

Consolidated Statements of Operations of European JV for the period June 10, 2010 through June 30, 2010 (unaudited) (in thousands); there were no activities for the three and six months ended June 30, 2009:

 

     For the Period June 10,
2010 Through June 30,
2010
 

Total Revenues

   $ 182   

Operating Expenses

     210   
        

Net Loss

   $ (28 )
        

Company’s Equity in Net Loss

   $ (22 )
        

5. Acquisition Related Intangible Assets

Our acquisition related intangible assets are included in the consolidated balance sheets as acquired in-place lease value, acquired above market lease value and acquired below market lease value.

The following is a schedule of future amortization of acquisition related intangible assets as of June 30, 2010 (in thousands):

 

     Acquired
In-Place Lease Value
   Below Market
Lease Value
   Above Market
Lease Value

2010 (Six months ending December 31, 2010)

   $ 5,548    $ 1,437    $ 1,632

2011

     10,870      2,871      3,251

2012

     9,303      2,134      3,203

2013

     7,817      1,354      2,383

2014

     6,613      1,259      1,284

2015

     6,392      1,222      1,213

Thereafter

     25,580      3,724      5,495
                    
   $ 72,123    $ 14,001    $ 18,461
                    

The amortization of the above and below-market lease values included in rental revenue were ($762,000) and $685,000, respectively, for the three months ended June 30, 2010, ($1,173,000) and $1,193,000, respectively, for the three months ended June 30, 2009. The amortization of in-place lease value included in amortization expense was $2,382,000 and $2,675,000 for the three months ended June 30, 2010 and 2009, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

The amortization of the above and below-market lease values included in rental revenue were ($1,497,000) and $1,382,000, respectively, for the six months ended June 30, 2010, ($1,866,000) and $1,469,000, respectively, for the six months ended June 30, 2009. The amortization of in-place lease value included in amortization expense was $5,162,000 and $5,070,000 for the six months ended June 30, 2010 and 2009, respectively.

6. Debt

Notes Payable secured by real property are summarized as follows (in thousands):

 

Property

   Interest Rate as of     Maturity Date    Notes Payable as of  
   June 30,
2010
    December 31,
2009
       June 30,
2010
    December 31,
2009
 

REMEC

   4.79 %   4.79 %   November 1, 2011    $ 13,250      $ 13,250   

300 Constitution

   4.84      4.84      April 1, 2012      12,000        12,000   

Deerfield Commons I.(1)

   5.23      5.23      December 1, 2015      9,725        9,725   

602 Central Blvd.(2)

   —        1.25      —        —          8,886   

Bolingbrook Point III

   5.26      5.26      January 1, 2015      9,000        9,000   

Fairforest Bldg. 5(3)

   6.33      6.33      February 1, 2024      10,101        10,330   

Fairforest Bldg. 6(3)

   5.42      5.42      June 1, 2019      3,124        3,257   

HJ Park—Bldg. 1(3)

   4.98      4.98      March 1, 2013      783        914   

North Rhett I(3)

   5.65      5.65      August 1, 2019      4,078        4,246   

North Rhett II(3)

   5.20      5.20      October 1, 2020      2,264        2,345   

North Rhett III(3)

   5.75      5.75      February 1, 2020      1,832        1,903   

North Rhett IV(3)

   5.80      5.80      February 1, 2025      10,113        10,328   

Mt Holly Bldg.(3)

   5.20      5.20      October 1, 2020      2,264        2,345   

Orangeburg Park Bldg(3)

   5.20      5.20      October 1, 2020      2,302        2,385   

Kings Mountain I(3)

   5.27      5.27      October 1, 2020      1,959        2,030   

Kings Mountain II(3)

   5.47      5.47      January 1, 2020      5,829        6,057   

Union Cross Bldg. I(3)

   5.50      5.50      July 1, 2021      2,843        2,935   

Union Cross Bldg. II(3)

   5.53      5.53      June 1, 2021      8,689        8,972   

Thames Valley Five(4)(5)

   6.42      6.42      May 30, 2013      11,205        12,117   

Lakeside Office Center(6)

   6.03      6.03      September 1, 2015      9,000        9,000   

Enclave on the Lake(7)

   5.45      5.45      May 1, 2011      18,092        18,274   

Albion Mills Retail Park(4)(8)(9)

   5.25      5.25      October 10, 2013      8,621        9,323   

Avion Midrise III & IV(10)

   5.52      5.52      April 1, 2014      21,561        21,765   

12650 Ingenuity Drive(11)

   5.62      5.62      October 1, 2014      13,244        13,424   

Maskew Retail Park(4)(12)

   5.68      5.68      August 10, 2014      20,879        22,578   

One Wayside Road(13)

   5.66      —        August 1, 2015      14,606        —     

One Wayside Road(13)

   5.92      —        August 1, 2015      12,111        —     
                       

Notes Payable

            229,475        217,389   

Plus Premium

            602        —     

Less Discount

            (4,157 )     (4,615 )

Less Albion Mills Retail Park Fair Value Adjustment

            (247 )     (349 )
                       

Notes Payable Net of Premiums / Discounts and Fair Value Adjustment

          $ 225,673      $ 212,425   
                       

 

(1)

Interest only payments are due monthly for the first 60 months of the loan term. Principal and interest payments are due monthly for the remaining 60 months of the loan term.

 

(2)

This loan was fully paid off on March 11, 2010.

 

(3)

These notes payable were assumed from the seller of the Carolina Portfolio on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount.

 

(4)

These loans are subject to certain financial covenants (interest coverage and loan to value).

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

(5)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of June 30, 2010 which expires on May 30, 2013. The stated rates on the mortgage note payable were 1.66% and 1.59% at June 30, 2010 and December 31, 2009, respectively, and were based on GBP-based LIBOR plus a spread of 1.01%.

 

(6)

Interest only payments are due monthly for the first 36 months of the loan term. Principal and interest payments are due monthly for the remaining 48 months of the loan term.

 

(7)

The loan was assumed from the seller of Enclave on the Lake on July 1, 2008 and was recorded at estimated fair value which includes the discount.

 

(8)

The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 15).

 

(9)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of June 30, 2010 which expires on October 10, 2013. The stated rates on the mortgage note payable were 1.96% and 1.88% at June 30, 2010 and December 31, 2009, respectively, and were based on GBP-based LIBOR plus a spread of 1.31%.

 

(10)

The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount.

 

(11)

The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount.

 

(12)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26 or 5.68% per annum as of June 30, 2010 which expires on August 10, 2014. The stated rates on the mortgage note payable was 2.91% and 2.83% at June 30, 2010 and December 31, 2009, respectively, and were based on GBP-based LIBOR plus a spread of 2.26%.

 

(13)

The two loans were assumed from the seller of One Wayside Road on June 24, 2010 and were recorded at estimated fair value which include the premiums.

Notes Payable / Loans Payable

On April 27, 2007, we, in connection with the acquisition of 602 Central Blvd., entered into a £5,500,000 financing arrangement with the Royal Bank of Scotland secured by the property. The loan was for a term of seven years with interest at a variable rate, adjusted quarterly, based on three month GBP-based LIBOR plus 0.67%, per annum. On March 11, 2010, we paid off the £5,500,000 ($8,281,000 at March 11, 2010) loan and expensed certain closing costs plus the unamortized deferred financing costs associated with obtaining the loan totaling $73,000. The interest rate cap agreement was cancelled concurrent with the loan payoff.

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $1,868,000 were made during the six months ended June 30, 2010. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.

On May 30, 2008, we entered into a £7,500,000 ($11,205,000 at June 30, 2010) financing arrangement with the Royal Bank of Scotland plc secured by the Thames Valley Five property. The loan is for a term of five years (with a two year extension option) and bears interest at a variable rate adjusted quarterly, based on six month GBP-based LIBOR plus 1.01%. In addition, we incurred financing costs of approximately £67,000 ($100,000 at June 30, 2010) associated with obtaining this loan. On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of June 30, 2010, and expires on May 30, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On July 1, 2008, in connection with the acquisition of Enclave on the Lake, we assumed an $18,281,000 ($18,790,000 face value less discount of $509,000) loan from NorthMarq Capital, Inc. that bears interest at a fixed rate of 5.45% per annum and matures on May 1, 2011. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $182,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $241,000 in conjunction with the assumption of the loan.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

On October 10, 2008, we entered into a £5,771,000 ($8,621,000 at June 30, 2010) financing agreement with the Royal Bank of Scotland plc secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on six month GBP-based LIBOR plus 1.31%. In addition, we incurred financing costs of approximately £75,000 ($112,000 at June 30, 2010) associated with obtaining this loan. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of June 30, 2010 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $204,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $344,000 in conjunction with the assumption of the loan.

On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $180,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $284,000 in conjunction with the assumption of the loan.

On August 10, 2009, we entered into a £13,975,000 ($20,879,000 at June 30, 2010) financing agreement with the Abbey National Treasury Services plc secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity. In addition, we incurred financing costs of approximately £268,000 ($401,000 at June 30, 2010) associated with obtaining this loan.

On May 26, 2010, we entered into a $70,000,000 revolving credit facility through our subsidiaries with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility is May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010 and is included in Loans Payable on our consolidated balance sheet, with the remaining $55,000,000 available for disbursement during the term of the facility. We have the right to prepay any outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we generally may not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. The Wells Fargo Credit Facility bears interest at a floating rate of 300 basis points over the LIBOR, however the interest rate shall be at least 4.00% for any of the outstanding balance that is not subject to an interest rate swap with an initial term of at least two years. Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 14 “Derivative Instruments.” The Wells Fargo Credit Facility is secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CBRE OP provides a limited guarantee for the Wells Fargo Credit Facility. The Wells Fargo Credit Facility is subject to certain customary financial covenants, including certain negative financial covenants, which we believe we were in compliance with as of May 26, 2010. A commitment fee of $1,050,000 was paid to Wells Fargo Bank, N.A. at closing. We will also pay certain other customary fees in connection with the Wells Fargo Credit Facility including fees related to the unused loan amount, extension, administrative and other fees, the amount of which in some cases is subject to certain terms and conditions.

On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road (i) $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015 and (ii) $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $48,000 were made during June 2010 on the two loans. In addition, we incurred financing costs totaling $342,000 in conjunction with the assumption of the loan.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

The minimum principal payments due for the notes payable and loan payable are as follows as of June 30, 2010 (in thousands):

 

2010 (Six months ending December 31, 2010)

   $ 2,742

2011

     36,766

2012

     18,001

2013

     25,945

2014

     73,123

2015

     55,188

Thereafter

     32,710
      
   $ 244,475
      

On August 8, 2008, we entered into an amended and restated credit agreement with Bank of America, N.A. (“Bank of America”), which amended the terms of our prior credit agreement with Bank of America, to provide us with a new $45,000,000 unsecured revolving line of credit (the “Revolving Credit Facility”), and to replace our prior Bank of America term loan and revolving credit facility which matured in August 2008. The new Revolving Credit Facility was fully drawn upon at closing, with such proceeds utilized to pay down the full $45,000,000 amount outstanding under our prior Bank of America term loan (as of August 8, 2008, no amount was outstanding under our prior $10,000,000 Bank of America revolving credit facility). The new Revolving Credit Facility matures in August 2010 and bears interest at a floating rate of LIBOR plus 2.00% to 2.75%, based upon our leverage ratio as defined in the credit agreement (at our current leverage ratio, the Revolving Credit Facility bears interest at a floating rate of LIBOR plus 2.00%). An upfront fee of $292,500 was paid to Bank of America, and a fee equal to the actual daily amount by which the aggregate commitments exceed the total outstanding (both as defined in the amended and restated credit agreement) times 0.20% per annum if the total outstandings are equal to or more than 50% of the aggregate commitments, or 0.25% per annum otherwise, is accrued on unfunded balances under the Revolving Credit Facility. The loan contains various financial covenants and restrictions including a fixed charge coverage ratio of at least 1.75 to 1.00, as defined in the amended and restated credit agreement. As of June 30, 2010, there was no amount outstanding under the Revolving Credit Facility. The Revolving Credit Facility matured on August 8, 2010 in accordance with its terms.

Our organizational documents contain a limitation on the amount of indebtedness that we may incur, so that unless our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.

7. Minimum Future Rents Receivable

The following is a schedule of minimum future rentals to be received on non-cancelable operating leases from consolidated properties as of June 30, 2010 (in thousands):

 

2010 (Six months ending December 31, 2010)

   $ 32,976

2011

     66,668

2012

     60,703

2013

     53,967

2014

     50,937

2015

     48,609

Thereafter

     206,009
      
   $ 519,869
      

8. Concentrations

Tenant Revenue Concentrations

For the six months ended June 30, 2010, there were no significant revenue concentrations.

For the six months ended June 30, 2009, the tenant in Enclave on the Lake accounted for approximately $2,870,000 or approximately 12% of total revenues from consolidated properties. The lease under which the tenant occupies our Enclave on the Lake property expires in February 2012.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Geographic Concentrations

As of June 30, 2010 we owned 62 consolidated properties located in eleven states (California, Florida, Georgia, Illinois, Massachusetts, Minnesota, New Jersey, North Carolina, South Carolina, Texas and Virginia) and in the United Kingdom.

As of June 30, 2009, we owned 53 consolidated properties located in nine states (California, Georgia, Illinois, Massachusetts, Minnesota, North Carolina, South Carolina, Texas and Virginia) and in the United Kingdom.

Our geographic revenue concentrations from consolidated properties for the six months ended June 30, 2010, and 2009 are as follows:

 

     Six Months Ended
June 30,
 
      2010     2009  

Domestic

    

South Carolina

   18.70 %   30.01 %

California

   16.11      5.77   

Texas

   13.04      21.18   

Florida

   12.43      —     

Minnesota

   7.80      0.04   

Virginia

   6.46      9.18   

Massachusetts

   5.93      4.46   

North Carolina

   4.35      4.60   

Georgia

   3.58      5.60   

Illinois

   1.22      3.04   

New Jersey

   0.33      0.00   
            

Total Domestic

   89.95      83.88   

International

    

United Kingdom

   10.05      16.12   
            

Total

   100.00 %   100.00 %
            

Our geographic long-lived asset concentrations from consolidated properties as of June 30, 2010 and December 31, 2009 are as follows:

 

     June 30,
2010
    December 31,
2009
 

Domestic

    

South Carolina

   20.47 %   23.95 %

California

   17.15      9.90   

Massachusetts

   11.23      5.22   

Texas

   8.03      9.43   

North Carolina

   6.33      7.35   

Florida

   6.32      13.26   

Minnesota

   5.25      6.12   

New Jersey

   4.93      0.00   

Virginia

   4.72      5.53   

Illinois

   2.01      2.33   

Georgia

   1.64      1.95   
            

Total Domestic

   88.08      85.04   

International

    

United Kingdom

   11.92      14.96   
            

Total

   100.00 %   100.00 %
            

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

9. Segment Disclosure

Our reportable segments consist of three types of commercial real estate properties, namely, Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. Management internally evaluates the operating performance and financial results of our segments based on net operating income. We also have certain general and administrative level activities including legal, accounting, tax preparation and shareholder servicing costs that are not considered separate operating segments. Our reportable segments are on the same basis of accounting as described in Note 2—“Basis of Presentation and Summary of Significant Accounting Policies.”

We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, property management fees, property level general and administrative expenses and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our general and administrative expenses. The following table compares the net operating income for the three and six months ended June 30, 2010 and 2009 (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2010            2009        2010    2009

Domestic Industrial Properties

           

Revenues:

           

Rental

   $ 5,487    $ 4,303    $ 11,300    $ 8,989

Tenant Reimbursements

     1,295      1,003      2,553      2,103
                           

Total Revenues

     6,782      5,306      13,853      11,092
                           

Property and Related Expenses:

           

Operating and Maintenance

     395      313      733      670

General and Administrative

     116      94      162      139

Property Management Fee to Related Party

     77      87      138      180

Property Taxes

     1,455      1,090      2,886      2,146
                           

Total Expenses

     2,043      1,584      3,919      3,135
                           

Net Operating Income

     4,739      3,722      9,934      7,957
                           

Domestic Office Properties

           

Revenues:

           

Rental

     7,612      3,713      14,861      7,485

Tenant Reimbursements

     1,467      940      3,046      1,701
                           

Total Revenues

     9,079      4,653      17,907      9,186
                           

Property and Related Expenses:

           

Operating and Maintenance

     957      739      2,114      1,528

General and Administrative

     84      43      171      101

Property Management Fee to Related Party

     27      27      60      64

Property Taxes

     1,096      608      2,286      1,218
                           

Total Expenses

     2,164      1,417      4,631      2,911
                           

Net Operating Income

     6,915      3,236      13,276      6,275
                           

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

International Office/Retail Properties

        

Revenues:

        

Rental

     1,535        1,831        3,475        3,715   

Tenant Reimbursements

     55        95        136        180   
                                

Total Revenues

     1,590        1,926        3,611        3,895   
                                

Property and Related Expenses:

        

Operating and Maintenance

     59        93        139        174   

General and Administrative

     86        15        121        67   

Property Management Fee to Related Party

     72        (2 )     142        10   
                                

Total Expenses

     217        106        402        251   
                                

Net Operating Income

     1,373        1,820        3,209        3,644   
                                

Reconciliation to Consolidated Net Loss

        

Total Segment Net Operating Income

     13,027        8,778        26,419        17,876   

Interest Expense

     3,238        2,638        6,333        5,445   

General and Administrative

     1,553        733        2,224        1,621   

Investment Management Fee to Related Party

     2,687        1,783        5,118        3,486   

Acquisition Expenses

     4,841        998       5,219        998   

Depreciation and Amortization

     6,717        6,148        13,960        11,870   
                                
     (6,009     (3,522     (6,435     (5,544 )
                                

Other Income and Expenses

        

Interest and Other Income

     91        140        689        261   

Net Settlement Payments on Interest Rate Swaps

     (230     (152 )     (444     (233 )

Loss on Interest Rate Swaps and Cap

     (115     525        (503     357   

Loss on Note Payable at Fair Value

     (5     (128 )     (78     (693 )

Loss on Early Extinguishment of Debt

     —          —          (73     —     
                                

Loss Before Provision for Income Taxes and Equity in Income (Loss) of Unconsolidated Entities

     (6,268     (3,137 )     (6,844     (5,852 )
                                

Provision for Income Taxes

     (70     (58 )     (85     (87 )

Equity in Income (Loss) of Unconsolidated Entities

     2,109        (1,051 )     2,846        (1,849 )
                                

Net Loss

     (4,229     (4,246 )     (4,083     (7,788 )
                                

Net Loss Attributable to Non-Controlling Operating Partnership Units

     8        8        7        21   
                                

Net Loss Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (4,221   $ (4,238 )   $ (4,076   $ (7,767 )
                                

 

Condensed Assets

   June 30,
2010
   December 31,
2009

Domestic Industrial Properties

   $ 340,533    $ 346,681

Domestic Office Properties

     402,123      279,658

International Office/Retail Properties

     101,451      115,223

Non-Segment Assets

     480,735      317,457
             

Total Assets

   $ 1,324,842    $ 1,059,019
             
     Six Months Ended
June 30,

Capital Expenditures

   2010    2009

Domestic Industrial Properties

   $ 817    $ 15,647

Domestic Office Properties

     167,001      35

International Office/Retail Properties

     —        379

Non-Segment Assets

     110      —  
             

Total Capital Expenditures

   $ 167,928    $ 16,061
             

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

10. Investment Management and Other Fees to Related Parties

Pursuant to the agreement between our company, CBRE OP and the Investment Advisor (the “Advisory Agreement”), the Investment Advisor and its affiliates perform services relating to our ongoing public offering and the management of our assets. Items of compensation and equity participation are as follows:

Offering Costs Relating to Public Offerings

Offering costs totaling $13,522,000 and $8,153,000, $24,936,000 and $13,292,000 were incurred during the three and six months ended June 30, 2010 and 2009, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Of the total amounts, $13,464,000, $8,102,000, $24,833,000 and $13,219,000 were incurred to CNL Securities Corp., as dealer manager and $58,000, $52,000, $103,000 and $73,000 were incurred to the Investment Advisor for reimbursable marketing for the three and six months ended June 30, 2010 and 2009, respectively. Each party will be paid the amount incurred from proceeds of the public offering. As of June 30, 2010 and December 2009 the accrued offering costs payable to related parties included in our consolidated balance sheets were $1,192,000 and $1,114,000.

Investment Management Fee to Related Party

Prior to October 24, 2006, the Investment Advisor received an annual fee equal to 0.75% of the book value of the total assets, as defined in the Advisory Agreement, based on the assets of CBRE OP. The investment management fee was calculated monthly based on the average of total assets, as defined, during such period. On October 24, 2006, the Board of Trustees, including our independent trustees, approved and the Company entered into the Amended and Restated Agreement of Limited Partnership of CBRE OP (the “Amended Partnership Agreement”) and the Amended and Restated Advisory Agreement (the “Amended Advisory Agreement” and, together with the Amended Partnership Agreement, the “Amended Agreements”). The Amended Advisory Agreement provides an investment management fee of (i) a monthly fee equal to one twelfth of 0.6% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 7.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio. On January 30, 2009, we entered into that certain second amended and restated advisory agreement (the “Second Amended Advisory Agreement”) with CBRE OP and the Investment Advisor. The Second Amended Advisory Agreement modified, among other things, the investment management fee to consist of (a) a monthly fee equal to one twelfth of 0.5% of the aggregate costs (before non-cash reserves and depreciation) of all real estate investment in our portfolio and (b) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments in our portfolio. All or any portion of the investment management fee not taken as to any fiscal year may be deferred or waived without interest at the option of the Investment Advisor.

The Investment Advisor earned investment management fees of $2,687,000 and $1,783,000 for the three months ended June 30, 2010 and 2009, respectively; and $5,118,000 and $3,486,000 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the investment management fees payable to related party in our consolidated balance sheets were $950,000 and $757,000, respectively. In connection with services provided to the Investment Advisor, CNL Fund Management Company, the Sub-Advisor and affiliate of the Dealer Manager pursuant to a sub-advisory agreement dated August 21, 2006, was paid by the Investment Advisor $371,000 and $246,000 for the three months ended June 30, 2010 and 2009, respectively; and $707,000 and $481,000 for the six months ended June 30, 2010 and 2009, respectively.

Acquisition Fee and Expenses to Related Party

On January 30, 2009, we entered into that certain Second Amendment Advisory Agreement that permits the Investment Advisor to earn an acquisition fee of up to 1.5% of (i) the purchase price of real estate investments acquired by us, including any debt attributable to such investments, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The Investment Advisor earned acquisition fees of $3,304,000 and $723,000 for the three months ended June 30, 2010 and 2009, respectively; and $3,600,000 and $723,000 for the six months ended June 30, 2010 and 2009, respectively. In connection with services provided to the Investment Advisor, the Sub Advisor, pursuant to a sub advisory agreement, was paid by the Investment Advisor acquisition fees of $618,000 and $135,000 for the three months ended June 30, 2010 and 2009, respectively; and $673,000 and $135,000 for the six months ended June 30, 2010 and 2009, respectively. The Investment Advisor earned $330,000 and $72,000 in acquisition related expenses during the three months ended June 30, 2010 and 2009, respectively; and $373,000 and $72,000 for the six months ended June 30, 2010 and 2009, respectively. Prior to the adoption of “Business Combinations” on January 1, 2009, these acquisitions fees and expenses were capitalized to investments in real estate and related intangibles.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Management Services to Related Party

Affiliates of the Investment Advisor may also provide leasing, brokerage, property management, or mortgage banking services for us. CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor, received property management fees of approximately $176,000 and $112,000 for the three months ended June 30, 2010 and 2009, respectively; and $340,000 and $254,000 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009 the property management fees payable to related party included in our consolidated balance sheets were $109,000 and $106,000, respectively. No brokerage fees were paid to affiliates of the Investment Advisor for the three and six months ended June 30, 2010 and 2009; and $210,000 in $0 mortgage banking fees were paid to CBRE Capital Markets, as affiliate of the Investment Advisor, for three and six months ended June 30, 2010. No mortgage banking fees were paid to CBRE Capital Markets during the three and six months ended June 30, 2009

Affiliates of the Investment Advisor received leasing fees of $373,000 and $0 for the three months ended June 30, 2010 and 2009, respectively; and $468,000 and $67,000 for the six months ended June 30, 2010 and 2009.

No management services fees were paid to CB Richard Ellis, UK for the three and six months ended June 30, 2010 and 2009, respectively.

11. Equity Incentive Plan and Performance Bonus Plan

Equity Incentive Plan

We have adopted a 2004 equity incentive plan. The purpose of the 2004 equity incentive plan is to provide us with the flexibility to use share options and other awards to provide a means of performance-based compensation. Our key employees, directors, trustees, officers, advisors, consultants or other personnel and our subsidiaries or other persons expected to provide significant services or our subsidiaries, including employees of the Investment Advisor, would be eligible to be granted share options, restricted shares, phantom shares, distribution equivalent rights and other share-based awards under the 2004 equity incentive plan. On April 20, 2010, the board’s independent trustees, Charles E. Black, Martin A. Reid and James M. Orphanides were awarded equity grants by the Company under the 2004 equity incentive plan on the following terms: (i) each award was for $80,000 in common shares of the Trust (or 8,000 shares at $10.00 per share) for a total of $240,000; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $240,000 during the three and six months ended June 30, 2010 as a result of granting these awards to our independent trustees.

Performance Bonus Plan

We have adopted a 2004 performance bonus plan. Annual bonuses under our 2004 performance bonus plan are awarded by our Compensation Committee to selected key employees, including employees of the Investment Advisor, based on corporate factors or individual factors (or a combination of both). Subject to the provisions of the 2004 performance bonus plan, the Compensation Committee will (i) determine and designate those key employees to whom bonuses are to be granted; (ii) determine, consistently with the 2004 performance bonus plan, the amount of the bonus to be granted to any key employee for any performance period; and (iii) determine, consistently with the 2004 performance bonus plan, the terms and conditions of each bonus. Bonuses may be so awarded by the Compensation Committee prior to the commencement of any performance period, during or after any performance period. No bonus shall exceed 200% of the key employee’s aggregate salary for the year. The Compensation Committee may provide for partial bonus payments at target and other levels. Corporate performance hurdles for bonuses may be adjusted by the Compensation Committee in its discretion to reflect (i) dilution from corporate acquisitions and share offerings, and (ii) changes in applicable accounting rules and standards. The Compensation Committee may determine that bonuses shall be paid in cash or shares or other equity-based grants, or a combination thereof. The Compensation Committee may also provide that any such share grants be made under our 2004 equity incentive plan or any other equity-based plan or program we may establish. The Compensation Committee may provide for programs under which the payment of bonuses may be deferred at the election of the employee. No bonuses were awarded and no bonus related expenses were incurred by us during the three months ended March 31, 2010 and 2009, respectively.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

12. Shareholders’ Equity

Under our declaration of trust, we have the authority to issue a total of 1,000,000,000 shares of beneficial interest. Of the total shares authorized, 990,000,000 shares are designated as common shares with a par value of $0.01 per share and 10,000,000 shares are designated as preferred shares.

The registration statement relating to our initial public offering was declared effective by the SEC on October 24, 2006. CNL Securities Corp. acted as the dealer manager of this offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. As of January 29, 2009, we had issued 60,808,967 common shares in our initial public offering. We terminated the initial public offering effective as of the close of business on January 29, 2009. The registration statement relating to our follow-on public offering was declared effective by the SEC on January 30, 2009. CNL Securities Corp. is the dealer manager of this offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through June 30, 2010, we received gross offering proceeds of approximately $728,540,691 from the sale of 72,998,556 shares.

During the six months ended June 30, 2010 and 2009, we repurchased 845,178 common shares, and 732,311 common shares, respectively, under our Share Redemption Program for $7,673,000 and $6,519,000, respectively.

13. Distributions

Earnings and profits, which determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes including the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

The following table reconciles the distributions declared per common share to the distributions paid per common share during the six months ended June 30, 2010 and 2009:

 

     Six Months Ended
June 30,
 
      2010     2009  

Distributions declared per common share

   $ 0.300      $ 0.300   

Less: Distributions declared in the current period, and paid in the subsequent period

     (0.150 )     (0.150 )

Add: Distributions declared in the prior year, and paid in the current year

     0.150        0.150   
                

Distributions paid per common share

   $ 0.300      $ 0.300   
                

Distributions paid to shareholders during the six months ended June 30, 2010 and 2009 totaled $31,591,000, and $19,055,000, respectively.

We issued 1,422,679 and 816,347 common shares pursuant to our dividend reinvestment plan for the six months ended June 30, 2010 and 2009, respectively.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

14. Derivative Instruments

The following table sets forth the terms of our interest rate swap derivative instruments at June 30, 2010 (amounts in thousands):

 

Type of Instrument

   Notional Amount    Fair Value     Pay Fixed Rate     Receive Variable
Rate
    Maturity Date

Non-qualifying Interest Rate Swap on Thames Valley Five debt(1)

   $ 11,205    $ (1,198 )   5.41 %   0.71   May 30, 2013

Non-qualifying Interest Rate Swap on Albion Mills Retail Park debt(1)

   $ 8,537    $ (604 )   3.94 %   0.65   October 10, 2013

Qualifying Interest Rate Swap on Maskew Retail Park debt(1)

   $ 20,879    $ (1,190 )   3.42 %   0.65   August 10, 2014

Qualifying Interest Rate Swap on Wells Fargo Credit Facility

   $ 15,000    $ (326   2.10   0.35   May 26, 2014

 

(1)

Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of swaps.

The following table sets forth the terms of our interest rate swap derivative instruments at December 31, 2009 (amounts in thousands):

 

Type of Instrument

   Notional Amount    Fair Value     Pay Fixed Rate     Receive Variable
Rate
    Maturity Date

Non-qualifying Interest Rate Swap on Thames Valley Five debt(1)

   $ 12,117    $ (1,049 )   5.41 %   0.61 %   May 30, 2013

Non-qualifying Interest Rate Swap on Albion Mills Retail Park debt(1)

   $ 9,231    $ (361 )   3.94 %   0.56 %   October 10, 2013

Qualifying Interest Rate Swap on Maskew Retail Park debt(1)

   $ 22,578    $ (293 )   3.42 %   0.58 %   August 10, 2014

Qualifying Interest Rate Swap on Wells Fargo Credit Facility

   $ —      $ —        —        —        —  

 

(1)

Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of swaps.

We marked our two non-qualifying economic hedge interest rate swap instruments to their estimated fair value of ($1,802,000) and ($1,410,000) on the consolidated balance sheet at June 30, 2010 and December 31, 2009 included in Liabilities as Interest Rate Swaps at Fair Value. We recognized a loss on interest rate swaps of $503,000 for the six months ended June 30, 2010 versus a gain of $357,000 for the six months ended June 30, 2009 included in Loss on Interest Rate Swaps and Cap on the Consolidated Statement of Operations.

Our $20,879,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Maskew Retail Park variable rate note payable from its inception on September 24, 2009. The estimated fair value of the interest rate swap value of ($1,190,000) and ($293,000) as of June 30, 2010 and December 31, 2009, respectively, has resulted in a swap fair value adjustment being recorded to other comprehensive loss totaling $897,000 for the six months ended June 30, 2010. There was no measured ineffectiveness for the qualifying hedge during the six months ended June 30, 2009.

Our $15,000,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Wells Fargo Credit Facility variable rate loan payable from its inception on May 26, 2010. The estimated fair value of the interest rate swap value of ($326,000) and $0 as of June 30, 2010 and December 31, 2009, respectively, has resulted in a swap fair value adjustment being recorded to other comprehensive loss totaling $326,000 for the six months ended June 30, 2010. There was no measured ineffectiveness for the qualifying hedge during the six months ended June 30, 2009.

As discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” all of our derivative instruments are used as economic hedges to swap identified variable rate debt interest payments to fixed rate payments through the use of interest rate swap agreements. Our Maskew Retail Park and Wells Fargo Credit Facility hedges are our only qualifying cash flow hedges in accordance with the accounting for derivative instruments and hedging activities. Further disclosures regarding our derivative financial instruments are included in Note 15 (Fair Value of Financial Instruments and Investments) of these consolidated financial statements.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

15. Fair Value of Financial Instruments and Investments

We apply the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical financial instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have classified the Albion Mills Retail Park notes payable as Level 3 as of June 30, 2010 and December 31, 2009 due to the lack of current market activity and our reliance on unobservable inputs to estimate the fair value of the mortgage note payable.

As of June 30, 2010 and December 31, 2009, we held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, an interest rate cap, interest rate swap derivative contracts and our equity method investment in CBRE Strategic Partners Asia. Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have maturities of 90 days or less, including money market funds and U.S. Government obligations. Derivative instruments are related to our economic hedging activities with respect to interest rates.

The fair values of the interest rate cap and swap derivative agreements are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rate fell above the strike rate of the interest rate cap agreement, and by discounting the future expected cash payments and receipts on the pay and receive legs of the interest rate swap agreements that swap the estimated variable rate mortgage note payment stream for a fixed rate payment stream over the period of the loan. The variable interest rates used in the calculation of projected receipts on the interest rate cap agreement and on the interest rate swap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements (where appropriate). Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2010 and December 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold.

Our investment in CBRE Strategic Partners Asia is based on the Level 3 valuation inputs applied by the Investment Manager of this investment company utilizing the following approaches for valuing the underlying real estate related investments within the investment company:

 

  ¡  

The income approach is generally based on a discounted cash flow analysis. Such an analysis for a real property includes projecting net cash flows from the property from a buyer’s perspective and computing the present value of the cash flows using a market discount rate. The cash flows include a projection of the net sales proceeds at the end of our estimate of a market participant holding period, computed using market reversionary capitalization rates and projected cash flows from the property for the year following the holding period.

 

  ¡  

The replacement cost approach to property valuation is a theoretical breakdown of the property into land and building components. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. While the replacement cost of the improvements can be determined by adding the labor, material, and other costs, land values must be derived from an analysis of comparable data. The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties.

 

  ¡  

For investments owned more than one year, except for investments under construction or incurring significant renovation, it is CBRE Strategic Partners Asia’s policy to obtain a third-party appraisal. For investments in real estate under construction or incurring significant renovation, the valuation analysis is prepared by the Investment Manager.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

The following items are measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009 (in thousands):

 

     As of June 30, 2010  
                 Fair Value Measurements Using:  
     Carrying
Value
    Total
Fair Value
    Quoted
Markets
Prices
(Level 1)
   Significant
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Financial Assets (Liabilities)

           

Cash and Cash Equivalents

   $ 140,032      $ 140,032      $ 140,032    $ —        $ —     

Interest Rate Swaps at Fair Value—Non Qualifying Hedges

   $ (1,802   $ (1,802   $ —      $ (1,802 )   $ —     

Interest Rate Swaps at Fair Value—Qualifying Hedges

   $ (1,516 )   $ (1,516 )   $ —      $ (1,516   $ —     

Investment in CBRE Strategic Partners Asia

   $ 5,432      $ 5,432      $ —      $ —        $ 5,432   

Note Payable at Fair Value

   $ (8,374 )   $ (8,374 )   $ —      $ —        $ (8,374 )
     As of December 31, 2009  
                 Fair Value Measurements Using:  
     Carrying
Value
    Total
Fair Value
    Quoted
Markets
Prices
(Level 1)
   Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets (Liabilities)

           

Cash and Cash Equivalents

   $ 79,997      $ 79,997      $ 79,997    $ —        $ —     

Interest Rate Cap at Fair Value

   $ 1      $ 1      $ —      $ 1      $ —     

Interest Rate Swaps at Fair Value—Non Qualifying Hedges

   $ (1,410   $ (1,410   $ —      $ (1,410   $ —     

Interest Rate Swaps at Fair Value—Qualifying Hedges

   $ (293 )   $ (293 )   $ —      $ (293 )   $ —     

Investment in CBRE Strategic Partners Asia

   $ 8,142      $ 8,142      $ —      $ —        $ 8,142   

Note Payable at Fair Value

   $ (8,974 )   $ (8,974 )   $ —      $ —        $ (8,974 )

The following table presents our activity for the variable rate note payable and our investment in CBRE Strategic Partners Asia measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2010 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Note Payable     Investment in
CBRE Strategic
Partners Asia
 

Balance at January 1, 2010

   $ (8,974   $ 8,142   

Transfers to Level 3

     —          —     

Contributions

     —          3,019   

Distributions

     —          (5,581 )

Total Loss on Fair Value Adjustment

     (77     (148 )

Translation Adjustment in Other Comprehensive Income

     677        —     
                

Balance at June 30, 2010

   $ (8,374   $ 5,432   
                

The Amount of Total Loss for the Period Included in Earnings Attributable to the Change in Unrealized Gain and Equity in Income of Unconsolidated Entities Relating to Note Payable and Investment in Unconsolidated Entities Held at June 30, 2010

   $ (77 )   $ (148
                

Losses (realized and unrealized) included in earnings related to the interest rate cap and non-qualifying swaps, as well as for the elected fair value note payable for the three months ended June 30, 2010 and 2009 are reported as components of “Other Income and Expense” on the consolidated statements of operations.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Disclosure of Fair Value Financial Instruments

For disclosure purposes only, the following table summarizes our notes payable and their estimated fair value at June 30, 2010 and December 31, 2009 (in thousands):

 

     Book Value    Fair Value

Financial Instrument

   June 30,
2010
   December 31,
2009
   June 30,
2010
   December 31,
2009

Notes Payable

   $ 217,299    $ 203,451    $ 221,547    $ 201,113

Note Payable at Fair Value

   $ 8,374    $ 8,974    $ 8,374    $ 8,974

For purposes of this fair value disclosure, we based our fair value estimate for notes payable on our internal valuation that includes a representative sample of our lenders’ market interest rate quotes as of June 30, 2010 and December 31, 2009 for debt with similar risk characteristics and maturities. We based the Note Payable carried at fair value on a third party appraiser’s valuation which used similar techniques as our internal valuation model as of June 30, 2010 and December 31, 2009.

16. Fair Value Option—Note Payable

During the fourth quarter of 2008 we elected to apply the fair value option on a note payable which bears interest at a variable rate and is currently subject to an economic hedge by an interest rate swap with similar terms and the same notional amount. We have elected to apply the fair value option on the Albion Mills Retail Park variable rate note payable to match the fair value treatment of interest rate swap derivative on the same note payable thereby achieving a reduction in the artificial volatility in net income or loss that occurs when related financial assets and liabilities are measured and reported on a different basis in the consolidated financial statements.

We applied the fair value option for the Albion Mills Retail Park note payable at each reporting period. Included in loss on notes payable at fair value in the statement of operations were $5,000 and $128,000 for the three months ended June 30, 2010 and 2009, respectively, and $78,000 and $693,000 for the six months ended June 30, 2010 and 2009, respectively. In addition, there were ($677,000) and $916,000 translation (gains) and losses recorded to Other Comprehensive Loss at June 30, 2010 and December 31, 2009, respectively.

17. Commitments and Contingencies

We have agreed to a capital commitment of up to $20,000,000 in CBRE Strategic Partners Asia, which extends to January 31, 2011. As of June 30, 2010, we funded $12,097,000 of our capital commitment. CBRE Investors, our sponsor, formed CBRE Strategic Partners Asia, to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. If we and all other currently committed capital investors had funded our entire commitments in CBRE Strategic Partners Asia as of June 30, 2010, we would have owned an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. A majority of our trustees (including a majority of our independent trustees) not otherwise interested in this transaction approved the transaction as being fair, competitive and commercially reasonable. CBRE Strategic Partners Asia is managed by CB Richard Ellis Investors SP Asia II, LLC or the Fund Manager, a subsidiary of CBRE Investors.

On June 10, 2010, the European JV entered into a purchase and sale agreement to acquire, subject to customary closing conditions, 85146 Langenbach (“Langenbach”), located in Lagenbach, Germany, a suburb of Munich. The European JV will acquire Lagenbach for approximately $19,450,951, exclusive of customary closing costs. We own an 80% interest in the European JV and Goodman owns a 20% interest. We expect to fund our pro rata share of the acquisition using the net proceeds from our current public offering. Lagenbach, scheduled to be completed in the third quarter of 2010, will be a 225,106 square foot, warehouse/distribution center with no operating history. We expect that the property will be 100% leased to a subsidiary of DSV Road Holding A/S, or DSV, to be utilized as a logistics facility through July 2015. DSV is a global third-party logistics services company. While the European JV expects this acquisition to close during the third quarter of 2010, the agreement to acquire the property is subject to certain contingencies and there can be no assurance that the acquisition will occur.

On June 23, 2010, we entered into a purchase and sale agreement to acquire, subject to customary closing conditions, Millers Ferry Road, located at Millers Ferry Road and Mars Road in Wilmer, TX, a suburb of Dallas. We will acquire Millers Ferry Road for

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

approximately $44,000,000, exclusive of customary closing costs. We anticipate that the acquisition will be funded using the net proceeds from our current public offering. Millers Ferry Road, scheduled to be completed in the second quarter of 2011, will be a 1,020,000 square foot, warehouse/distribution center with no operating history. We expect that the property will be 100% leased to Whirlpool Corporation to be utilized as a regional distribution center through December 2020. Whirlpool Corporation is a leading global manufacturer and marketer of major home appliances. While we anticipate this acquisition will close during the second quarter of 2011, the agreement to acquire the property is subject to a number of contingencies, including, but not limited to, substantial completion of the construction of the property and acceptance by the tenant of the space and therefore there can be no assurances that this acquisition will occur.

Litigation—From time to time, we and our properties may be subject to legal proceedings, which arise in the ordinary course of our business. Currently, neither our company nor any of our properties are subject to, or threatened with, any legal proceedings for which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition.

Environmental Matters—We are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

18. Comprehensive Income (Loss)

U.S. GAAP requires that the effect of foreign currency translation adjustments be classified as comprehensive income (loss). The following table sets forth our comprehensive loss for the three months ended June 30, 2010 and 2009, (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009         2010     2009  

Net Loss

   $ (4,229   $ (4,246 )   $ (4,083   $ (7,788 )

Foreign Currency Translation Gain (Loss)

     414        10,652        (2,998 )     9,342   

Swap Fair Value Adjustments

     (644     —          (1,224 )     —     
                                

Total Comprehensive (Loss) Income

     (4,459     6,406        (8,305 )     1,554   

Comprehensive Loss (Income) Attributable to Non-Controlling Interest

     9        (9 )     16        9   
                                

Comprehensive (Loss) Income Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (4,450   $ 6,415      $ (8,289 )   $ 1,545   
                                

19. Income Taxes

We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). It is our current intention to adhere to these requirements and maintain our REIT qualification. As a REIT, we generally will not be subject to corporate level U.S. federal income tax on net income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, then we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income, if any (see Note 2 “Basis of Presentation and Summary of Significant Accounting Policies” for a further discussion of income taxes).

On March 31, 2009, the Carolina TRS was dissolved. We had made a taxable REIT subsidiary election for all held for sale properties during the tax years beginning January 1, 2007. On September 30, 2008 all held for sale properties were reclassified as held for investment and transferred to CBRE OP.

ASC 740 Income Taxes (formerly SFAS No. 109 “Accounting for Income Taxes”) requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We did not have a liability for any unrecognized tax benefits.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amount of $70,000 and $58,000, $85,000 and $87,000 for California, Georgia, Minnesota, Texas and North Carolina impacting our operations during the three and six months ended June 30, 2010 and 2009, respectively. The United Kingdom taxes real property operating results at a statutory rate of 22%. The United Kingdom taxable losses to date have generated a deferred tax asset of approximately $316,000 consisting of these net operating loss carryforwards. We have provided for a full valuation allowance of ($316,000) as of six months ended June 30, 2010 on deferred tax assets because it is not likely that future operating profits in the United Kingdom would be sufficient to absorb the net operating losses.

20. Subsequent Events

From July 1, 2010 through August 6, 2010, we received gross proceeds from our current public offering of approximately $65,784,736 from the sale of 6,622,631 common shares.

On July 6, 2010, we entered into a purchase and sale agreement to acquire, subject to customary closing conditions, 100 Tice Blvd., located at 100 Tice Blvd. in Woodcliff Lake, New Jersey, a suburb of New York City. We will acquire 100 Tice Blvd. for approximately $67,600,000, of which approximately $42,600,000 will be paid by assuming an existing mortgage loan held by Hartford Life and Accident Insurance Company and Principal Life Insurance Company. We anticipate that the remainder of the purchase price will be funded using the net proceeds from our current public offering. 100 Tice Blvd. is a 208,911 square foot office building that is 100% leased to Eisai Inc. through December 2021 and is used as Eisai’s North American headquarters. Eisai Inc. is the U.S. operating subsidiary of the Japanese company Eisai Co., Ltd. Eisai Inc. is a producer of pharmaceuticals for the treatment of Alzheimer’s disease and cancers. While we anticipate this acquisition to close during the third quarter of 2010, the agreement to acquire the property is subject to a number of contingencies and therefore there can be no assurances that this acquisition will occur.

On July 27, 2010, we contributed an additional $507,000 of our CBRE Strategic Partners Asia capital commitment which was funded using net proceeds from our current public offering.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Explanatory Note

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This document contains various “forward-looking statements.” You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:

 

  ¡  

our business strategy;

 

  ¡  

our ability to obtain future financing arrangements;

 

  ¡  

estimates relating to our future distributions;

 

  ¡  

our understanding of our competition;

 

  ¡  

market trends;

 

  ¡  

projected capital expenditures;

 

  ¡  

the impact of technology on our products, operations and business; and

 

  ¡  

the use of the proceeds of our current offering and subsequent offerings.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:

 

  ¡  

national, regional and local economic climates;

 

  ¡  

the continued volatility and disruption of capital and credit markets;

 

  ¡  

changes in supply and demand for office, retail, industrial, and multi-family residential properties;

 

  ¡  

adverse changes in the real estate markets, including increasing vacancy, decreasing rental revenue and increasing insurance costs;

 

  ¡  

availability and credit worthiness of prospective tenants;

 

  ¡  

our ability to maintain rental rates and maximize occupancy;

 

  ¡  

our ability to identify acquisitions;

 

  ¡  

our pace of acquisitions and/or dispositions of properties;

 

  ¡  

our corporate debt ratings and changes in the general interest rate environment;

 

  ¡  

availability of capital (debt and equity);

 

  ¡  

our ability to refinance existing indebtedness or incur additional indebtedness;

 

  ¡  

unanticipated increases in financing and other costs, including a rise in interest rates;

 

  ¡  

the actual outcome of the resolution of any conflict;

 

  ¡  

our ability to successfully operate acquired properties;

 

  ¡  

availability of and ability to retain qualified personnel;

 

  ¡  

CBRE Advisors LLC remaining as our Investment Advisor;

 

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  ¡  

future terrorist attacks in the United States or abroad;

 

  ¡  

our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes and our operating partnership’s ability to satisfy the rules in order for it to qualify as a partnership for U.S. federal income tax purposes;

 

  ¡  

foreign currency fluctuations;

 

  ¡  

accounting principles and policies and guidelines applicable to REITs;

 

  ¡  

legislative or regulatory changes adversely affecting REITs and the real estate business;

 

  ¡  

environmental, regulatory and/or safety requirements; and

 

  ¡  

other factors discussed under Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of this Form 10-Q.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

Overview

We are a Maryland real estate investment trust that invests in real estate properties, focusing on office, retail, industrial (primarily warehouse/distribution) and multi-family residential properties, as well as other real estate-related assets. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace, in which we might also acquire interests in mortgages or other investments where we could seek to acquire the underlying property. We will not invest more than 20% of our total assets in any single investment. We intend to invest primarily in properties located in geographically-diverse major metropolitan areas in the United States. In addition, we currently intend to invest up to 30% of our total assets in properties outside of the United States. Our international investments may be in markets in which CBRE Investors has existing operations or previous investment experience, or may be in partnership with other entities that have significant local-market expertise. We expect that our international investments will focus on properties typically located in significant business districts and suburban markets.

As of June 30, 2010, we owned, on a consolidated basis, 62 office, retail, and industrial (primarily warehouse/distribution) properties located in 11 states (California, Florida, Georgia, Illinois, Massachusetts, Minnesota, New Jersey, North Carolina, South Carolina, Texas and Virginia) and in the United Kingdom, encompassing approximately 9,086,000 rentable square feet, as well as one undeveloped land parcel in Georgia. In addition, we have ownership interests in five unconsolidated entities that, as of June 30, 2010, owned interests in 30 properties. Excluding those properties owned through our investment in CBRE Strategic Partners Asia, we owned on an unconsolidated basis, 22 industrial, office and retail properties located in seven states (Arizona, Florida, Indiana, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 8,633,000 rentable square feet.

We commenced operations in July 2004, following an initial private placement of our common shares of beneficial interest. We raised aggregate net proceeds (after commissions and expenses) of approximately $55,500,000 from July 2004 to October 2004 in private placements of our common shares. On October 24, 2006, we commenced an initial public offering of up to $2,000,000,000 in our common shares.

Our initial public offering was terminated effective as of the close of business on January 29, 2009. As of the close of business on January 29, 2009, we had sold a total of 60,808,967 common shares in the initial public offering, including 1,487,943 common shares which were issued pursuant to our dividend reinvestment plan, and received $607,345,702 in gross proceeds. We withdrew from registration a total of 140,243,665 common shares that were registered but not sold in connection with the initial public offering.

The registration statement relating to our follow-on public offering was declared effective by the Securities and Exchange Commission (the “SEC”) on January 30, 2009. CNL Securities Corp. is the dealer manager of our offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through June 30, 2010, we received gross offering proceeds of approximately $728,540,691 from the sale of 72,998,556 shares.

We are externally managed by CBRE Advisors LLC (the “Investment Advisor”), and all of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of, CBRE Operating Partnership, L.P., (the “CBRE OP”). Generally, we contribute the

 

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proceeds we receive from the issuance of common shares for cash to CBRE OP and CBRE OP, in turn, issues units of limited partnership to us, which entitle us to receive our share of CBRE OP’s earnings or losses and net cash flow. Provided we have sufficient available cash flow, we intend to pay our shareholders quarterly cash dividends. We are structured in a manner that allows CBRE OP to issue limited partnership interests from time to time in exchange for real estate properties. By structuring our acquisitions in this manner, the contributors of real estate to CBRE OP are generally able to defer gain recognition for U.S. federal income tax purposes. We have elected to be taxed as a real estate investment trust, (“REIT”), for U.S. federal income tax purposes. As a REIT, our company generally will not be subject to U.S. federal income tax on that portion of income that is distributed to shareholders if at least 90% of our company’s REIT taxable income is distributed to our shareholders.

Our business objective is to maximize shareholder value through: (1) maintaining an experienced management team of investment professionals; (2) investing in properties in certain markets where property fundamentals will support stable income returns and where capital appreciation is expected to be above average; (3) acquiring properties at a discount to replacement cost and where there is expected positive rent growth; and (4) repositioning properties to increase their value in the market place. Operating results at our individual properties are impacted by the supply and demand for office, retail, industrial and multifamily space, trends of the national regional economies, the financial health of current and prospective tenants and their customers, capital and credit market trends, construction costs, and interest rate movements. Individual operating property performance is monitored and calculated using certain non-GAAP financial measures such as an analysis of net operating income. An analysis of net operating income as compared to local regional and national statistics may provide insight into short or longer term trends exclusive of capital markets or capital structuring issues. Interest rates are a critical factor in our results of operations. Our properties may be financed with significant amounts of debt, so changes in interest rates may affect both net income and the health of capital markets. For investments outside of the United States, in addition to monitoring local property market fundamentals and capital and credit market trends, we evaluate currency hedging strategies, taxes, the stability of the local government and economy and the experience of our management team in the region.

Beginning in the second half of 2007, U.S. economic activity weakened due initially to stresses in the residential housing and financial sectors. The weak economic environment continued through 2008 and 2009, and the timing of a full economic recovery remains uncertain at this time. The currently-weak economic environment may result in declining demand for office, industrial and retail space, increasing tenant bankruptcies, lower average occupancy rates and effective rents, including potentially in our real estate portfolio which may impact our net income, funds from operations and cash flow.

Additionally, during the first half of 2009, the capital markets experienced significant distress during which many financial industry participants, including commercial real estate owners, operators, investors and lenders, found it challenging to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. Since then, however, we have found that the capital market environment has continued to improve. This has driven a limited resumption of commercial real estate transaction activity and demand, which has however been concentrated on the highest quality, well-leased and well-located properties.

The table below provides information relating to our properties, excluding those owned through our investment in CBRE Strategic Partners Asia, as of June 30, 2010. We purchased all of these properties from unaffiliated third parties. These properties are subject to competition from similar properties within their market areas and their economic performance could be affected by changes in local economic conditions. In evaluating these properties for acquisition, we considered a variety of factors including location, functionality and design, price per square foot, the credit worthiness of tenants, length of lease terms, market fundamentals and the in-place rental rates compared to market rates.

 

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As of June 30, 2010, we owned the following properties:

 

Property and Market

  Date
Acquired
  Year
Built
  Property Type   Our
Effective
Ownership
    Net Rentable
Square  Feet
(in thousands)
  Percentage
Leased
    Approximate
Total
Acquisition

Cost(1)
(in thousands)

Domestic Consolidated Properties:

             

REMEC Corporate Campus 1
San Diego, CA

  9/15/2004   1983   Office   100.00 %   34   100.00 %   $ 6,833

REMEC Corporate Campus 2
San Diego, CA

  9/15/2004   1983   Office   100.00 %   30   100.00 %     6,125

REMEC Corporate Campus 3
San Diego, CA

  9/15/2004   1983   Office   100.00 %   37   100.00 %     7,523

REMEC Corporate Campus 4
San Diego, CA

  9/15/2004   1983   Office   100.00 %   31   100.00 %     6,186

300 Constitution Drive
Boston, MA

  11/3/2004   1998   Warehouse/Distribution   100.00 %   330   100.00 %     19,805

Deerfield Commons(2)
Atlanta, GA

  6/21/2005   2000   Office   100.00 %   122   97.76 %     21,834

505 Century(3)
Dallas, TX

  1/9/2006   1997   Warehouse/Distribution   100.00 %   100   72.40 %     6,095

631 International(3)
Dallas, TX

  1/9/2006   1998   Warehouse/Distribution   100.00 %   73   100.00 %     5,407

660 North Dorothy(3)
Dallas, TX

  1/9/2006   1997   Warehouse/Distribution   100.00 %   120   87.50 %     6,836

Bolingbrook Point III
Chicago, IL

  8/29/2007   2006   Warehouse/Distribution   100.00 %   185   100.00 %     18,170

Cherokee Corporate Park(3)
Spartanburg, SC

  8/30/2007   2000   Warehouse/Distribution   100.00 %   60   0.00 %     3,775

Community Cash Complex 1(3)
Spartanburg, SC

  8/30/2007   1960   Warehouse/Distribution   100.00 %   205   32.83 %     2,690

Community Cash Complex 2(3)
Spartanburg, SC

  8/30/2007   1978   Warehouse/Distribution   100.00 %   145   6.90 %     2,225

Community Cash Complex 3(3)
Spartanburg, SC

  8/30/2007   1981   Warehouse/Distribution   100.00 %   116   100.00 %     1,701

Community Cash Complex 4(3)
Spartanburg, SC

  8/30/2007   1984   Warehouse/Distribution   100.00 %   33   100.00 %     547

Community Cash Complex 5(3)
Spartanburg, SC

  8/30/2007   1984   Warehouse/Distribution   100.00 %   53   84.85 %     824

Fairforest Building 1(3)
Spartanburg, SC

  8/30/2007   2000   Manufacturing   100.00 %   51   100.00 %     2,974

Fairforest Building 2(3)
Spartanburg, SC

  8/30/2007   1999   Manufacturing   100.00 %   104   100.00 %     5,379

Fairforest Building 3(3)
Spartanburg, SC

  8/30/2007   2000   Manufacturing   100.00 %   100   100.00 %     5,760

Fairforest Building 4(3)
Spartanburg, SC

  8/30/2007   2001   Manufacturing   100.00 %   101   100.00 %     5,640

Fairforest Building 5
Spartanburg, SC

  8/30/2007   2006   Warehouse/Distribution   100.00 %   316   100.00 %     16,968

Fairforest Building 6
Spartanburg, SC

  8/30/2007   2005   Manufacturing   100.00 %   101   100.00 %     7,469

Fairforest Building 7(3)
Spartanburg, SC

  8/30/2007   2006   Warehouse/Distribution   100.00 %   101   83.78 %     5,626

Greenville/Spartanburg Industrial Park(3)
Spartanburg, SC

  8/30/2007   1990   Manufacturing   100.00 %   67   100.00 %     3,388

Highway 290 Commerce Park Building 1(3)
Spartanburg, SC

  8/30/2007   1995   Warehouse/Distribution   100.00 %   150   100.00 %     5,388

Highway 290 Commerce Park Building 5(3)
Spartanburg, SC

  8/30/2007   1993   Warehouse/Distribution   100.00 %   30   100.00 %     1,420

Highway 290 Commerce Park Building 7(3)
Spartanburg, SC

  8/30/2007   1994   Warehouse/Distribution   100.00 %   88   0.00 %     4,889

HJ Park Building 1
Spartanburg, SC

  8/30/2007   2003   Manufacturing   100.00 %   70   100.00 %     4,216

Jedburg Commerce Park(3)
Charleston, SC

  8/30/2007   2007   Manufacturing   100.00 %   513   100.00 %     41,991

Kings Mountain I
Charlotte, NC

  8/30/2007   1998   Warehouse/Distribution   100.00 %   100   100.00 %     5,497

Kings Mountain II
Charlotte, NC

  8/30/2007   2002   Warehouse/Distribution   100.00 %   302   100.00 %     11,311

Mount Holly Building
Charleston, SC

  8/30/2007   2003   Warehouse/Distribution   100.00 %   101   0.00 %     6,208

 

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Property and Market

  Date
Acquired
  Year
Built
  Property Type   Our
Effective
Ownership
    Net Rentable
Square  Feet
(in thousands)
  Percentage
Leased
    Approximate
Total
Acquisition

Cost(1)
(in thousands)

North Rhett I
Charleston, SC

  8/30/2007   1973   Warehouse/Distribution   100.00 %   285   100.00 %   10,302

North Rhett II
Charleston, SC

  8/30/2007   2001   Warehouse/Distribution   100.00 %   102   0.00 %   7,073

North Rhett III
Charleston, SC

  8/30/2007   2002   Warehouse/Distribution   100.00 %   80   100.00 %   4,812

North Rhett IV
Charleston, SC

  8/30/2007   2005   Warehouse/Distribution   100.00 %   316   100.00 %   17,060

Orangeburg Park Building
Charleston, SC

  8/30/2007   2003   Warehouse/Distribution   100.00 %   101   100.00 %   5,474

Orchard Business Park 2(3)
Spartanburg, SC

  8/30/2007   1993   Warehouse/Distribution   100.00 %   18   100.00 %   761

Union Cross Building I
Winston-Salem, NC

  8/30/2007   2005   Warehouse/Distribution   100.00 %   101   100.00 %   6,585

Union Cross Building II
Winston-Salem, NC

  8/30/2007   2005   Warehouse/Distribution   100.00 %   316   0.00 %   17,216

Highway 290 Commerce Park Building 2(3)
Spartanburg, SC

  9/24/2007   1995   Warehouse/Distribution   100.00 %   100   100.00 %   4,626

Highway 290 Commerce Park Building 6(3)
Spartanburg, SC

  11/1/2007   1996   Warehouse/Distribution   100.00 %   105   0.00 %   3,760

Orchard Business Park 1(3)
Spartanburg, SC

  11/1/2007   1994   Warehouse/Distribution   100.00 %   33   100.00 %   1,378

Lakeside Office Center
Dallas, TX

  3/5/2008   2006   Office   100.00 %   99   90.63 %   17,994

Kings Mountain III(3)
Charlotte, NC

  3/14/2008   2007   Warehouse/Distribution   100.00 %   542   0.00 %   25,728

Enclave on the Lake
Houston, TX

  7/1/2008   1999   Office   100.00 %   171   100.00 %   37,827

Avion Midrise III
Washington, DC

  11/18/2008   2002   Office   100.00 %   71   100.00 %   21,111

Avion Midrise IV
Washington, DC

  11/18/2008   2002   Office   100.00 %   72   100.00 %   21,112

13201 Wilfred
Minneapolis, MN

  6/29/2009   1999   Warehouse/Distribution   100.00 %   335   100.00 %   15,340

3011, 3055 & 3077 Comcast Place
Oakland, CA

  7/1/2009   1988   Office   100.00 %   220   100.00 %   49,000

140 Depot Street
Boston, MA

  7/31/2009   2007   Warehouse/Distribution   100.00 %   238   100.00 %   18,950

12650 Ingenuity Drive
Orlando, FL

  8/5/2009   1999   Office   100.00 %   125   100.00 %   25,350

Crest Ridge Corporate Center 1
Minneapolis, MN

  8/17/2009   2009   Office   100.00 %   116   100.00 %   28,419

West Point Trade Center
Jacksonville, FL

  12/30/2009   2009   Warehouse/Distribution   100.00 %   602   100.00 %   29,000

5160 Hacienda Drive(3)
Oakland, CA

  4/8/2010   1988   Office   100.00 %   202   100.00 %   38,500

10450 Pacific Center Court(3)
San Diego, CA

  5/7/2010   1985   Office   100.00   134   100.00   32,750

225 Summit Ave(3)
Metro New York, NY

  6/21/2010   1966   Office   100.00   143   100.00   40,600

One Wayside Road
Boston, MA

  6/24/2010   1998   Office   100.00   200   100.00   55,525
                     

Total Domestic Consolidated Properties

  

  8,796   81.06 %   786,953
                     

International Consolidated Properties:

             

602 Central Blvd.(3)
Coventry, UK

  4/27/2007   2001   Office   100.00 %   50   0.00 %   23,847

Thames Valley Five
Reading, UK

  3/20/2008   1998   Office   100.00 %   40   100.00 %   29,572

Albion Mills Retail Park
Wakefield, UK

  7/11/2008   2000   Retail   100.00 %   55   100.00 %   22,098

Maskew Retail Park
Peterborough, UK

  10/23/2008   2007   Retail   100.00 %   145   100.00 %   53,740
                     

Total International Consolidated Properties

  

  290   82.77 %   129,257
                     

Total Consolidated Properties

  

  9,086   81.12 %   916,210
                     

 

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Table of Contents

Property and Market

  Date
Acquired
  Year
Built
  

Property Type

   Our
Effective
Ownership
    Net Rentable
Square  Feet
(in thousands)
   Percentage
Leased
    Approximate
Total
Acquisition

Cost(1)
(in thousands)

Unconsolidated Properties(4):

                

Buckeye Logistics Center(5)
Phoenix, AZ

  6/12/2008   2008    Warehouse/Distribution    80.00 %   605    100.00 %     35,573

Afton Ridge Shopping Center(6)
Charlotte, NC

  9/18/2008   2007    Retail    90.00 %   296    94.83 %     44,530

AllPoints at Anson Bldg. 1(5)
Indianapolis, IN

  9/30/2008   2008    Warehouse/Distribution    80.00 %   631    100.00 %     27,150

12200 President’s Court(5)
Jacksonville, FL

  9/30/2008   2008    Warehouse/Distribution    80.00 %   772    100.00 %     29,995

201 Sunridge Blvd.(5)
Dallas, TX

  9/30/2008   2008    Warehouse/Distribution    80.00 %   823    100.00 %     25,690

Aspen Corporate Center 500(5)
Nashville, TN

  9/30/2008   2008    Office    80.00 %   180    100.00 %     30,033

125 Enterprise Parkway(5)
Columbus, OH

  12/10/2008   2008    Warehouse/Distribution    80.00 %   1,142    100.00 %     38,088

AllPoints Midwest Bldg. I(5)
Indianapolis, IN

  12/10/2008   2008    Warehouse/Distribution    80.00 %   1,200    100.00 %     41,428

Celebration Office Center(3)(5)
Orlando, FL

  5/13/2009   2009    Office    80.00 %   101    100.00 %     13,640

22535 Colonial Pkwy(3)(5)
Houston, TX

  5/13/2009   2009    Office    80.00 %   90    100.00 %     11,596

Fairfield Distribution Ctr. IX(3)(5)
Tampa, FL

  5/13/2009   2008    Warehouse/Distribution    80.00 %   136    100.00 %     7,151

Northpoint III(3)(5)
Orlando, FL

  10/15/2009   2001    Office    80.00 %   108    100.00 %     14,592

Goodyear Crossing Ind. Park II(3)(5)
Phoenix, AZ

  12/07/2009   2009    Warehouse/Distribution    80.00 %   820    100.00 %     36,516

3900 North Paramount Parkway(3)(5)
Raleigh, NC

  3/31/2010   1999    Office    80.00 %   101    100.00 %     11,176

3900 South Paramount Parkway(3)(5)
Raleigh, NC

  3/31/2010   1999    Office    80.00 %   119    100.00 %     13,055

1400 Perimeter Park Drive(3)(5)
Raleigh, NC

  3/31/2010   1991    Office    80.00 %   45    100.00 %     3,970

Miramar I(3)(5)(7)
Fort Lauderdale, FL

  3/31/2010   2001    Office    80.00 %   94    100.00 %     13,645

Miramar II(3)(5)(7)
Fort Lauderdale, FL

  3/31/2010   2001    Office    80.00 %   129    100.00 %     20,899
                          

Total Domestic Unconsolidated Properties

  

  7,392    99.79 %     418,727
                          

International Unconsolidated Properties

                

Amber Park(3)(8)
South Normanton, UK

  6/10/2010   1997    Warehouse/Distribution    80.00 %   208    100.00 %     12,514

Brackmills(3)(8)
Northhampton, UK

  6/10/2010   1980    Warehouse/Distribution    80.00 %   187    100.00 %     13,407

Düren(3)(9)
Düren, Germany

  6/10/2010   2008    Warehouse/Distribution    80.00 %   392    100.00 %     13,148

Shönberg(3)(9)
Shönberg, Germany

  6/10/2010   2009    Warehouse/Distribution    80.00 %   454    100.00 %     13,819
                          

Total International Unconsolidated Properties

  

  1,241    100.00     52,888
                          

Total Unconsolidated Properties(4)

  

  8,633    99.82 %     471,615
                          

Total Properties(4)

  

  17,719    90.23 %   $ 1,387,825
                          

 

(1)

Approximate total acquisition cost represents the pro rata purchase price inclusive of customary closing costs and acquisition fees/acquisition expenses.

 

(2)

Includes undeveloped land zoned for future use.

 

(3)

This property is unencumbered and not secured by mortgage debt.

 

(4)

Does not include CBRE Strategic Partners Asia properties.

 

(5)

This property is held through the Duke joint venture.

 

(6)

This property is held through the Afton Ridge joint venture.

 

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Table of Contents
(7)

Consolidated properties acquired on December 31, 2009 and contributed to the Duke joint venture.

 

(8)

This property is held through the UK JV.

 

(9)

This property is held through the European JV.

Property Type Concentration

Our property type concentrations as of June 30, 2010 are as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

    Consolidated
Properties
  Unconsolidated
Properties(1)
  Consolidated & Unconsolidated
Properties(1)

Property Type

  Properties   Net
Rentable
Square
Feet
  Approximate
Total
Acquisition
Cost
  Properties   Net
Rentable

Square
Feet
  Approximate
Total
Acquisition
Cost
  Properties   Net
Rentable
Square
Feet
  Approximate
Total
Acquisition
Cost

Office

  18   1,897   $ 470,108   9   967   $ 132,606   27   2,864   $ 602,714

Warehouse/Distribution

  34   5,881     293,447   12   7,370     294,479   46   13,251     587,926

Retail

  2   201     75,838   1   296     44,530   3   497     120,368

Manufacturing

  8   1,107     76,817   —     —       —     8   1,107     76,817
                                         

Total

  62   9,086   $ 916,210   22   8,633   $ 471,615   84   17,719   $ 1,387,825
                                         

 

(1)

Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

Geographic Concentration

Our geographic concentrations as of June 30, 2010 are as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

    Consolidated
Properties
  Unconsolidated
Properties(1)
  Consolidated & Unconsolidated
Properties(1)

Domestic

  Properties   Net
Rentable
Square
Feet
  Approximate
Total
Acquisition
Cost
  Properties   Net
Rentable
Square
Feet
  Approximate
Total
Acquisition
Cost
  Properties   Net
Rentable
Square
Feet
  Approximate
Total
Acquisition
Cost

South Carolina

  29   3,647   $ 184,324   —     —     $ —     29   3,647   $ 184,324

Florida

  2   725     54,350   6   1,340     99,922   8   2,065     154,272

California

  7   688     146,917   —     —       —     7   688     146,917

North Carolina

  5   1,360     66,337   4   561     72,731   9   1,921     139,068

Texas

  5   563     74,159   2   913     37,286   7   1,476     111,445

Massachusetts

  3   769     94,280   —     —       —     3   769     94,280

Arizona

  —     —       —     2   1,425     72,089   2   1,425     72,089

Indiana

  —     —       —     2   1,831     68,578   2   1,831     68,578

Minnesota

  2   452     43,759   —     —       —     2   452     43,759

Virginia

  2   143     42,223   —     —       —     2   143     42,223

New Jersey

  1   142     40,600   —     —       —     1   142     40,600

Ohio

  —     —       —     1   1,142     38,088   1   1,142     38,088

Tennessee

  —     —       —     1   180     30,033   1   180     30,033

Georgia

  1   122     21,834   —     —       —     1   122     21,834

Illinois

  1   185     18,170   —     —       —     1   185     18,170
                                         

Total Domestic

  58   8,796     786,953   18   7,392     418,727   76   16,188     1,205,680

International

                                   

United Kingdom

  4   290     129,257   2   395     25,921   6   685     155,178

Germany

  —     —       —     2   846     26,967   2   846     26,967
                                         

Total International

  4   290     129,257   4   1,241     52,888   8   1,531     182,145
                                         

Total

  62   9,086   $ 916,210   22   8,633   $ 471,615   84   17,719   $ 1,387,825
                                         

 

(1)

Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

 

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Table of Contents

Significant Tenants

The following table details our largest tenants as of June 30, 2010 (in thousands):

 

     

Tenant

  

Primary Industry

  Consolidated Properties   Unconsolidated
Properties(1)
  Consolidated &
Unconsolidated

Properties(1)
        Net Rentable
Square Feet
  Annualized
Base Rent
  Net Rentable
Square Feet
  Annualized
Base Rent
  Net Rentable
Square Feet
  Annualized
Base Rent

1

  

Amazon.com(2)

  

Internet Retail

  —     $ —     2,056   $ 7,705   2,056   $ 7,705

2

  

Nuance

  

Software

  201     5,263   —       —     201     5,263

3

  

Comcast

  

Telecommunications

  220     4,578   —       —     220     4,578

4

  

SBM Offshore(3)

  

Petroleum and Mining

  171     4,277   —       —     171     4,277

5

  

Barr Laboratories

  

Pharmaceutical and Health Care Related

  143     4,061   —       —     143     4,061

6

  

Unilever(4)

  

Consumer Products

  —       —     1,595     3,864   1,595     3,864

7

  

PPD Development

  

Pharmaceutical and Health Care Related

  —       —     251     3,616   251     3,616

8

  

Carl Zeiss

  

Pharmaceutical and Health Care Related

  202     3,337   —       —     202     3,337

9

  

Prime Distribution Services

  

Logistics and Distribution

  —       —     1,200     2,958   1,200     2,958

10

  

American LaFrance

  

Vehicle Related Manufacturing

  513     2,892   —       —     513     2,892

11

  

Kellogg’s

  

Consumer Product

  —       —     1,142     2,817   1,142     2,817

12

  

B&Q

  

Home Furnishings/ Home Improvement

  104     2,496   —       —     104     2,496

13

  

Syngenta Seed

  

Agriculture

  116     2,472   —       —     116     2,472

14

  

Time Warner

  

Telecommunications

  134     2,412   —       —     134     2,412

15

  

Dr. Pepper

  

Food service and Retail

  602     2,388   —       —     602     2,388

16

  

REMEC

  

Defense and Aerospace

  133     2,376   —       —     133     2,376

17

  

US General Services Administration

  

Government

  72     2,197   —       —     72     2,197

18

  

Verizon Wireless(5)

  

Telecommunications

  —       —     180     2,180   180     2,180

19

  

Royal Caribbean

  

Travel/Leisure

  —       —     129     2,139   129     2,139

20

  

Kaplan(6)

  

Education

  125     2,117   —       —     125     2,117

21

  

Best Buy

  

Specialty Retail

  238     1,657   30     317   268     1,974

22

  

Regus Business Centers

  

Executive Office Suites

  86     1,862   —       —     86     1,862

23

  

Disney Vacation Development

  

Entertainment

  —       —     101     1,800   101     1,800

24

  

Lockheed Martin

  

Defense and Aerospace

  72     1,793   —       —     72     1,793

25

  

DeVry

  

Education

  —       —     94     1,517   94     1,517
  

Other (98 tenants)

  4,241     19,849   1,840     10,540   6,081     30,389
                                   
        7,373   $ 66,027   8,618   $ 39,453   15,991   $ 105,480
                                   

 

(1)

Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

 

(2)

Our tenants are Amazon.com.azdc, Inc., in our Buckeye Logistics Center and Goodyear Crossing Park II properties, and Amazon.com.indc, LLC, in our AllPoints at Anson Bldg. 1 property, which are all wholly-owned subsidiaries of Amazon.com.

 

(3)

Our tenant is Atlantic Offshore Ltd., a wholly-owned subsidiary of SBM Offshore.

 

(4)

Our tenant is CONOPCO, Inc., a wholly-owned subsidiary of Unilever.

 

(5)

Verizon Wireless is the d/b/a for Cellco Partnership.

 

(6)

Our tenant is Iowa College Acquisitions Corp., an operating subsidiary of Kaplan, Inc. The lease is guaranteed by Kaplan Inc.

 

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Table of Contents

Tenant Industries

Our tenants operate across a wide range of industries. The following table details our tenant-industry concentrations as of June 30, 2010 (in thousands):

 

     Consolidated Properties    Unconsolidated
Properties(1)
   Consolidated &
Unconsolidated
Properties(1)

Primary Tenant Industry Category

   Net Rentable
Square Feet
   Annualized
Base Rent
   Net Rentable
Square Feet
   Annualized
Base Rent
   Net Rentable
Square Feet
   Annualized
Base Rent

Pharmaceutical and Health Care Related

   696    $ 8,970    462    $ 4,753    1,158    $ 13,723

Telecommunications

   670      8,223    180      2,180    850      10,403

Consumer Products

   156      893    3,325      9,198    3,481      10,091

Internet Retail

   330      1,426    2,056      7,705    2,386      9,131

Logistics and Distribution

   614      2,099    1,791      4,651    2,405      6,750

Software

   201      5,263    —        —      201      5,263

Home Furnishings/Home Improvement

   549      4,740    35      391    584      5,131

Petroleum and Mining

   171      4,277    —        —      171      4,277

Defense and Aerospace

   204      4,170    —        —      204      4,170

Travel and Leisure

   —        —      229      3,939    229      3,939

Vehicle Related Manufacturing

   709      3,919    —        —      709      3,919

Education

   125      2,117    94      1,517    219      3,634

Business Services

   561      2,318    103      1,214    664      3,532

Food Service and Retail

   743      3,225    16      300    759      3,525

Specialty Retail

   284      2,699    75      712    359      3,411

Other Manufacturing

   841      2,808    —        —      841      2,808

Agriculture

   116      2,472    —        —      116      2,472

Government

   72      2,197    —        —      72      2,197

Executive Office Suites

   86      1,862    —        —      86      1,862

Financial Services

   182      1,604    —        —      182      1,604

Utilities

   —        —      108      1,280    108      1,280

Apparel Retail

   —        —      91      842    91      842

Other Retail

   22      123    47      645    69      768

Professional Services

   41      622    6      126    47      748
                                   

Total

   7,373    $ 66,027    8,618    $ 39,453    15,991    $ 105,480
                                   

 

(1)

Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

 

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Table of Contents

Tenant Lease Expirations

The following table sets forth a schedule of expiring leases for our consolidated and unconsolidated properties as of June 30, 2010 (in thousands):

 

     Consolidated Properties    Unconsolidated
Properties(1)
   Consolidated &
Unconsolidated
Properties(1)
     Expiring
Net  Rentable
Square Feet
   Expiring
Base Rent
   Expiring
Net  Rentable
Square Feet
   Expiring
Base Rent
   Expiring
Net Rentable
Square Feet
   Expiring
Base Rent

2010 (Six months ending December 31, 2010)

   166    $ 373    —      $ —      166    $ 373

2011

   174      893    —        —      174      893

2012

   691      9,892    33      557    724      10,449

2013

   1,296      8,126    411      1,566    1,707      9,692

2014

   102      521    15      254    117      775

2015

   856      3,760    458      1,288    1,314      5,048

2016

   301      1,618    259      4,684    560      6,302

2017

   200      3,421    605      5,235    805      8,656

2018

   715      8,385    3,088      12,840    3,803      21,225

2019

   1,697      13,239    3,253      11,216    4,950      24,455

2020

   326      5,687    —        —      326      5,687

Thereafter

   849      15,218    496      7,021    1,345      22,239
                                   

Total

   7,373    $ 71,133    8,618    $ 44,661    15,991    $ 115,794
                                   

Weighted Average Expiration (years)

        8.22         8.82         8.45

 

(1)

Expiring Net Rentable Square Feet for Unconsolidated Properties is at 100%. Expiring Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

Property Portfolio Size

Our portfolio size at the end of each quarter since commencement of our initial public offering through June 30, 2010 is as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

     Consolidated Properties    Unconsolidated Properties(1)    Consolidated & Unconsolidated
Properties(1)

Cumulative Property

Portfolio as of:

   Properties    Net
Rentable
Square
Feet
   Approximate
Total
Acquisition
Cost
   Properties    Net
Rentable
Square
Feet
   Approximate
Total
Acquisition
Cost
   Properties    Net
Rentable
Square
Feet
   Approximate
Total
Acquisition
Cost

9/30/2006

   9    878    $ 86,644    —      —      $ —      9    878    $ 86,644

12/31/2006

   9    878      86,644    —      —        —      9    878      86,644

3/31/2007

   9    878      86,644    —      —        —      9    878      86,644

6/30/2007

   10    928      110,491    —      —        —      10    928      110,491

9/30/2007

   42    5,439      348,456    —      —        —      42    5,439      348,456

12/31/2007

   44    5,576      353,594    —      —        —      44    5,576      353,594

3/31/2008

   47    6,257      426,856    —      —        —      47    6,257      426,856

6/30/2008

   47    6,257      426,856    1    605      35,636    48    6,862      462,492

9/30/2008

   49    6,483      486,777    6    3,307      193,773    55    9,790      680,550

12/31/2008

   52    6,771      582,682    8    5,649      273,205    60    12,420      855,887

3/31/2009

   52    6,771      582,717    8    5,649      273,130    60    12,420      855,847

6/30/2009

   53    7,106      598,103    11    5,976      305,308    64    13,082      903,411

9/30/2009

   57    7,805      719,822    11    5,976      305,202    68    13,781      1,025,024

12/31/2009

   60    8,630      791,314    13    6,904      356,158    73    15,534      1,147,472

3/31/2010

   58    8,407      748,835    18    7,392      418,818    76    15,799      1,167,653

6/30/2010

   62    9,086      916,210    22    8,633      471,615    84    17,719      1,387,825

 

(1)

Net Rentable Square Feet for unconsolidated properties is at 100%. Approximate Total Acquisition Cost is at our pro rata share of effective ownership and does not include our investment in CBRE Strategic Partners Asia.

 

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Table of Contents

Critical Accounting Policies

Management believes our most critical accounting policies are accounting for lease revenues (including straight-line rent), regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for our derivatives and hedging activities, if any. Each of these items involves estimates that require management to make judgments that are subjective in nature. Management relies on its experience, collects historical data and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates.

Impairment of Long-Lived Assets

We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. In spite of intensive leasing efforts and preliminary interest exhibited by a variety of tenants since our acquisition in 2008, the Kings Mountain III property remains vacant. Due to the currently challenging economic environment, we recognized impairment for our consolidated investment in Kings Mountain III in the amount of $9,160,000 during the year ended December 31, 2009 which reduced our carrying value of the property to $15,300,000. The impairment reflects our estimates of the fair value of the Kings Mountain III property which is based on an appraisal using the sales comparable method which is a Level 3 Valuation Method as described in Note 15 “Fair Value of Financial Instruments and Investments.” No impairment for consolidated investments was recognized during six months ended June 30, 2010.

Revenue Recognition and Valuation of Receivables

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $6,535,000 and $6,785,000 as security for such leases at June 30, 2010 and December 31, 2009.

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.

Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $237,000 and $183,000 as of June 30, 2010 and December 31, 2009, respectively. During the six months ended June 30, 2010, we wrote off $310,000 of the uncollectible rent receivables for the tenant Randal C. Espey at the Deerfield Commons I property, tenants Cell Arch Technologies, Inc. and Keogh Consulting, Inc. at the Lakeside Office Center, and the tenant Romeo Rim, Inc. at the Cherokee Corporate Park. $363,000 of allowance for doubtful accounts was recognized during the six months ended June 30, 2010. In addition, the unamortized tangible and intangible asset balances totaling $27,000 were also written off during the six months ended June 30, 2010, of which ($10,000), $5,000, $8,000 and $24,000 are related to above/below market leases, lease commissions, tenant improvements and in place lease value, respectively.

Investments in Real Estate

We record investments in real estate at cost (including third-party acquisition expenses) and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of our real estate assets, which we expect to be approximately 39 years for buildings and improvements, three to five years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

 

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Table of Contents

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis throughout the expected useful lives of the related assets.

We have adopted, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB ASC 360-10),” which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. This accounting provision requires that the operations related to properties that have been sold or that we intend to sell be presented as discontinued operations in the statement of operations for all periods presented, and properties we intend to sell be designated as “held for sale” on our balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. These factors contain subjectivity and thus are not able to be precisely estimated. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate.

Purchase Accounting for Acquisition of Investments in Real Estate

We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the purchase consideration of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases; and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the real estate acquired as such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

 

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Discontinued Operations and Real Estate Held for Sale

In a period in which a property has been disposed of or is classified as held for sale, the statements of operations for current and prior periods report the results of operations of the property as discontinued operations.

At such time as a property is deemed held for sale, such property is carried at the lower of: (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as property held for sale in the period in which all of the following criteria are met:

 

  ¡  

management, having the authority to approve the action, commits to a plan to sell the asset;

 

  ¡  

the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

 

  ¡  

an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

 

  ¡  

the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

 

  ¡  

the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

 

  ¡  

given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

As of June 30, 2010 and December 31, 2009, we did not have any properties held for sale.

Accounting for Derivative Financial Investments and Hedging Activities

All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.

We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within footnotes to enable financial statement users to locate important information about derivative instruments.

Investments in Unconsolidated Entities

Our determination of the appropriate accounting method with respect to our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. (“CBRE Strategic Partners Asia”), which is not considered a Variable Interest Entity (“VIE”), is partly based on CBRE Strategic Partners Asia’s sufficiency of equity investment at risk which was triggered by a substantial paydown during 2009 of its subscription line of credit backed by investor capital commitments to fund its operations. We account for this investment under the equity method of accounting.

We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we consolidate the entity as the

 

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primary beneficiary. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not we consolidate such entity.

With respect to our majority limited membership interest in the Duke/Hulfish, LLC joint venture (the “Duke joint venture”), the Afton Ridge Joint Venture, LLC (“Afton Ridge”), the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”) and the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”) we considered the Codification Topic “Consolidation” (“FASB ASC 810”) in determining that we did not have control over the financial and operating decisions of such entities due to the existence of substantive participating rights held by the minority limited members who are also the managing members of the Duke joint venture and Afton Ridge, and the investment advisors/managers of the UK JV and European JV, respectively.

We carry our investments in CBRE Strategic Partners Asia, the Duke joint venture, Afton Ridge, the UK JV and the European JV on the equity method of accounting because we have the ability to exercise significant influence (but not control) over operating and financial policies of each such entity. We eliminate transactions with such equity method entities to the extent of our ownership in each such entity. Accordingly, our share of net income (loss) of these equity method entities is included in consolidated net income (loss). CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323 the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally fair value basis, applied by CBRE Strategic Partners Asia under the investment company guide is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 15 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable period ended December 31, 2004. To qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) adjusted taxable income, as defined in the Code, to our shareholders and satisfy certain other organizational and operating requirements. We generally will not be subject to U.S. federal income taxes if we distribute 100% of our taxable income for each year to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to U.S. federal income taxes and excise taxes on our undistributed taxable income. Except as discussed in Note 2 “Basis of Presentation in Summary of Significant Accounting Policies—Income Taxes,” we believe that we have met all of the REIT distribution and technical requirements for the six months ended June 30, 2010 and 2009. Management intends to continue to adhere to these requirements and maintain our REIT qualification.

Fair Value of Financial Instruments and Investments

We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Notes 15 “Fair Value of Financial Instruments and Investments” and Note 16 “Fair Value Option—Note Payable.”

We generally determine or calculate the fair value of financial instruments using the appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the

 

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net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the two interest rate swaps, one interest rate cap, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act) and one mortgage note payable that is economically hedged by one of the interest rate swaps.

The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.

We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact on our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:

 

  ¡  

Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination;

 

  ¡  

Long-lived assets measured at fair value due to an impairment assessment and

 

  ¡  

Asset retirement obligations initially measured under the Codification Topic “Asset Retirement and Environmental Obligations” (“FASB ASC 410”).

Non-controlling (Minority) Interests in the Operating Partnership

Effective January 1, 2009, we adopted FASB ASC 810. The new accounting provisions require that amounts formerly reported as minority interests in our consolidated financial statements be reported as non-controlling interests. In connection with the issuance of this adoption, certain revisions were also made to the. Codification Topic “Distinguishing Liabilities from Equity” (“FASB ASC 480-10-S99-3A”). These revisions clarify that non-controlling interests with redemption provisions outside of the control of the issuer and non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer are subject to evaluation to determine the appropriate balance sheet classification and measurement of such instruments.

With respect to the operating partnership units, FASB ASC 480-10-S99-3A requires non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer to be further evaluated under the Codification Sub-Topic “Derivatives and Hedging—Conditions Necessary for Equity Classification” (“FASB ASC 815-40-25-10”) (Paragraphs 815-40-25-39 through 815-40-25-42) to determine whether permanent equity or temporary equity classification on the balance sheet is appropriate. Since the operating partnership units contain such a provision, the Company evaluated this guidance and determined that the operating partnership units do not meet the requirements to qualify for equity presentation. As a result, upon the adoption of FASB ASC 810 and the related revisions to FASB ASC 480-10-S99-3A, the operating partnership units are presented in the temporary equity section of the consolidated balance sheets and reported at the higher of their proportionate share of the net assets of CBRE OP or fair value, with period to period changes in value reported as an adjustment to shareholder’s equity. Under the terms of the second amended and restated agreement of limited partnership of CBRE OP (the “Second Amended Partnership Agreement”) the fair value of the operating partnership units is determined as an amount equal to the redemption value as defined therein.

Operating Property Acquisitions

Effective January 1, 2009, we adopted the provisions of FASB ASC 805 which requires an acquiring entity to recognize acquired assets and assumed liabilities in a transaction at fair value as of the acquisition date and changes the accounting treatment for certain items, including acquisition costs, which is required to be expensed as incurred. The provision of “Business Combinations” is required to be applied on a prospective basis.

The adoption of the provisions of the FASB ASC 805 could have an impact on the cost allocation of future acquisitions and requires us to expense acquisition costs for future property acquisitions. The adoption of the provisions of the new accounting standard FASB ASC 805 had an effect on our consolidated financial statements, results of operations and cash flows for the three and six months ended June 30, 2010. We expensed $4,841,000 and $998,000, $5,219,000 and $998,000 of acquisition costs during the three and six months ended June 30, 2010 and 2009, respectively.

 

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Subsequent Events

Effective for the second quarter of 2009, we adopted the provisions of FASB ASC 855-10—Subsequent Events (“FASB ASC 855-10”), as amended by Accounting Standard Update 2010-09. ASC 855-10 establishes principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. The adoption of ASC 855-10 did not have a material impact on our financial statements.

In preparing our accompanying financial statements, management has evaluated subsequent events through the financial statement issuance date.

Adoption of Accounting Standards

Consolidations

In December 2009, the Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” which incorporates Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R)” issued by the FASB in June 2009. The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in VIEs, which enhances the information provided to users of financial statements. We adopted ASU 2009-17 effective January 1, 2010. As a result of the fact that we have no variable interests in VIEs, the adoption of ASU 2009-17 did not have a material impact on our financial statements.

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06 which was an update to the Fair Value Measurements and Disclosure topic of the FASB Accounting Standards Codification (the “Codification”). ASU 2010-06 clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities. These requirements of ASU 2010-06 are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009. The adoption of these requirements of the ASU did not have a material impact on our financial statements.

New Accounting Standards

ASU 2010-06 also requires additional disclosures regarding the transfers of classifications among the fair value classification levels as well as the reasons for those changes and a separate presentation of purchases, sales, issuances and settlements in the presentation of the roll-forward of Level 3 assets and liabilities. Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 is not expected to have a material impact on our financial statements.

Treatment of Management Compensation, Expense Reimbursements

Management of our operations is conducted by the Investment Advisor. Fees related to services provided by our Investment Advisor are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent our period costs, such as cash payments for investment management fees paid to the Investment Advisor, are expensed as incurred. In addition, an affiliate of the Investment Advisor owns a partnership interest which represents a profits interest in CBRE OP related to these services.

Subject to certain limitations, we are obligated to reimburse the Investment Advisor for the organizational and offering costs incurred on our behalf. This treatment is consistent with Staff Accounting Bulletin, or SAB, Topic 1.B.1, which requires that we include all of the costs associated with our operations and formation in our financial statements. These costs will then be analyzed and segregated between those which are organizational in nature, those which are offering-related salaries and other general and administrative expenses of the Investment Advisor and its affiliates, and those which qualify as offering expenses in accordance with SAB Topic 5.A. Organizational costs are expensed as incurred in accordance with AICPA Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities.” Offering-related salaries and other general and administrative costs of the Investment Advisor and its affiliates will be expensed as incurred and third-party offering expenses will be taken as a reduction against the net proceeds of the offering within additional paid-in capital (“APIC”), in accordance with SAB Topic 5.A.

 

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Offering costs totaling $13,522,000 and $8,153,000, $24,936,000 and $13,292,000 were incurred during the three and six months ended June 30, 2010 and 2009, respectively, and are recorded as a reduction of APIC in the consolidated statement of shareholders’ equity. Of the total amounts, $13,464,000, $8,102,000, $24,833,000 and $13,219,000 were incurred to CNL Securities Corp., as dealer manager, and $58,000, $52,000, $103,000 and $73,000 were incurred to the Investment Advisor for reimbursable marketing expenses for the three and six months ended June 30, 2010 and 2009, respectively. Each party will be paid the amount incurred from proceeds of the public offering. As of June 30, 2010 and December 2009, the accrued offering costs payable to related parties included in our consolidated balance sheet were $1,192,000 and $1,114,000.

Prior to October 24, 2006, the Investment Advisor received an annual fee equal to 0.75% of the book value of the total assets, as defined in the Advisory Agreement, based on the assets of CBRE OP. The investment management fee was calculated monthly based on the average of total assets, as defined, during such period. On October 24, 2006, the Board of Trustees, including our independent trustees, approved and the Company entered into the Amended and Restated Agreement of Limited Partnership of CBRE OP (the “Amended Partnership Agreement”) and the Amended and Restated Advisory Agreement (the “Amended Advisory Agreement” and, together with the Amended Partnership Agreement, the “Amended Agreements”). The Amended Advisory Agreement provides an investment management fee of (i) a monthly fee equal to one twelfth of 0.6% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 7.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio. On January 30, 2009, we entered into that certain second amended and restated advisory agreement (the “Second Amended Advisory Agreement”) with CBRE OP and the Investment Advisor. The Second Amended Advisory Agreement modified, among other things, the investment management fee to consist of (a) a monthly fee equal to one twelfth of 0.5% of the aggregate costs (before non-cash reserves and depreciation) of all real estate investment in our portfolio and (b) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments in our portfolio. All or any portion of the investment management fee not taken as to any fiscal year may be deferred or waived without interest at the option of the Investment Advisor.

The Investment Advisor earned investment management fees of $2,687,000 and $1,783,000 for the three months ended June 30, 2010 and 2009, respectively; and $5,118,000 and $3,486,000 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the investment management fees payable to related party in our consolidated balance sheets were $950,000 and $757,000, respectively. In connection with services provided to the Investment Advisor, CNL Fund Management Company, the Sub-Advisor and affiliate of the Dealer Manager pursuant to a sub-advisory agreement dated August 21, 2006, was paid by the Investment Advisor $371,000 and $246,000 for the three months ended June 30, 2010 and 2009, respectively; and $707,000 and $481,000 for the six months ended June 30, 2010, respectively.

On January 30, 2009, we entered into that certain Second Amendment Advisory Agreement that permits the Investment Advisor to earn an acquisition fee of up to 1.5% of (i) the purchase price of real estate investments acquired by us, including any debt attributable to such investments, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The Investment Advisor earned acquisition fees of $3,304,000 and $723,000 for the three months ended June 30, 2010 and 2009, respectively; and $3,600,000 and $723,000 for the six months ended June 30, 2010 and 2009, respectively. In connection with services provided to the Investment Advisor, the Sub Advisor, pursuant to a sub advisory agreement, was paid by the Investment Advisor acquisition fees of $618,000 and $135,000 for the three months ended June 30, 2010 and 2009, respectively; and $673,000 and $135,000 for the six months end June 30, 2010 and 2009, respectively. The Investment Advisor earned $330,000 and $72,000 in acquisition related expenses during the three months ended June 30, 2010 and 2009, respectively; and $373,000 and $72,000 for the six months ended June 30, 2010 and 2009, respectively. Prior to the adoption of “Business Combinations” on January 1, 2009, these acquisitions fees and expenses were capitalized to investments in real estate and related intangibles.

 

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Rental Operations

Our reportable segments consist of three types of commercial real estate properties for which our management internally evaluates operating performance and financial results: the Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. All periods presented have been revised to report our segment results under our new reportable segment structure. We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, management fees and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our company-level general and administrative expenses. The following tables compare the net operating income for the three and six months ended June 30, 2010 and 2009 (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
         2010            2009            2010            2009    

Domestic Industrial Properties

           

Revenues:

           

Rental

   $ 5,487    $ 4,303    $ 11,300    $ 8,989

Tenant Reimbursements

     1,295      1,003      2,553      2,103
                           

Total Revenues

     6,782      5,306      13,853      11,092
                           

Property and Related Expenses:

           

Operating and Maintenance

     395      313      733      670

General and Administrative

     116      94      162      139

Property Management Fee to Related Party

     77      87      138      180

Property Taxes

     1,455      1,090      2,886      2,146
                           

Total Expenses

     2,043      1,584      3,919      3,135
                           

Net Operating Income

     4,739      3,722      9,934      7,957
                           

Domestic Office Properties

           

Revenues:

           

Rental

     7,612      3,713      14,861      7,485

Tenant Reimbursements

     1,467      940      3,046      1,701
                           

Total Revenues

     9,079      4,653      17,907      9,186
                           

Property and Related Expenses:

           

Operating and Maintenance

     957      739      2,114      1,528

General and Administrative

     84      43      171      101

Property Management Fee to Related Party

     27      27      60      64

Property Taxes

     1,096      608      2,286      1,218
                           

Total Expenses

     2,164      1,417      4,631      2,911
                           

Net Operating Income

     6,915      3,236      13,276      6,275
                           

 

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     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

International Office/Retail Properties

        

Rental

     1,535        1,831        3,475        3,715   

Tenant Reimbursements

     55        95        136        180   
                                

Total Revenues

     1,590        1,926        3,611        3,895   
                                

Property and Related Expenses:

        

Operating and Maintenance

     59        93        139        174   

General and Administrative

     86        15        121        67   

Property Management Fee to Related Party

     72        (2 )     142        10   
                                

Total Expenses

     217        106        402        251   
                                

Net Operating Income

     1,373        1,820        3,209        3,644   
                                

Reconciliation to Consolidated Net Loss

        

Total Segment Net Operating Income(1)

     13,027        8,778        26,419        17,876   

Interest Expense

     3,238        2,638        6,333        5,445   

General and Administrative

     1,553        733        2,224        1,621   

Investment Management Fee to Related Party

     2,687        1,783        5,118        3,486   

Acquisition Expenses

     4,841        998       5,219        998   

Depreciation and Amortization

     6,717        6,148        13,960        11,870   
                                
     (6,009     (3,522     (6,435     (5,544 )
                                

Other Income and Expenses

        

Interest and Other Income

     91        140        689        261   

Net Settlement Payments on Interest Rate Swaps

     (230     (152 )     (444     (233 )

Loss on Interest Rate Swaps and Cap

     (115     525        (503     357   

Loss on Note Payable at Fair Value

     (5     (128 )     (78     (693 )

Loss on Early Extinguishment of Debt

     —          —          (73     —     
                                

Loss Before Provision for Income Taxes and Equity in Income (Loss) of Unconsolidated Entities

     (6,268     (3,137 )     (6,844     (5,852 )
                                

Provision for Income Taxes

     (70     (58 )     (85     (87 )

Equity in Income (Loss) of Unconsolidated Entities

     2,109        (1,051 )     2,846        (1,849 )
                                

Net Loss

     (4,229     (4,246 )     (4,083     (7,788 )
                                

Net Loss Attributable to Non-Controlling Operating Partnership Units

     8        8        7        21   
                                

Net Loss Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (4,221   $ (4,238 )   $ (4,076   $ (7,767 )
                                

 

(1)

Total Segment Net Operating Income is a Non-GAAP financial measure which may be useful as a supplemental measure for evaluating the relationship of each reporting segment to the combined total. This measure should not be viewed as an alternative measure of operating performance to our U.S. GAAP presentations provided. Segment “Net Operating Income” is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, including real estate taxes) before depreciation and amortization expense. The Net Operating Income segment information presented consists of the same Net Operating Income segment information disclosed in Note 9 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

 

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Consolidated Results of Operations

Comparison of Three Months Ended June 30, 2010 to Three Months Ended June 30, 2009

Revenues

Rental

Rental revenue increased $4,787,000, or 49%, to $14,634,000 during the three months ended June 30, 2010 compared to $9,847,000 for the three months ended June 30, 2009. The increase was due to the ownership of 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, 12650 Ingenuity Drive, Crest Ridge Corporate Center 1, West Point Trade Center (“2009 Acquisitions”) for the three months ended June 30, 2010 and the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit Avenue, One Wayside Road, (the “2010 Acquisitions”, and together with the “2009 Acquisitions”, the “2009 & 2010 Acquisitions”) during the three months ended June 30, 2010.

Tenant Reimbursements

Tenant reimbursements increased $779,000, or 38%, to $2,817,000 for the three months ended June 30, 2010 compared to $2,038,000 for the three months ended June 30, 2009, due to tenant reimbursement revenue from the 2009 & 2010 acquisitions.

Expenses

Operating and Maintenance

Property operating and maintenance expenses increased $266,000, or 23%, to $1,411,000 for the three months ended June 30, 2010 compared to $1,145,000 for the three months ended June 30, 2009. The increase was due to the 2009 & 2010 Acquisitions and increased operating and maintenance expenses associated with our vacant properties.

Property Taxes

Property tax expense increased $853,000, or 50%, to $2,551,000 for the three months ended June 30, 2010 compared to $1,698,000 for the three months ended June 30, 2009. The increase in property taxes was due to the 2009 & 2010 Acquisitions and increased property taxes in the Carolina portfolio

Interest

Interest expense increased $600,000, or 23%, to $3,238,000 for the three months ended June 30, 2010 compared to $2,638,000 for the three months ended June 30, 2009 as a result of placing debt on Maskew Retail Park during 2009, the assumption of debt during the 2009 acquisition of 12650 Ingenuity Drive, the assumption of debt during the 2010 acquisition of One Wayside Road and interest related to the Wells Fargo Credit Facility.

General and Administrative

General and administrative expense increased $954,000, or 108%, to $1,839,000 for the three months ended June 30, 2010 compared to $885,000 for the three months ended June 30, 2009. Of the total increase, $114,000 was due to the increase in legal expenses; $6,000 was due to the increase in officer and director fees; $84,000 was due to the increase in shareholder servicing fees and reports production costs; $224,000 was due to the increase in professional fees; $536,000 was largely due to the increase in organizational costs which were slightly offset by the reduction of general audit fees and Sarbanes-Oxley assistance of $10,000.

Property Management Fee and Investment Management Fee to Related Party

Property management fee and investment management fee to related party increased $969,000, or 51%, to $2,864,000 for three months ended June 30, 2010 compared to $1,895,000 for the three months ended June 30, 2009. The increase was due to additional investment management fees to related party earned relative to an increase in assets under management.

Acquisition Expenses

Acquisition expenses increased $3,843,000, or 385%, to $4,841,000 for three months ended June 30, 2010 compared to $998,000 for the three months ended June 30, 2009. The net increase was related to the 2010 acquisitions of consolidated and unconsolidated properties.

 

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Depreciation and Amortization

Depreciation and amortization expenses increased $569,000, or 9%, to $6,717,000 for the three months ended June 30, 2010 as compared to $6,148,000 for the three months ended June 30, 2009. The net increase is primarily due to depreciation and amortization expense related to the 2009 and 2010 acquisitions.

Interest and Other Income

Interest and other income decreased $49,000, or 35%, to $91,000 for the three months ended June 30, 2010 compared to $140,000 for the three months ended June 30, 2009. The decrease was due to significantly lower money market interest rates.

Net Settlement Payments on Interest Rate Swaps

During the three months ended June 30, 2010, we made net payments on interest rate swaps of $230,000 compared to $152,000 during the three months ended June 30, 2009. The increase is a result of lower variable interest rates for the three months ended June 30, 2010 as compared to the three months ended June 30 2009.

Loss on Interest Rate Swaps and Cap

Loss on interest rate swaps and cap increased $640,000, or 122%, to ($115,000) for the three months ended June 30, 2010 compared $525,000 for the three months ended June 30, 2009. The increase was due to valuation losses on interest rate swaps as a result of lower variable interest rates for Thames Valley Five and Albion Mills Retail Park.

Loss on Note Payable on Fair Value

Loss on notes payables decreased by $123,000, or 96%, to ($5,000) for the three months ended June 30, 2010 compared to ($128,000) for the three months ended June 30, 2009. The year to year change is attributable to a stabilization of UK interest rate spreads used to value the loan.

Provision for Income Taxes

Provision for income taxes increased $12,000, or 21%, to $70,000 for the three months ended June 30, 2010 compared to $58,000 for the three months ended June 30, 2009 resulting primarily from payment of annual state representation fees during the three months ended June 30, 2010.

Equity in income of Unconsolidated Entities

Equity in income of unconsolidated entities increased $3,160,000, or 301%, to $2,109,000 for the three months ended June 30, 2010 compared to ($1,051,000) for the three months ended June 30, 2009. The increase was primarily due to the acquisition of additional properties by the Duke joint venture and improved CBRE Strategic Partners Asia performance during the three months ended June 30, 2010.

Non-Controlling Interest

Non-controlling interest remained at $8,000 for the three months ended June 30, 2010 compared to $8,000 for the three months ended June 30, 2009.

Comparison of Six Months Ended June 30, 2010 to the Six Months Ended June 30, 2009

Revenues

Rental

Rental revenue increased $9,447,000, or 47%, to $29,636,000 during the six months ended June 30, 2010 compared to $20,189,000 for the six months ended June 30, 2009. The increase was due to the ownership of 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, 12650 Ingenuity Drive, Crest Ridge Corporate Center 1, West Point Trade Center (“2009 Acquisitions”) for the six months ended June 30, 2010, and the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit Avenue, One Wayside Road, (the “2010 Acquisitions”, together with the “2009 Acquisitions”, the “2009 & 2010 Acquisitions”) during the six months ended June 30, 2010.

 

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Tenant Reimbursements

Tenant reimbursements increased $1,751,000, or 44%, to $5,735,000 for the six months ended June 30, 2010 compared to $3,984,000 for the six months ended June 30, 2009, due to tenant reimbursement revenue from the 2009 & 2010 acquisitions.

Expenses

Operating and Maintenance

Property operating and maintenance expenses increased $614,000, or 26%, to $2,986,000 for the six months ended June 30, 2010 compared to $2,372,000 for the six months ended June 30, 2009. The increase was due to the 2009 & 2010 Acquisitions and increased operating and maintenance expenses associated with our vacant properties.

Property Taxes

Property tax expense increased $1,808,000, or 54%, to $5,172,000 for the six months ended June 30, 2010 compared to $3,364,000 for the six months ended June 30, 2009. The increase in property taxes was due to the 2009 & 2010 Acquisitions and increased property taxes in the Carolina portfolio.

Interest

Interest expense increased $888,000, or 16%, to $6,333,000 for the six months ended June 30, 2010 compared to $5,445,000 for the six months ended June 30, 2009 as a result of placing debt on Maskew Retail Park during 2009, the assumption of debt during the 2009 acquisition of 12650 Ingenuity Drive, the assumption of debt during the 2010 acquisition of One Wayside Road and interest related to the Wells Fargo Credit Facility.

General and Administrative

General and administrative expense increased $750,000, or 39%, to $2,678,000 for the six months ended June 30, 2010 compared to $1,928,000 for the six months ended June 30, 2009. Of the total increase, $11,000 was due to the increase in legal expenses; $15,000 was due to the increase in officer and director fees; $61,000 increase in shareholder servicing fees and reports production costs; $175,000 was due to the increase in professional fees; $535,000 was largely due to the increase in organizational costs which were slightly offset by the reduction of general audit fees and Sarbanes-Oxley assistance $47,000.

Property Management Fee and Investment Management Fee to Related Party

Property management fee and investment management fee to related party increased $1,718,000, or 46%, to $5,458,000 for six months ended June 30, 2010 compared to $3,740,000 for the six months ended June 30, 2009 .The increase was due to additional investment management fees to related party earned relative to an increase in assets under management.

Acquisition Expenses

Acquisition expenses increased $4,221,000, or 423%, to $5,219,000 for six months ended June 30, 2010 compared to $998,000 for the six months ended June 30, 2009. The net increase was related to the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit Valley, One Wayside, 1400 Perimeter Parkway, 3900 N. Paramount, 3900 S. Paramount, Miramar I & II, UK JV and European JV.

Depreciation and Amortization

Depreciation and amortization expense increased $2,090,000, or 18%, to $13,960,000 for the six months ended June 30, 2010 as compared to $11,870,000 for the six months ended June 30, 2009. The net increase is primarily due to depreciation and amortization expense related to the 2009 and 2010 acquisitions.

Interest and Other Income

Interest and other income increased $428,000, or 164%, to $689,000 for the six months ended June 30, 2010 compared to $261,000 for the six months ended June 30, 2009 as a result of placing debt on Maskew Retail Park during 2009 and the assumption of debt during the 2009 acquisition of 12650 Ingenuity Drive, in addition the assumption of debt during the 2010 acquisition of One Wayside Road.

 

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Net Settlement Payments on Interest Rate Swaps

During the six months ended June 30, 2010, we made net payments on interest rate swaps of $444,000 compared to $233,000 during the six months ended June 30, 2009. The increase is a result of lower variable interest rates for the six months ended June 30, 2010 as compared to the six months ended June 30 2009.

Loss on Interest Rate Swaps and Cap

Loss on interest rate swaps and cap increased $860,000, or 241%, to ($503,000) for the six months ended June 30, 2010 compared $357,000 for the six months ended June 30, 2009. The increase was due to valuation losses on interest rate swaps as a result of lower variable interest rates for Thames Valley Five and Albion Mills Retail Park.

Loss on Note Payable on Fair Value

Loss on notes payables decreased by $615,000, or 89%, to ($78,000) for the six months ended June 30, 2010 compared to ($693,000) for the six months ended June 30, 2009. The year to year change is attributable to a stabilization of UK interest rate spreads used to value the loan.

Loss on Early Extinguishment of Debt

During the six months ended June 30, 2010, we repaid in full the existing loan at 602 Central Blvd. and incurred expense of $73,000. There was no extinguishment of debt activity during the six months ended June 30, 2009.

Provision for Income Taxes

Provision for income taxes decreased $2,000, or 2%, to $85,000 for the six months ended June 30, 2010 compared to $87,000 for the six months ended June 30, 2009 resulting primarily from reduced state tax payments in North Carolina.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities increased $4,695,000, or 254%, to $2,846,000 for the six months ended June 30, 2010 compared to ($1,849,000) for the six months ended June 30, 2009. The increase was primarily due to the acquisition of additional properties by the Duke joint venture and improved CBRE Strategic Partners Asia performance during the six months ended June 30, 2010.

Non-Controlling Interest

Non-controlling interest decreased $14,000 to $7,000 for the six months ended June, 2010 compared to $21,000 for the six months ended June 30, 2009.

Financial Condition, Liquidity and Capital Resources

Overview

Liquidity is a measurement of the ability to meet cash requirements, including funding investments and ongoing commitments, to repay borrowings as well as paying dividends, fees and other costs associated with our public offerings and other general business needs. Our sources of funds will primarily be the net proceeds of our initial public and follow-on offerings, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements and we do not anticipate a need to raise funds from other than these sources within the next twelve months. Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. Depending on market conditions, we expect that once the net proceeds of our initial public and follow-on offerings are fully invested, our debt financing will be approximately 65% of the value of the cost of our assets before non-cash reserves and depreciation. The amount of debt we place on an individual property, or the amount of debt incurred by an individual entity in which we invest, may be more or less than 65% of the value of such property or the value of the assets owned by such entity, depending on market conditions and other factors. In fact, depending on market conditions and other factors, we may choose not to place debt on our portfolio or our assets and may choose not to borrow to finance our operations or to acquire properties. Our declaration of trust limits our borrowing to 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to our shareholders in our next quarterly report. Our declaration of trust defines “net assets” as our total assets (other than intangibles) at cost, before deducting depreciation,

 

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reserves for bad debts or other non-cash reserves, less total liabilities, calculated at least quarterly by us on a basis consistently applied; provided, however, that during such periods in which we are obtaining regular independent valuations of the current value of its net assets for purposes of enabling fiduciaries of employee benefit plan shareholders to comply with applicable Department of Labor reporting requirements, “net assets” means the greater of (i) the amount determined pursuant to the foregoing and (ii) the assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other non-cash reserves. Any indebtedness we do incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on the value of our common shares. We believe that, even without any proceeds raised from our public offering, we have sufficient cash flow from operations to continue as a going concern for the next twelve months and into the foreseeable future.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to the Investment Advisor and the Dealer Manager. During the offering stage, assuming all of the shares in our primary offering are sold, these payments will include payments of up to $189,000,000 for selling commissions, up to $54,000,000 for the dealer manager fee, up to $27,000,000 for the marketing support fee and up to $20,750,000 for organizational and offering expenses. During the acquisition and operational stages, certain services related to the acquisition and management of our investments and our operations will be provided to us by the Investment Advisor pursuant to an advisory agreement entered into in July 2004 which was amended and restated in October 2006 and again in January 2009. Pursuant to that agreement, we expect to make various payments to the Investment Advisor, including acquisition fees, investment management fees and payments for reimbursements of certain costs incurred by the Investment Advisor in providing related services to us. As the actual amounts to be paid are dependent upon the total equity and debt capital we raise and our results of operations, we cannot determine these amounts at this time.

In order to avoid corporate-level tax on our net taxable income, we are required to pay distributions to our shareholders equal to our net taxable income. In addition, to qualify as a REIT, we generally are required to pay annual distributions to our shareholders equal to at least 90% of our net ordinary taxable income. Therefore, once the net proceeds we receive from our public offerings are substantially fully invested, we will need to raise additional capital in order to grow our business and acquire additional real estate investments. We anticipate borrowing funds to obtain additional capital, but there can be no assurance that we will be able to do so on terms acceptable to us, if at all.

Historical Cash Flows

Our net cash provided by operating activities increased by $9,680,000 to $20,538,000 for the six months ended June 30, 2010, compared to $10,858,000 for the six months ended June 30, 2009. The increase was due to an increase in operating distributions from the Duke joint venture of $9,271,000 and increased tenant billing collections from both consolidated and unconsolidated properties; offset by lower interest income, the payment of annual property taxes for North Carolina, South Carolina and Texas properties and the expensing of acquisition costs of $5,219,000 during the six months ended June 30, 2010.

Net cash used in investing activities increased by $155,838,000 to $212,653,000 for the six months ended June 30, 2010, compared to $56,815,000 for the six months ended June 30, 2009. The increase was due to the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit, One Wayside Rd. and investments in the UK JV and European JV during the six months ended June 30, 2010.

Net cash provided by financing activities increased by $133,073,000 to $245,386,000 for the six months ended June 30, 2010, compared to $112,313,000 for the six months ended June 30, 2009. The increase was due to an increase in proceeds from the public offering of $146,480,000, and the $15,000,000 draw down of the Wells Fargo Credit Facility, offset by an increase in principal payments on notes payable of $8,631,000 (602 Central Blvd. note payable of $8,281,000 was paid off on March 11, 2010), an increase in offering costs of $9,627,000, an increase in distributions to shareholders and non-controlling interest holders of $6,805,000, an increase in shareholder redemptions of $1,153,000, an increase in deferred financing costs of $2,137,000 and a decrease in security deposits of $55,000.

Non-GAAP Supplemental Financial Measure: Funds from Operations

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry

 

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analysts and investors consider presentations of operating results for REITs that use historical cost accounting to be insufficient by themselves. Consequently, the National Association of Real Estate Investment Trusts, or NAREIT, created Funds from Operations, or FFO, as a supplemental measure of REIT operating performance.

FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net income. FFO, as we define it, is presented as a supplemental financial measure. Management believes that FFO is a useful supplemental measure of REIT performance. FFO does not present, nor do we intend for it to present, a complete picture of our financial condition and/or operating performance. We believe that net income, as computed under GAAP, appropriately remains the primary measure of our performance and that FFO, when considered in conjunction with net income, improves the investing public’s understanding of the operating results of REITs and makes comparisons of REIT operating results more meaningful.

We compute FFO in accordance with standards established by NAREIT. Modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business and provide greater transparency to the investing public as to how our management team considers our results of operations. As a result, our FFO may not be comparable to FFO as reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised NAREIT White Paper on FFO defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.

Management believes that NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time, and that depreciation charges required by GAAP do not always reflect the underlying economic realities. Likewise, the exclusion from NAREIT’s definition of FFO of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. Thus, FFO provides a performance measure that, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates and operating costs. Management also believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs, since FFO is generally recognized as the industry standard for reporting the operations of REITs.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO, as adjusted, which excludes the effects of acquisition costs, non-cash impairment charges and unrealized (gain) loss in an unconsolidated entity. We believe that adjusting FFO to exclude these acquisition costs, impairment charges and unrealized (gain) loss in an unconsolidated entity more appropriately presents our results of operations on a comparative basis. The items that we exclude from net income are subject to significant fluctuations from period to period that cause both positive and negative effects on our results of operations, often in inconsistent and unpredictable directions. The economics underlying these excluded items are not the primary factors in management’s decision-making process. Period to period fluctuations in these items can be driven by accounting for short-term factors that are not relevant to long-term investment decisions, long-term capital structures or long-term tax planning and tax structuring decisions. Therefore, while our FFO, as adjusted, clearly differs from NAREIT’s definition of FFO, and may not be comparable to similarly named measures of other REITs and real estate companies, we believe that it provides a meaningful supplemental measure of our operating performance. We believe that investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy, thus fostering a greater degree of transparency into our management process.

Neither FFO, nor FFO as adjusted, represents cash generated from operating activities in accordance with GAAP and should not be considered as alternatives to (i) net income (determined in accordance with GAAP), as indications of our financial performance, or (ii) to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. We believe that to further understand our performance, each of FFO and FFO, as adjusted, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our Consolidated Financial Statements.

 

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The following table presents our FFO for the three and six months ended June 30, 2010 and 2009 (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Reconciliation of net loss to funds from operations

        

Net Loss Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (4,221   $ (4,238   $ (4,076   $ (7,767 )

Adjustments:

        

Non-controlling interest

     (8     (8     (7     (21 )

Real estate depreciation and amortization

     6,717        6,148        13,960        11,870   

Realized gain from transfer of real estate to unconsolidated entities

     —          —          (154 )     —     

Net effect of FFO adjustment from unconsolidated entities(1)

     4,382        3,516        8,097        6,777   
                                

FFO

   $ 6,870      $ 5,418      $ 17,820      $ 10,859   

Other Adjustments:

        

Acquisition / Organization Expenses(2)

     5,529        998        5,912        998   

Unrealized (gain) loss in unconsolidated entity

     (373     1,424        (349     2,291   
                                

FFO, as adjusted

   $ 12,026      $ 7,840      $ 23,383      $ 14,148   
                                

 

(1)

Represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) for each of our unconsolidated entities multiplied by our ownership interest in each of these unconsolidated entities during the three and six months ended June 30, 2010 and multiplied by the percentage of income or loss recognized by us for each of these unconsolidated entities during the three and six months ended June 30, 2009.

(2)

In addition to organization and acquisition costs incurred in our consolidated results, this adjustment also includes our portion of acquisition costs incurred within our unconsolidated entities.

Financing

Notes Payable

On April 27, 2007, we, in connection with the acquisition of 602 Central Blvd., entered into a £5,500,000 financing arrangement with the Royal Bank of Scotland secured by the property. The loan was for a term of seven years with interest at a variable rate, adjusted quarterly, based on three month GBP-based LIBOR plus 0.67%, per annum. On March 11, 2010, we paid off the £5,500,000 ($8,281,000 at March 11, 2010) loan and expensed certain closing costs plus the unamortized deferred financing costs associated with obtaining the loan totaling $73,000. The interest rate cap agreement was cancelled concurrent with the loan payoff.

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $1,868,000 were made during the six months ended June 30, 2010. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.

On May 30, 2008, we entered into a £7,500,000 ($11,205,000 at June 30, 2010) financing arrangement with the Royal Bank of Scotland plc secured by the Thames Valley Five property. The loan is for a term of five years (with a two year extension option) and bears interest at a variable rate adjusted quarterly, based on six month GBP-based LIBOR plus 1.01%. In addition, we incurred financing costs of approximately £67,000 ($100,000 at June 30, 2010) associated with obtaining this loan. On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of June 30, 2010, and expires on May 30, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On July 1, 2008, in connection with the acquisition of Enclave on the Lake, we assumed an $18,281,000 ($18,790,000 face value less discount of $509,000) loan from NorthMarq Capital, Inc. that bears interest at a fixed rate of 5.45% per annum and matures on May 1, 2011. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $182,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $241,000 in conjunction with the assumption of the loan.

On October 10, 2008, we entered into a £5,771,000 ($8,621,000 at June 30, 2010) financing agreement with the Royal Bank of Scotland plc secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on six month GBP-based LIBOR plus 1.31%. In addition, we incurred financing costs of approximately

 

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£75,000 ($112,000 at June 30, 2010) associated with obtaining this loan. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of June 30, 2010 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $204,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $344,000 in conjunction with the assumption of the loan.

On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $180,000 were made during the six months ended June 30, 2010. In addition, we incurred financing costs totaling $284,000 in conjunction with the assumption of the loan.

On August 10, 2009, we entered into a £13,975,000 ($20,879,000 at June 30, 2010) financing agreement with the Abbey National Treasury Services plc secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity. In addition, we incurred financing costs of approximately £268,000 ($400,000 at June 30, 2010) associated with obtaining this loan.

On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road (i) $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015 and (ii) $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $48,000 were made during June 2010. In addition, we incurred financing costs totaling $342,000 in conjunction with the assumption of the loan.

Loan Payable

On August 8, 2008, we entered into an amended and restated credit agreement with Bank of America, N.A. (“Bank of America”), which amended the terms of our prior credit agreement with Bank of America, to provide us with a new $45,000,000 unsecured revolving line of credit (the “Revolving Credit Facility”), and to replace our prior Bank of America term loan and revolving credit facility which matured in August 2008. The new Revolving Credit Facility was fully drawn upon at closing, with such proceeds utilized to pay down the full $45,000,000 amount outstanding under our prior Bank of America term loan (as of August 8, 2008, no amount was outstanding under our prior $10,000,000 Bank of America revolving credit facility). The new Revolving Credit Facility matures in August 2010 and bears interest at a floating rate of LIBOR plus 2.00% to 2.75%, based upon our leverage ratio as defined in the credit agreement (at our current leverage ratio, the Revolving Credit Facility bears interest at a floating rate of LIBOR plus 2.00%). An upfront fee of $292,500 was paid to Bank of America, and a fee equal to the actual daily amount by which the aggregate commitments exceed the total outstandings (both as defined in the amended and restated credit agreement) times 0.20% per annum if the total outstandings are equal to or more than 50% of the aggregate commitments, or 0.25% per annum otherwise, is accrued on unfunded balances under the Revolving Credit Facility. The loan contains various financial covenants and restrictions including a fixed charge coverage ratio of at least 1.75 to 1.00, as defined in the amended and restated credit agreement. As of June 30, 2010, there was no amount outstanding under the Revolving Credit Facility. The Revolving Credit Facility matured on August 8, 2010 in accordance with its terms.

On May 26, 2010, we entered into a $70,000,000 revolving credit facility through our subsidiaries with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility is May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010 and is included in Loans Payable on our consolidated balance sheet, with the remaining $55,000,000 available for disbursement during the term of the facility. We have the right to prepay any outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we generally may not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. The Wells Fargo Credit Facility bears interest at a floating rate of 300 basis points over the LIBOR, however the interest rate shall be at least 4.00% for any of the outstanding balance that is not subject

 

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to an interest rate swap with an initial term of at least two years. Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 14 “Derivative Instruments.” The Wells Fargo Credit Facility is secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CBRE OP provides a limited guarantee for the Wells Fargo Credit Facility. The Wells Fargo Credit Facility is subject to certain customary financial covenants, including certain negative financial covenants, which we believe we were in compliance with as of May 26, 2010. A commitment fee of $1,050,000 was paid to Wells Fargo Bank, N.A. at closing. We will also pay certain other customary fees in connection with the Wells Fargo Credit Facility including fees related to the unused loan amount, extension, administrative and other fees, the amount of which in some cases is subject to certain terms and conditions.

Our organizational documents contain a limitation on the amount of indebtedness that we may incur, so that unless our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.

Distribution Policy

In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, we generally must make distributions to our shareholders each year in an amount at least equal to 90% of our REIT taxable income (as determined without regard to the dividends paid deduction and excluding net capital gain).

It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.

 

2010 Quarters

   First    Second

Total distributions declared and paid

   $ 16,841,000    $ 19,266,000

Distributions per share

   $ 0.15    $ 0.15

Amount of distributions per share funded by cash flows provided by operating entities

   $ 0.1212    $ 0.0540

Amount of distributions per share funded by uninvested proceeds from financings of our properties

   $ 0.0288    $ 0.0960

 

2009 Quarters

   First    Second    Third    Fourth

Total distributions declared and paid

   $ 10,066,000    $ 11,181,000    $ 12,767,000    $ 14,750,000

Distributions per share

   $ 0.15    $ 0.15    $ 0.15    $ 0.15

Amount of distributions per share funded by cash flows provided by operating entities

   $ 0.0903    $ 0.0643    $ 0.1309    $ 0.0434

Amount of distributions per share funded by uninvested proceeds from financings of our properties

   $ 0.0597    $ 0.0857    $ 0.0191    $ 0.1066

For the quarter ended June 30, 2010, distributions were funded 35.98% by cash flows provided by operating activities and 64.02% from uninvested proceeds from financings of our properties. In addition, distributions totaling $7,318,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during the quarter ended June 30, 2010.

For the quarter ended March 31, 2010, distributions were funded 80.79% by cash flows provided by operating activities and 19.21% from uninvested proceeds from financings of our properties. In addition, distributions totaling $6,197,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during the quarter ended March 31, 2010.

Our 2009 distributions were funded 53.78% by cash flows provided by operating activities and 46.22% from uninvested proceeds from financings of our properties. In addition, distributions totaling $17,600,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during 2009.

To the extent that our cash available for distribution is less than the amount we are required to distribute to qualify as a REIT, we may consider various funding sources to cover any shortfall, including borrowing funds on a short-term, or possibly long-term, basis or selling properties. In addition, we may utilize these funding sources to make distributions that exceed the amount we are required to distribute to qualify as a REIT.

 

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Off-Balance Sheet Arrangements

As of June 30, 2010, we had five Investments in Unconsolidated Entities: (i) a 5.07% ownership interest in CBRE Strategic Partners Asia, (ii) an 80% ownership interest in the Duke joint venture (iii) a 90% ownership interest in Afton Ridge, (iv) an 80% ownership interest in the UK JV and (v) an 80% investment in the European JV. Our investments are discussed in Note 4, “Investments in Unconsolidated Entities” in the accompanying consolidated financial statements.

Contractual Obligations and Commitments

The following table provides information with respect to our consolidated property contractual obligations at June 30, 2010 (in thousands):

 

Contractual Obligations

   Total     Less than
One Year
    One to Three
Years
    Three to Five
Years
    More than
Five Years
 

Note Payable (and interest payments) Collateralized by REMEC Corporate Campus

   $ (14,149 )   $ (635 )   $ (13,514 )   $ —        $ —     

Note Payable (and interest payments) Collateralized by 300 Constitution Drive

     (13,065 )     (581 )     (12,484 )     —          —     

Note Payable (and interest payments) Collateralized by Deerfield Commons I

     (12,429 )     (576 )     (1,286 )     (1,286 )     (9,281 )

Note Payable (and interest payments) Collateralized by Bolingbrook Point III

     (11,170 )     (473 )     (947 )     (9,750 )     —     

Notes Payable (and interest payments) Collateralized by the Carolina Portfolio

     (76,977 )     (6,980 )     (13,961 )     (13,350 )     (42,686 )

Note Payable (and interest payments) Collateralized by Lakeside Office Center

     (11,749 )     (543 )     (1,281 )     (1,299 )     (8,626 )

Note Payable (and interest payments) Collateralized by Thames Valley Five(1)

     (11,809 )     (185 )     (11,624 )     —          —     

Note Payable (and interest payments) Collateralized by Enclave on the Lake

     (18,092 )     (18,092 )     —          —          —     

Note Payable (and interest payments) Collateralized by Albion Mills Retail Park(1)

     (9,212 )     (169 )     (337 )     (8,706 )     —     

Note Payable (and interest payments) Collateralized by Avion Midrise III & IV

     (26,013 )     (1,618 )     (3,237 )     (21,158 )     —     

Note Payable (and interest payments) Collateralized by 12650 Ingenuity Drive

     (16,309 )     (1,118 )     (2,236 )     (12,955 )     —     

Note Payable (and interest payments) Collateralized by Maskew Retail Park(1)

     (23,612 )     (607 )     (1,215 )     (21,790 )     —     

Loan Payable (and interest payments) Wells Fargo Credit Facility(1)(2)

     (17,988     (765     (1,530     (15,693     —     

Note Payable (and interest payments) Collateralized by One Wayside Road

     (34,094     (1,950     (4,254     (4,254     (23,636
                                        

Total Consolidated Properties

   $ (296,668 )   $ (34,292 )   $ (67,906 )   $ (110,241 )   $ (84,229 )
                                        

 

(1)

These contractual obligations included the expected net payments due under interest rate swap agreements where in each case we have swapped our variable interest rate payments due under the debt agreements for fixed rates of interest payments.

 

(2 )

Includes five properties that secure the Wells Fargo Credit Facility (see Note 6 “Debt”).

The following table provides information with respect to our unconsolidated property contractual obligations at June 30, 2010 (in thousands):

 

Contractual Obligations

   Total     Less than
One Year
    One to Three
Years
    Three to Five
Years
    More than
Five Years

Note Payable (and interest payments) Collateralized by Duke joint venture

   $ (142,329 )   $ (6,696 )   $ (13,392 )   $ (122,241 )   $ —  

Note Payable (and interest payments) Collateralized by Afton Ridge joint venture

     (27,310 )     (1,308 )     (2,616 )     (23,386 )     —  
                                      

Total Unconsolidated Properties(1)

   $ (169,639 )   $ (8,004 )   $ (16,008 )   $ (145,627 )   $ —  
                                      

 

(1)

Unconsolidated payment amounts are at our pro rata share of effective ownership and exclude our investment in CBRE Strategic Partners Asia.

 

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As of June 30, 2010, we were committed to pay $1,340,000 in accrued offering costs. The timing of future payments is uncertain.

As of June 30, 2010, we had an unfunded investment commitment in CBRE Strategic Partners Asia totaling $7,903,000. The timing of future payments is uncertain.

Income Taxes

We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004. As a REIT, we generally will not be subject to U.S. federal income tax on income that we distribute currently to our shareholders. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they generally distribute at least 90% of their annual net taxable income (excluding net capital gains) to their shareholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state, local and foreign taxes on our income and property and to U.S. federal income and excise taxes on our undistributed gross income. Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amount of $70,000 and $58,000, $85,000 and $87,000 for California, Georgia, Minnesota, Texas and North Carolina impacting our operations during the three and six months ended June 30, 2010 and 2009, respectively.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. With the exception of leases with tenants in multifamily properties, we expect to include provisions in the majority of our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market. Leases in multifamily properties generally turn over on an annual basis and do not typically present the same issue regarding inflation protection due to their short-term nature.

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

We may be exposed to the effects of foreign exchange rate changes from our investments in unconsolidated entities with operations in China, Japan, the United Kingdom and the European Union, as well as our consolidated operations in the United Kingdom.

We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we will borrow primarily at fixed rates or variable rates and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

 

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Notes Payable secured by real property are summarized as follows (in thousands):

 

     Interest Rate as of     Maturity Date    Notes Payable as of  

Property

   June 30,
2010
    December 31,
2009
       June 30,
2010
    December 31,
2009
 

REMEC

   4.79 %   4.79   November 1, 2011    $ 13,250      $ 13,250   

300 Constitution

   4.84      4.84      April 1, 2012      12,000        12,000   

Deerfield Commons I.(1)

   5.23      5.23      December 1, 2015      9,725        9,725   

602 Central Blvd.(2)

   —        1.25      —        —          8,886   

Bolingbrook Point III

   5.26      5.26      January 1, 2015      9,000        9,000   

Fairforest Bldg. 5(3)

   6.33      6.33      February 1, 2024      10,101        10,330   

Fairforest Bldg. 6(3)

   5.42      5.42      June 1, 2019      3,124        3,257   

HJ Park—Bldg. 1(3)

   4.98      4.98      March 1, 2013      783        914   

North Rhett I(3)

   5.65      5.65      August 1, 2019      4,078        4,246   

North Rhett II(3)

   5.20      5.20      October 1, 2020      2,264        2,345   

North Rhett III(3)

   5.75      5.75      February 1, 2020      1,832        1,903   

North Rhett IV(3)

   5.80      5.80      February 1, 2025      10,113        10,328   

Mt Holly Bldg.(3)

   5.20      5.20      October 1, 2020      2,264        2,345   

Orangeburg Park Bldg(3)

   5.20      5.20      October 1, 2020      2,302        2,385   

Kings Mountain I(3)

   5.27      5.27      October 1, 2020      1,959        2,030   

Kings Mountain II(3)

   5.47      5.47      January 1, 2020      5,829        6,057   

Union Cross Bldg. I(3)

   5.50      5.50      July 1, 2021      2,843        2,935   

Union Cross Bldg. II(3)

   5.53      5.53      June 1, 2021      8,689        8,972   

Thames Valley Five(4)(5)

   6.42      6.42      May 30, 2013      11,205        12,117   

Lakeside Office Center(6)

   6.03      6.03      September 1, 2015      9,000        9,000   

Enclave on the Lake(7)

   5.45      5.45      May 1, 2011      18,092        18,274   

Albion Mills Retail Park(4)(8)(9)

   5.25      5.25      October 10, 2013      8,621        9,323   

Avion Midrise III & IV(10)

   5.52      5.52      April 1, 2014      21,561        21,765   

12650 Ingenuity Drive(11)

   5.62      5.62      October 1, 2014      13,244        13,424   

Maskew Retail Park(4)(12)

   5.68      5.68      August 10, 2014      20,879        22,578   

One Wayside Road(13)

   5.66      —        August 1, 2015      14,606        —     

One Wayside Road(13)

   5.92      —        August 1, 2015      12,111        —     
                       

Notes Payable

     229,475        217,389   

Plus Premium

     602        —     

Less Discount

     (4,157 )     (4,615 )

Less Albion Mills Retail Park Fair Value Adjustment

     (247 )     (349 )
                       

Notes Payable Net of Premiums / Discounts and Fair Value Adjustment

   $ 225,673      $ 212,425   
                       

 

(1)

Interest only payments are due monthly for the first 60 months of the loan term. Principal and interest payments are due monthly for the remaining 60 months of the loan term.

 

(2)

This loan was fully paid off on March 11, 2010.

 

(3)

These notes payable were assumed from the seller of the Carolina Portfolio on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount.

 

(4)

These loans are subject to certain financial covenants (interest coverage and loan to value).

 

(5)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of June 30, 2010 and expires on May 30, 2013. The stated rates on the mortgage note payable were 1.66% and 1.59% at June 30, 2010 and December 31, 2009, respectively, which were based on GBP-based LIBOR plus a spread of 1.01%.

 

(6)

Interest only payments are due monthly for the first 36 months of the loan term. Principal and interest payments are due monthly for the remaining 48 months of the loan term.

 

(7)

The loan was assumed from the seller of Enclave on the Lake on July 1, 2008 and was recorded at estimated fair value which includes the discount.

 

(8)

The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 15).

 

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(9)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of June 30, 2010 and expires on October 10, 2013. The stated rates on the mortgage note payable were 1.96% and 1.88% at June 30, 2010 and December 31, 2009, respectively, which were based on GBP-based LIBOR plus a spread of 1.31%.

 

(10)

The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount.

 

(11)

The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount.

 

(12)

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26 or 5.68% per annum as of June 30, 2010 and expires on August 10, 2014. The stated rates on the mortgage note payable was 2.91% and 2.83% at June 30, 2010 and December 31, 2009, respectively, which were based on GBP-based LIBOR plus a spread of 2.26%.

 

(13)

The two loans were assumed from the seller of One Wayside Road on June 24, 2010 and were recorded at estimated fair value which include the discount.

Upon the maturity of our debt, there is a market risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affect the fair market value of our debt but it has no impact on interest expense or cash flow. A 100 basis point increase or decrease in interest rates on our fixed rate debt would not increase or decrease our annual interest expense on our fixed rate debt.

The fair value of long-term debt was estimated based on current interest rates available to us for debt instruments with similar terms. The following table summarizes our financial instruments and their calculated fair value at June 30, 2010 and December 31, 2009 (in thousands):

 

     As of June 30, 2010  
     Carrying
Value
    Total Fair
Value
 

Financial Liabilities:

    

Interest Rate Swaps

   $ (3,318 )   $ (3,318 )

Notes Payable

     (225,673 )     (229,921 )

Loan Payable

     (15,000     (15,000

A 100 basis point increase or decrease in interest rates would increase or decrease the fair market value of our notes payable by $7,939,000 at June 30, 2010. In addition, a 100 basis point increase or decrease in interest rates would either increase or decrease annual variable interest expense as follows; approximately $112,000 on the Thames Valley Five property, approximately $86,000 on the Albion Mills Retail Park property and approximately $209,000 on the Maskew Retail Park property.

 

     As of December 31, 2009  
     Carrying
Value
    Total Fair
Value
 

Financial Assets (Liabilities):

    

Interest Rate Cap

   $ 1      $ 1   

Interest Rate Swaps

     (1,703 )     (1,703 )

Notes Payable

     (212,425 )     (210,087 )

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

 

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Debt Maturities

The following table details our consolidated and unconsolidated debt maturities as of June 30, 2010 (in thousands):

 

    Consolidated Debt     Unconsolidated Debt(1)     Consolidated &
Unconsolidated Debt(1)
 
    Scheduled
Amortization
  Term
Maturities
  Total     Scheduled
Amortization
  Term
Maturities
  Total     Scheduled
Amortization
  Term
Maturities
  Total  

2010 (Six months ending December 31, 2010)

  $ 2,742   $ —     $ 2,742      $     $     $        $ 2,742   $ —     $ 2,742   

2011

    5,738     31,028     36,766        —       —       —          5,738     31,028     36,766   

2012

    6,001     12,000     18,001        —       —       —          6,001     12,000     18,001   

2013(2)

    6,119     19,826     25,945        —       102,310     102,310        6,119     122,136     128,255   

2014

    5,932     67,191     73,123        —       40,640     40,640        5,932     107,831     113,763   

2015

    5,350     49,838     55,188        —       —       —          5,350     49,838     55,188   

2016

    4,930     —       4,930        —       —       —          4,930     —       4,930   

2017

    5,215     —       5,215        —       —       —          5,215     —       5,215   

2018

    5,516     —       5,516        —       —       —          5,516     —       5,516   

2019

    5,420     —       5,420        —       —       —          5,420     —       5,420   

2020

    3,959     —       3,959        —       —       —          3,959     —       3,959   

Thereafter

    7,670     —       7,670        —       —       —          7,670     —       7,670   
                                                           

Total

  $ 64,592   $ 179,883   $ 244,475      $ —     $ 142,950   $ 142,950      $ 64,592   $ 322,833   $ 387,425   
                                                           

Weighted Average Maturity (years)

        4.64            3.78            4.32   

Weighted Average Interest Rate

        5.53 %         5.60 %         5.55 %

 

(1)

Unconsolidated debt amounts are at our pro rata share of effective ownership.

 

(2)

The Thames Valley Five consolidated debt ($11,205,000 at June 30, 2010) maturity date may be extended for an additional two years from May, 2013 to May, 2015. In addition, Afton Ridge has the option to extend the maturity date of the unconsolidated debt ($22,950,000 at June 30, 2010—our share) for one additional year from October, 2013 to October, 2014.

Encumbered and Unencumbered Properties

The following table details our Encumbered and Unencumbered properties as of June 30, 2010 (Approximate Acquisition Cost and Debt Balance in thousands):

 

    Consolidated Properties   Unconsolidated Properties(1)   Consolidated &
Unconsolidated  Properties(1)
    Properties   Approximate
Acquisition Cost
  Debt
Balance
  Properties   Approximate
Acquisition Cost
  Debt
Balance
  Properties   Approximate
Acquisition Cost
  Debt
Balance

Encumbered Properties(2)

  34   $ 631,705   $ 244,475   8   $ 272,487   $ 142,950   42   $ 904,192   $ 387,425

Unencumbered
Properties

  28     284,505     —     14     199,128     —     42     483,633     —  
                                               

Total Properties

  62   $ 916,210   $ 244,475   22   $ 471,615   $ 142,950   84   $ 1,387,825   $ 387,425
                                               

 

(1)

Number of Properties at 100%. Approximate Acquisition Cost and Debt Balance for Unconsolidated Properties are at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

 

(2)

Includes five properties that secure the Wells Fargo Credit Facility (see Note 6 “Debt”).

Subsequent Events

From July 1, 2010 through August 6, 2010, we received gross proceeds from our current public offering of approximately $65,784,736 from the sale of 6,622,631 common shares.

On July 6, 2010, we entered into a purchase and sale agreement to acquire, subject to customary closing conditions, 100 Tice Blvd., located at 100 Tice Blvd. in Woodcliff Lake, New Jersey, a suburb of New York City. We will acquire 100 Tice Blvd. for approximately $67,600,000, of which approximately $42,600,000 will be paid by assuming an existing mortgage loan held by Hartford Life and Accident Insurance Company and Principal Life Insurance Company. We anticipate that the remainder of the purchase price will be funded using the net proceeds from our current public offering. 100 Tice Blvd. is a 208,911 square foot office building that is 100% leased to Eisai Inc. through December 2021 and is used as Eisai’s North American headquarters. Eisai Inc. is the U.S. operating subsidiary of the Japanese company Eisai Co., Ltd. Eisai Inc. is a producer of pharmaceuticals for the treatment of Alzheimer’s disease and cancers. While we anticipate this acquisition to close during the third quarter of 2010, the agreement to acquire the property is subject to a number of contingencies and therefore there can be no assurances that this acquisition will occur.

On July 27, 2010, we contributed an additional $507,000 of our CBRE Strategic Partners Asia capital commitment which was funded using net proceeds from our current public offering.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of quantitative and qualitative disclosures about market risk, see the “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

 

ITEM 4. CONTROLS AND PROCEDURES

Not Applicable

 

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have formally adopted a policy for disclosure controls and procedures that provides guidance on the evaluation of disclosure controls and procedures and is designed to ensure that all corporate disclosure is complete and accurate in all material respects and that all information required to be disclosed in the periodic reports submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods and in the manner specified in the Securities and Exchange Commission’s rules and forms and that disclosure controls and procedures were effective to ensure that the information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial offer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we have an investment in five unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to these entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, as required by the Securities Exchange Act Rule 13(a)-15(e), our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls Over Financial Reporting

No changes in internal control over financial reporting occurred during the fiscal 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 not party to any material legal proceedings as of June 30, 2010.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in Item 1.A. to Part I of our Annual Report on Form 10-K for the year ended December 31, 2009 and in Item 1.A. to Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Securities and Repurchases of Securities

During the three months ended June 30, 2010, we did not sell any equity securities that are not registered under the Securities Act of 1933, as amended.

The following table provides information with respect to our Share Redemption Program for the three months ended June 30, 2010:

 

Period

   Total Number of
Shares Purchased
   Average Price
Paid Per
Share
   Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
   Maximum Number (or
approximate dollar value)  of
Shares that May Yet Be Purchased
Under the Plans or Programs

April

   374,990.38    $ 9.12    N/A    N/A

May

   —        —      N/A    N/A

June

   —        —      N/A    N/A

Total

   374,990.38    $ 9.12    N/A    N/A

Use of Proceeds from Sale of Registered Securities

The registration statement relating to our initial public offering (No. 333-127405) was declared effective on October 24, 2006. CNL Securities Corp. is the Dealer Manager of our offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor or another firm we choose for that purpose. Our initial public offering was terminated effective as of the close of business on January 29, 2009. As of the close of business on January 29, 2009, we had sold a total of 60,808,967 common shares in the initial public offering, including 1,487,943 common shares which were issued pursuant to our dividend reinvestment plan. We withdrew from registration a total of 140,243,665 common shares that were registered but not sold in connection with the initial public offering. From October 24, 2006 (effective date) through January 29, 2009 (termination date), we had accepted subscriptions from 13,270 investors, issued 60,808,967 common shares and received $607,345,702 in gross offering proceeds pursuant to our initial public offering. After payment of approximately $8,290,000 in acquisition fees and related expenses, payment of approximately $26,335,000 in selling commission, $8,898,000 in dealer manager fees, $4,008,000 in marketing support fees and payment of approximately $12,147,000 in organization and offering expenses, as of January 29, 2009, we had raised aggregate net offering proceeds of approximately $548,000,000.

The registration statement relating to our follow-on public offering (No. 333-152653) was declared effective on January 30, 2009. CNL Securities Corp. is the Dealer Manager of our follow-on offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through June 30, 2010, we had accepted subscriptions from 19,546 investors, issued 72,998,556 common shares and received $728,540,691 in gross offering proceeds pursuant to our public offering after payment of $11,051,000 in acquisition fees and related expenses, payment of approximately $37,488,000 in selling commissions, $14,056,000 in dealer manager fees, $5,682,000 in marketing support fees and payment of approximately $10,348,000 in organization and offering expenses, as of June 30, 2010, we had raised aggregate net offering proceeds of approximately $649,916,000.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. (REMOVED AND RESERVED)

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

10.1    Shareholders’ Agreement by and among Goodman Europe Development Trust, RT Princeton CE Holdings, LLC and Goodman Princeton Holdings (LUX) S.À R.L., dated June 10, 2010, filed herewith.
10.2    Shareholders’ Agreement by and among Goodman Jersey Holdings Trust, RT Princeton UK Holdings, LLC and Goodman Princeton Holdings (Jersey) Limited, dated June 10, 2010, filed herewith.
31.1    Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2    Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2    Certification by the Chief Financial Officer 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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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.

 

      CB RICHARD ELLIS REALTY TRUST
Date: August 13, 2010       /S/    JACK A. CUNEO        
      Jack A. Cuneo
      President and Chief Executive Officer
Date: August 13, 2010       /S/    LAURIE E. ROMANAK        
      Laurie E. Romanak
      Chief Financial Officer

 

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