UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from                      to                     

Commission File Number: 333-158111 (1933 Act)

GRUBB & ELLIS HEALTHCARE REIT II, INC.

(Exact name of registrant as specified in its charter)

Maryland		26-4008719
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1551 N. Tustin Avenue, Suite 300, Santa Ana, California		92705
(Address of principal executive offices)		(Zip Code)

(714) 667-8252
(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark 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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of October 31, 2010, there were 11,869,701 shares of common stock of Grubb & Ellis Healthcare REIT II, Inc. outstanding.

 

 

Grubb & Ellis Healthcare REIT II, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			2
Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009 (Unaudited)			2
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2010 and 2009 (Unaudited), for the Nine Months Ended September 30, 2010 (Unaudited) and for the Period from January 7, 2009 (Date of Inception) through September 30, 2009 (Unaudited)			3
Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2010 (Unaudited) and for the Period from January 7, 2009 (Date of Inception) through September 30, 2009 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 (Unaudited) and for the Period from January 7, 2009 (Date of Inception) through September 30, 2009 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			46
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			52
Item 4. [Removed and Reserved.]			52
Item 5. Other Information			52
Item 6. Exhibits			52
Signatures			53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2010 and December 31, 2009
(Unaudited)

		September 30, 2010				December 31, 2009
ASSETS
Real estate investments:
Operating properties, net		$	118,570,000			$	—
Cash and cash equivalents			2,954,000				13,773,000
Accounts and other receivables			453,000				—
Restricted cash			2,225,000				—
Real estate and escrow deposits			759,000				—
Identified intangible assets, net			20,199,000				—
Other assets, net			1,857,000				36,000
Total assets		$	147,017,000			$	13,809,000
LIABILITIES AND EQUITY
Liabilities:
Mortgage loan payables, net		$	42,128,000			$	—
Line of credit			12,650,000				—
Accounts payable and accrued liabilities			2,324,000				178,000
Accounts payable due to affiliates			464,000				347,000
Derivative financial instrument			503,000				—
Identified intangible liabilities, net			147,000				—
Security deposits, prepaid rent and other liabilities			3,190,000				—
Total liabilities			61,406,000				525,000
Commitments and contingencies (Note 10)
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value; 200,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 10,574,010 and 1,532,268 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively			106,000				15,000
Additional paid-in capital			94,226,000				13,549,000
Accumulated deficit			(8,846,000	)			(281,000	)
Total stockholders’ equity			85,486,000				13,283,000
Noncontrolling interests (Note 12)			125,000				1,000
Total equity			85,611,000				13,284,000
Total liabilities and equity		$	147,017,000			$	13,809,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)

														Period from
														January 7, 2009
		Three Months Ended								Nine Months				(Date of Inception)
		September 30,								Ended				through
		2010				2009				September 30, 2010				September 30, 2009
Revenue:
Rental income		$	2,807,000			$	—			$	4,010,000			$	—
Expenses:
Rental expenses			834,000				—				1,241,000				—
General and administrative			503,000				62,000				1,048,000				62,000
Acquisition related expenses			2,847,000				—				5,179,000				—
Depreciation and amortization			1,157,000				—				1,722,000				—
Total expenses			5,341,000				62,000				9,190,000				62,000
Loss from operations			(2,534,000	)			(62,000	)			(5,180,000	)			(62,000	)
Other income (expense):
Interest expense (including amortization of deferred financing costs and debt discount):
Interest expense related to mortgage loan payables, line of credit and derivative financial instrument			(323,000	)			—				(432,000	)			—
Loss in fair value of derivative financial instrument			(74,000	)			—				(194,000	)			—
Interest income			1,000				—				14,000				—
Net loss			(2,930,000	)			(62,000	)			(5,792,000	)			(62,000	)
Less: Net income attributable to noncontrolling interests			1,000				—				1,000				—
Net loss attributable to controlling interests		$	(2,931,000	)		$	(62,000	)		$	(5,793,000	)		$	(62,000	)
Net loss per common share attributable to controlling interests — basic and diluted		$	(0.34	)		$	(3.10	)		$	(1.02	)		$	(3.46	)
Weighted average number of common shares outstanding — basic and diluted			8,745,255				20,000				5,687,117				17,895
Distributions declared per common share		$	0.16			$	—			$	0.49			$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)

		Stockholders’ Equity
		Common Stock
		Number of								Additional				Preferred				Accumulated				Noncontrolling
		Shares				Amount				Paid-In Capital				Stock				Deficit				Interests				Total Equity
BALANCE — December 31, 2009			1,532,268			$	15,000			$	13,549,000			$	—			$	(281,000	)		$	1,000			$	13,284,000
Issuance of common stock			8,930,259				90,000				89,000,000				—				—				—				89,090,000
Offering costs			—				—				(9,605,000	)			—				—				—				(9,605,000	)
Issuance of vested and nonvested restricted common stock			7,500				—				15,000				—				—				—				15,000
Issuance of common stock under the DRIP			114,983				1,000				1,091,000				—				—				—				1,092,000
Repurchase of common stock			(11,000	)			—				(110,000	)			—				—				—				(110,000	)
Amortization of nonvested common stock compensation			—				—				27,000				—				—				—				27,000
Contribution from sponsor			—				—				259,000				—				—				—				259,000
Contribution from noncontrolling interest			—				—				—				—				—				200,000				200,000
Distribution to noncontrolling interest			—				—				—				—				—				(77,000	)			(77,000	)
Distributions declared			—				—				—				—				(2,772,000	)			—				(2,772,000	)
Net (loss) income			—				—				—				—				(5,793,000	)			1,000				(5,792,000	)
BALANCE — September 30, 2010			10,574,010			$	106,000			$	94,226,000			$	—			$	(8,846,000	)		$	125,000			$	85,611,000

		Stockholder’s Equity
		Common Stock
		Number of								Additional				Preferred				Accumulated				Noncontrolling
		Shares				Amount				Paid-In Capital				Stock				Deficit				Interests				Total Equity
BALANCE — January 7, 2009			—			$	—			$	—			$	—			$	—			$	—			$	—
(Date of Inception)			—				—				—				—				—				—				—
Issuance of common stock			20,000				—				200,000				—				—				—				200,000
Contribution from noncontrolling interest to our operating partnership			—				—				—				—				—				2,000				2,000
Net loss			—				—				—				—				(62,000	)			—				(62,000	)
BALANCE — September 30, 2009			20,000			$	—			$	200,000			$	—			$	(62,000	)		$	2,000			$	140,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Grubb & Ellis Healthcare REIT II, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and
for the Period from January 7, 2009 (Date of Inception) through September 30, 2009
(Unaudited)

						Period from
						January 7, 2009
		Nine Months				(Date of Inception)
		Ended				through
		September 30, 2010				September 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(5,792,000	)		$	(62,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization (including deferred financing costs, above/below market leases, leasehold interests, debt discount and deferred rent receivable)			1,598,000				—
Stock based compensation			42,000				—
Change in fair value of derivative financial instrument			194,000				—
Changes in operating assets and liabilities:
Accounts and other receivables			(453,000	)			—
Other assets, net			(181,000	)			—
Accounts payable and accrued liabilities			1,256,000				25,000
Accounts payable due to affiliates			120,000				37,000
Security deposits, prepaid rent and other liabilities			(264,000	)			—
Net cash used in operating activities			(3,480,000	)			—
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate operating properties			(128,761,000	)			—
Capital expenditures			(18,000	)			—
Restricted cash			(2,225,000	)			—
Real estate and escrow deposits			(759,000	)			—
Net cash used in investing activities			(131,763,000	)			—
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on mortgage loan payables			34,810,000				—
Payments on mortgage loan payables			(139,000	)			—
Borrowings under the line of credit			32,400,000				—
Payments under the line of credit			(19,750,000	)			—
Proceeds from issuance of common stock			89,090,000				200,000
Deferred financing costs			(1,311,000	)			—
Repurchase of common stock			(110,000	)			—
Contribution from sponsor			259,000				—
Contribution from noncontrolling interest to our operating partnership			—				2,000
Distribution to noncontrolling interests			(77,000	)			—
Security deposits			8,000				—
Payment of offering costs			(9,610,000	)			—
Distributions paid			(1,146,000	)			—
Net cash provided by financing activities			124,424,000				202,000
NET CHANGE IN CASH AND CASH EQUIVALENTS			(10,819,000	)			202,000
CASH AND CASH EQUIVALENTS — Beginning of period			13,773,000				—
CASH AND CASH EQUIVALENTS — End of period		$	2,954,000			$	202,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes		$	—			$	—
Interest		$	277,000			$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Investing Activities:
Accrued capital expenditures		$	22,000			$	—
The following represents the increase in certain assets and liabilities in connection with our acquisitions of operating properties:
Other assets		$	124,000			$	—
Mortgage loan payables, net		$	7,439,000			$	—
Derivative financial instrument		$	310,000			$	—
Accounts payable and accrued liabilities		$	323,000			$	—
Security deposits, prepaid rent and other liabilities		$	3,446,000			$	—
Financing Activities:
Issuance of common stock under the DRIP		$	1,092,000			$	—
Distributions declared but not paid		$	534,000			$	—
Accrued offering costs		$	277,000			$	—
Contribution from noncontrolling interest		$	200,000			$	—
Accrued deferred financing costs		$	13,000			$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended September 30, 2010 and 2009, for the
Nine Months Ended September 30, 2010 and for the Period from
January 7, 2009 (Date of Inception) through September 30, 2009

The use of the words “we,” “us” or “our” refers to Grubb & Ellis Healthcare REIT II, Inc. and its subsidiaries, including Grubb & Ellis Healthcare REIT II Holdings, LP, except where the context otherwise requires.

1. Organization and Description of Business

Grubb & Ellis Healthcare REIT II, Inc., a Maryland corporation, was incorporated on January 7, 2009 and therefore we consider that our date of inception. We were initially capitalized on February 4, 2009. We invest and intend to continue to invest in a diversified portfolio of real estate properties, focusing primarily on medical office buildings and healthcare-related facilities. We may also originate and acquire secured loans and real estate-related investments. We generally seek investments that produce current income. We intend to qualify and elect to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes for our taxable year ending December 31, 2010.

We are conducting a best efforts initial public offering, or our offering, in which we are offering to the public up to 300,000,000 shares of our common stock for $10.00 per share in our primary offering and 30,000,000 shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, for $9.50 per share, for a maximum offering of up to $3,285,000,000. The United States Securities and Exchange Commission, or the SEC, declared our registration statement effective as of August 24, 2009. We reserve the right to reallocate the shares of our common stock we are offering between the primary offering and the DRIP. As of September 30, 2010, we had received and accepted subscriptions in our offering for 10,427,527 shares of our common stock, or $104,006,000, excluding shares of our common stock issued pursuant to the DRIP.

We conduct substantially all of our operations through Grubb & Ellis Healthcare REIT II Holdings, LP, or our operating partnership. We are externally advised by Grubb & Ellis Healthcare REIT II Advisor, LLC, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our advisor that has a one year term that expires on June 1, 2011 and is subject to successive one-year renewals upon the mutual consent of the parties. Our advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our advisor also provides marketing, sales and client services on our behalf. Our advisor engages affiliated entities to provide various services to us. Our advisor is managed by, and is a wholly owned subsidiary of, Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our sponsor.

As of September 30, 2010, we had completed 10 acquisitions comprising 19 buildings and 676,000 square feet of gross leasable area, or GLA, for an aggregate purchase price of $138,028,000.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

2. Summary of Significant Accounting Policies

The summary of significant accounting policies presented below is designed to assist in understanding our condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representations of our management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing our accompanying condensed consolidated financial statements.

Basis of Presentation

Our accompanying condensed consolidated financial statements include our accounts and those of our operating partnership, the wholly owned subsidiaries of our operating partnership and all non-wholly owned subsidiaries and any variable interest entities, or VIEs, as defined, in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidation, or ASC Topic 810, which we have concluded should be consolidated pursuant to ASC Topic 810. We operate and intend to continue to operate in an umbrella partnership REIT structure in which our operating partnership, or wholly owned subsidiaries of our operating partnership, will own substantially all of the properties acquired on our behalf. We are the sole general partner of our operating partnership and, as of September 30, 2010 and December 31, 2009, we owned a 99.99% general partnership interest therein. Our advisor is a limited partner and, as of September 30, 2010 and December 31, 2009, owned a 0.01% noncontrolling limited partnership interest in our operating partnership. Because we are the sole general partner of our operating partnership and have unilateral control over its management and major operating decisions, the accounts of our operating partnership are consolidated in our condensed consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation.

Interim Unaudited Financial Data

Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, 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. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable.

In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2009 Annual Report on Form 10-K, as filed with the SEC on February 25, 2010.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Cash and Cash Equivalents

Cash and cash equivalents consist of all highly liquid investments with a maturity of three months or less when purchased.

Restricted Cash

Restricted cash is comprised of lender impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements.

Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts

We recognize revenue in accordance with ASC Topic 605, Revenue Recognition, or ASC Topic 605. ASC Topic 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.

In accordance with ASC Topic 840, Leases, minimum annual rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to deferred rent receivable or deferred rent liability, as applicable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45, Revenue Recognition — Principal Agent Consideration, or ASC Subtopic 605-45. ASC Subtopic 605-45 requires that these reimbursements be recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have credit risk. We recognize lease termination fees at such time when there is a signed termination letter agreement, all of the conditions of such agreement have been met and the tenant is no longer occupying the property.

Tenant receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible current tenant receivables and unbilled deferred rent receivables. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. We maintain an allowance for deferred rent receivables arising from the straight line recognition of rents. Such allowance is charged to bad debt expense which is included in general and administrative in our accompanying condensed consolidated statements of operations. Our determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. No allowance for uncollectible amounts as of September 30, 2010 and December 31, 2009 was determined to be necessary to reduce receivables and deferred rent receivables to our estimate of the amount recoverable. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, none of our receivables or deferred rent receivables were directly written off to bad debt expense.

Operating Properties, Net

Operating properties are carried at historical cost less accumulated depreciation. The cost of operating properties includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized and the cost of maintenance and repairs is charged to expense as incurred. The cost of buildings and capital improvements is depreciated on a straight-line basis over the estimated useful lives of the buildings and capital improvements, up to 39 years, and the cost for tenant improvements is depreciated over the shorter of the lease term or useful life, ranging from five months to 15.1 years. When depreciable property is retired, replaced or disposed of, the related costs and accumulated depreciation will be removed from the accounts and any gain or loss will be reflected in earnings.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

As part of the leasing process, we may provide the lessee with an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements, the allowance is considered to be a lease inducement and is recognized over the lease term as a reduction of rental revenue on a straight-line basis. Factors considered during this evaluation include, among other things, who holds legal title to the improvements as well as other controlling rights provided by the lease agreement and provisions for substantiation of such costs (e.g. unilateral control of the tenant space during the build-out process). Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. Recognition of lease revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements when we are the owner of the leasehold improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date (and the date on which recognition of lease revenue commences) is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements.

An operating property is evaluated for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Impairment losses are recorded on an operating property when indicators of impairment are present and the carrying amount of the asset is greater than the sum of the future undiscounted cash flows expected to be generated by that asset. We would recognize an impairment loss to the extent the carrying amount exceeded the fair value of the property. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, there were no impairment losses recorded.

Property Acquisitions

In accordance with ASC Topic 805, Business Combinations, or ASC Topic 805, we, with assistance from independent valuation specialists, measure the fair value of tangible and identified intangible assets and liabilities based on their respective fair values for acquired properties. The fair value of tangible assets (building and land) is based upon our determination of the value of the property as if it were to be replaced and vacant using comparable sales, cost data and discounted cash flow models similar to those used by independent appraisers. We also recognize the fair value of furniture, fixtures and equipment on the premises, as well as above or below market value of in place leases, the value of in place lease costs, tenant relationships, above or below market debt and derivative financial instruments assumed. Factors considered by us include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.

The value of the above or below market component of the acquired in place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the lease over its remaining term (including considering the impact of renewal options) and (2) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease (including considering the impact of renewal options). The amounts related to above market leases are included in identified intangible assets, net in our accompanying condensed consolidated balance sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired leases with each property. The amounts related to below market lease values are included in identified intangible liabilities, net in our accompanying condensed consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

The total amount of other intangible assets acquired includes in place lease costs and the value of tenant relationships based on management’s evaluation of the specific characteristics of the tenant’s lease and our overall relationship with the tenants. Characteristics considered by us in determining these values include the nature and extent of the credit quality and expectations of lease renewals, among other factors. The amounts related to in place lease costs are included in identified intangible assets, net in our accompanying condensed consolidated balance sheets and are amortized to depreciation and amortization expense over the average remaining non-cancelable lease term of the acquired leases with each property. The amounts related to the value of tenant relationships are included in identified intangible assets, net in our accompanying condensed consolidated balance sheets and are amortized to depreciation and amortization expense over the average remaining non-cancelable lease term of the acquired leases plus the market renewal lease term.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The value of above or below market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage at the time of assumption. The value of above or below market debt is included in mortgage loan payables, net in our accompanying condensed consolidated balance sheets and is amortized to interest expense over the remaining term of the assumed mortgage.

The value of derivative financial instruments is determined in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. See Note 13, Fair Value of Financial Instruments, for a further discussion.

The fair values are subject to change based on information received within one year of the purchase related to one or more events identified at the time of purchase which confirm the value of an asset or liability received in an acquisition of property.

Derivative Financial Instruments

We are exposed to the effect of interest rate changes in the normal course of business. We seek to mitigate these risks by following established risk management policies and procedures which include the occasional use of derivatives. Our primary strategy in entering into derivative contracts is to add stability to interest expense and to manage our exposure to interest rate movements. We utilize derivative instruments, including interest rate swaps, to effectively convert a portion of our variable-rate debt to fixed-rate debt. We do not enter into derivative instruments for speculative purposes.

Derivatives are recognized as either assets or liabilities in our accompanying condensed consolidated balance sheets and are measured at fair value in accordance with ASC Topic 815, Derivatives and Hedging, or ASC Topic 815. ASC Topic 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Since our derivative instruments are not designated as hedge instruments, they do not qualify for hedge accounting under ASC Topic 815, and accordingly, changes in fair value are included as a component of interest expense in gain (loss) in fair value of derivative financial instrument in our accompanying condensed consolidated statements of operations in the period of change.

Fair Value Measurements

We follow ASC Topic 820 to account for the fair value of certain assets and liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

See Note 13, Fair Value of Financial Instruments, for a further discussion.

Real Estate and Escrow Deposits

Real estate and escrow deposits include funds held by escrow agents and others to be applied towards the purchase of real estate.

Other Assets, Net

Other assets, net consist primarily of deferred rent receivables, leasing commissions, prepaid expenses, deposits and deferred financing costs. Costs incurred for property leasing have been capitalized as deferred assets. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Deferred financing costs include amounts paid to lenders and others to obtain financing. Such costs are amortized using the straight-line method over the term of the related loan, which approximates the effective interest rate method. Amortization of deferred financing costs is included in interest expense in our accompanying condensed consolidated statements of operations.

Stock Compensation

We follow ASC Topic 718, Compensation — Stock Compensation, or ASC Topic 718, to account for our stock compensation pursuant to the 2009 Incentive Plan, or our incentive plan. See Note 12, Equity — 2009 Incentive Plan, for a further discussion of grants under our incentive plan.

Income Taxes

We intend to qualify and elect to be taxed as a REIT, under Sections 856 through 860 of the Code, beginning with our taxable year ending December 31, 2010. We have not yet elected to be taxed as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our annual taxable income, excluding net capital gains, to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.

If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. Because of our intention to elect REIT status for our taxable year ending December 31, 2010, we will not benefit from the loss incurred for the period from January 7, 2009 (Date of Inception) through December 31, 2009.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our accompanying condensed consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2010 and December 31, 2009, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our accompanying condensed consolidated financial statements.

Segment Disclosure

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in medical office buildings, healthcare-related facilities and commercial office properties. Our investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of our assets has similar economic characteristics, tenants and products and services, our assets have been aggregated into one reportable segment for the three and nine months ended September 30, 2010.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140, or SFAS No. 166 (now contained in ASC Topic 860, Transfers and Servicing, or ASC Topic 860). SFAS No. 166 removes the concept of a qualifying special-purpose entity from SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (now contained in ASC Topic 860), and removes the exception from applying Financial Accounting Standards Board Interpretation, or FIN, No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as revised, or FIN No. 46(R) (now contained in ASC Topic 810). SFAS No. 166 also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. SFAS No. 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. Early adoption was prohibited. We adopted SFAS No. 166 on January 1, 2010. The adoption of SFAS No. 166 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS No. 167 (now contained in ASC Topic 810), which amends the consolidation guidance applicable to VIEs. The amendments to the overall consolidation guidance affect all entities previously within the scope of FIN No. 46(R), as well as qualifying special-purpose entities that were excluded from the scope of FIN No. 46(R). Specifically, an enterprise will need to reconsider its conclusion regarding whether an entity is a VIE, whether the enterprise is the VIE’s primary beneficiary and what type of financial statement disclosures are required. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. Early adoption was prohibited. We adopted SFAS No. 167 on January 1, 2010. The adoption of SFAS No. 167 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, Improving Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends ASC Topic 820 to require additional disclosure and clarify existing disclosure requirements about fair value measurements. ASU 2010-06 requires entities to provide fair value disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in the statement of financial position. The additional requirements also include disclosure regarding the amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. The guidance clarifies existing disclosure requirements regarding the inputs and valuation techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements, which disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted ASU 2010-06 on January 1, 2010, which only applies to our disclosures on the fair value of financial instruments. The adoption of ASU 2010-06 did not have a material impact on our footnote disclosures. We have provided these disclosures in Note 13, Fair Value of Financial Instruments.

In August 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules, or ASU 2010-21. ASU 2010-21 updates various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The changes affect provisions relating to consolidation and reporting requirements under conditions of majority and minority ownership positions and ownership by both controlling and noncontrolling entities. The amendments also deal with redeemable and non-redeemable preferred stocks and convertible preferred stocks. We adopted ASU 2010-21 upon issuance in August 2010. The adoption of ASU 2010-21 did not have a material impact on our consolidated financial statements.

In August 2010, the FASB issued ASU 2010-22, Accounting for Various Topics — Technical Corrections to SEC Paragraphs, or ASU 2010-22. ASU 2010-22 amends various SEC paragraphs based on external comments received and the issuance of Staff Accounting Bulletin, or SAB, 112, which amends or rescinds portions of certain SAB topics. The topics affected include reporting of inventories in condensed financial statements for Form 10-Q, debt issue costs in conjunction with a business combination, business combinations prior to an initial public offering, accounting for divestitures, and accounting for oil and gas exchange offers. We adopted ASU 2010-22 upon issuance in August 2010. The adoption of ASU 2010-22 did not have a material impact on our consolidated financial statements.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

3. Real Estate Investments

Our investments in our consolidated properties consisted of the following as of September 30, 2010 and December 31, 2009:

		September 30, 2010				December 31, 2009
Land		$	11,429,000			$	—
Building and improvements			108,043,000				—
			119,472,000				—
Less: accumulated depreciation			(902,000	)			—
		$	118,570,000			$	—

Depreciation expense for the three months ended September 30, 2010 and 2009 was $615,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009 was $902,000 and $0, respectively.

Acquisitions in 2010

During the nine months ended September 30, 2010, we completed 10 acquisitions comprising 19 buildings from unaffiliated parties. The aggregate purchase price of these properties was $138,028,000 and we paid $3,808,000 in acquisition fees to our advisor or its affiliates in connection with these acquisitions.

																					Acquisition Fee
				Date		Ownership							Mortgage Loan								to our Advisor or
Property		Property Location		Acquired		Percentage			Purchase Price				Payables (1)				Line of Credit (2)				its Affiliate (3)
Lacombe Medical Office Building		Lacombe, LA		03/05/10		100	%		$	6,970,000			$	—			$	—			$	192,000
Center for Neurosurgery and Spine		Sartell, MN		03/31/10		100	%			6,500,000				3,341,000				—				179,000
Parkway Medical Center		Beachwood, OH		04/12/10		100	%			10,900,000				—				—				300,000
Highlands Ranch Medical Pavilion		Highlands Ranch, CO		04/30/10		100	%			8,400,000				4,443,000				—				231,000
Muskogee Long-Term Acute Care Hospital		Muskogee, OK		05/27/10		100	%			11,000,000				—				—				303,000
St. Vincent Medical Office Building		Cleveland, OH		06/25/10		100	%			10,100,000				—				—				278,000
Livingston Medical Arts Pavilion		Livingston, TX		06/28/10		100	%			6,350,000				—				—				175,000
Pocatello East Medical Office Building		Pocatello, ID		07/27/10		98.75	%			15,800,000				—				5,000,000				435,000
Monument Long-Term Acute Care Hospital Portfolio (4)		Cape Girardeau and Joplin, MO		Various		100	%			17,008,000				—				14,500,000				477,000
Virginia Skilled Nursing Facility Portfolio		Charlottesville, Bastian, Lebanon, Fincastle, Low Moor, Midlothian and Hot Springs, VA		09/16/10		100	%			45,000,000				26,810,000				12,900,000				1,238,000
						Total:			$	138,028,000			$	34,594,000			$	32,400,000			$	3,808,000

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

We reimburse our advisor or its affiliates for acquisition expenses related to selecting, evaluating, acquiring and investing in properties. The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our disinterested independent directors. As of September 30, 2010, such fees and expenses did not exceed 6.0% of the purchase price of our acquisitions.

Proposed Acquisition

In August 2010, we entered into an agreement, as amended or assigned, to purchase the Monument LTACH Portfolio which consists of four separate long-term acute care hospitals: Cape Girardeau Long-Term Acute Care Hospital located in Cape Girardeau, Missouri, or the Cape property, Joplin Long-Term Acute Care Hospital located in Joplin, Missouri, or the Joplin property, Columbia Long-Term Acute Care Hospital located in Columbia, Missouri or the Columbia property, and Athens Long-Term Acute Care Hospital located in Athens, Georgia, or the Athens property. As of September 30, 2010, we have acquired the Cape and Joplin properties. On October 29, 2010, we acquired the Athens property from an unaffiliated third party for a contract purchase price of $12,142,000, plus closing costs. In connection with the acquisition, we paid an acquisition fee of $334,000, or 2.75% of the contract purchase price, to Grubb & Ellis Equity Advisors. See Note 17, Subsequent Events, for a further discussion.

We anticipate acquiring the Columbia property during 2011 for a contract purchase price of $12,209,000, plus closing costs. We also anticipate paying an acquisition fee of 2.75% of the contract purchase price to Grubb & Ellis Equity Advisors in connection with the acquisition. However, we cannot provide any assurance that we will be able to acquire the Columbia property within the anticipated timeframe, or at all.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

4. Identified Intangible Assets, Net

Identified intangible assets, net consisted of the following as of September 30, 2010 and December 31, 2009:

		September 30, 2010				December 31, 2009
In place leases, net of accumulated amortization of $554,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 9.8 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)		$	9,193,000			$	—
Above market leases, net of accumulated amortization of $73,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 7.2 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)			958,000				—
Tenant relationships, net of accumulated amortization of $210,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 20.4 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)			9,483,000				—
Leasehold interest, net of accumulated amortization of $1,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 71.2 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)			148,000				—
Master lease, net of accumulated amortization of $38,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 1.8 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)			417,000				—
		$	20,199,000			$	—

Amortization expense for the three months ended September 30, 2010 and 2009 was $590,000 and $0, respectively, which included $47,000 and $0, respectively, of amortization recorded against rental income for above market leases and $1,000 and $0, respectively, of amortization recorded against rental expenses for leasehold interest in our accompanying condensed consolidated statements of operations.

Amortization expense for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009 was $894,000 and $0, respectively, which included $73,000 and $0, respectively, of amortization recorded against rental income for above market leases and $1,000 and $0, respectively, of amortization recorded against rental expenses for leasehold interest in our accompanying condensed consolidated statements of operations.

Estimated amortization expense on the identified intangible assets as of September 30, 2010, for the three months ending December 31, 2010 and each of the next four years ending December 31 and thereafter is as follows:

Year		Amount
2010		$	712,000
2011		$	2,498,000
2012		$	2,119,000
2013		$	1,748,000
2014		$	1,635,000
Thereafter		$	11,487,000

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

5. Other Assets, Net

Other assets, net consisted of the following as of September 30, 2010 and December 31, 2009:

		September 30, 2010				December 31, 2009
Deferred financing costs, net of accumulated amortization of $49,000 and $0 as of September 30, 2010 and December 31, 2009, respectively		$	1,275,000			$	—
Lease commissions, net of accumulated amortization of $0 as of September 30, 2010 and December 31, 2009			53,000				—
Deferred rent receivable			241,000				—
Prepaid expenses and deposits			288,000				36,000
		$	1,857,000			$	36,000

Amortization expense on deferred financing costs and lease commissions for the three months ended September 30, 2010 and 2009 was $44,000 and $0, respectively, of which $44,000 and $0, respectively, of amortization was recorded as interest expense for deferred financing costs in our accompanying condensed consolidated statements of operations.

Amortization expense on deferred financing costs and lease commissions for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009 was $49,000 and $0, respectively, of which $49,000 and $0, respectively, of amortization was recorded as interest expense for deferred financing costs in our accompanying condensed consolidated statements of operations.

Estimated amortization expense on deferred financing costs and lease commissions as of September 30, 2010, for the three months ending December 31, 2010 and each of the next four years ending December 31 and thereafter is as follows:

Year		Amount
2010		$	166,000
2011		$	668,000
2012		$	294,000
2013		$	35,000
2014		$	30,000
Thereafter		$	135,000

6. Mortgage Loan Payables, Net

Mortgage loan payables were $42,454,000 ($42,128,000, net of discount) and $0 as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, we had two fixed rate and two variable rate mortgage loan payables with effective interest rates ranging from 1.36% to 6.00% per annum and a weighted average effective interest rate of 5.32% per annum. As of September 30, 2010, we had $12,406,000 ($12,382,000, net of discount) of fixed rate debt, or 29.2% of mortgage loan payables, at a weighted average effective interest rate of 5.96% per annum and $30,048,000 ($29,746,000, net of discount) of variable rate debt, or 70.8% of mortgage loan payables, at a weighted average effective interest rate of 5.05% per annum.

Most of the mortgage loan payables may be prepaid and in some cases subject to a prepayment premium. We are required by the terms of certain loan documents to meet certain covenants, such as occupancy ratios, leverage ratios, net worth ratios, debt service coverage ratios and reporting requirements. As of September 30, 2010, we were in compliance with all such requirements.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Mortgage loan payables, net consisted of the following as of September 30, 2010 and December 31, 2009:

		Interest
Property		Rate(1)			Maturity Date			September 30, 2010				December 31, 2009
Fixed Rate Debt:
Highlands Ranch Medical Pavilion			5.88	%		11/11/12		$	4,406,000			$	—
Pocatello East Medical Office Building			6.00	%		10/01/20			8,000,000				—
									12,406,000				—
Variable Rate Debt:
Center for Neurosurgery and Spine (2)			1.36	%		08/15/21 (callable)			3,238,000				—
Virginia Skilled Nursing Facility Portfolio (3)			5.50	%		03/14/12			26,810,000				—
									30,048,000				—
Total fixed and variable rate debt									42,454,000				—
Less: discount									(326,000	)			—
Mortgage loan payables, net								$	42,128,000			$	—

The principal payments due on our mortgage loan payables as of September 30, 2010, for the three months ending December 31, 2010 and for each of the next four years ending December 31 and thereafter, is as follows:

Year		Amount
2010		$	3,303,000
2011		$	263,000
2012		$	31,268,000
2013		$	169,000
2014		$	169,000
Thereafter		$	7,282,000

7. Derivative Financial Instrument

ASC Topic 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We utilize derivatives such as fixed interest rate swaps to add stability to interest expense and to manage our exposure to interest rate movements. Consistent with ASC Topic 815, we record derivative financial instruments in our accompanying condensed consolidated balance sheets as either an asset or a liability measured at fair value. ASC Topic 815 permits special hedge accounting if certain requirements are met. Hedge accounting allows for gains and losses on derivatives designated as hedges to be offset by the change in value of the hedged item(s) or to be deferred in other comprehensive income.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

As of September 30, 2010, no derivatives were designated as fair value hedges or cash flow hedges. Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes in the fair value of derivative financial instruments are recorded as a component of interest expense in gain (loss) in fair value of derivative financial instrument in our accompanying condensed consolidated statements of operations. For the three months ended September 30, 2010 and 2009, we recorded $74,000 and $0, respectively, as an increase to interest expense in our accompanying condensed consolidated statements of operations related to the change in the fair value of our derivative financial instrument, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we recorded $194,000 and $0, respectively, as an increase to interest expense in our accompanying condensed consolidated statements of operations related to the change in the fair value of our derivative financial instrument.

The following table lists the derivative financial instrument held by us as of September 30, 2010:

Interest

Maturity

Notional Amount

Index

Rate

Fair Value

Instrument

Date

$

3,238,000

one month LIBOR

6.00

%

$

(503,000

)

Swap

08/15/21

We did not have any derivative financial instruments as of December 31, 2009.

See Note 13, Fair Value of Financial Instruments, for a further discussion of the fair value of our derivative financial instrument.

8. Line of Credit

On July 19, 2010, we entered into a loan agreement with Bank of America, or the Bank of America Loan Agreement, to obtain a secured revolving credit facility with an aggregate maximum principal amount of $25,000,000, or the line of credit. The actual amount of credit available under the line of credit at any given time is a function of, and is subject to, certain loan to cost, loan to value and debt service coverage ratios contained in the Bank of America Loan Agreement. The line of credit matures on July 19, 2012 and may be extended by one 12 month period subject to satisfaction of certain conditions, including payment of an extension fee.

Any loan made under the Bank of America Loan Agreement shall bear interest at per annum rates equal to either: (a) the daily floating London Interbank Offered Rate, or LIBOR, plus 3.75%, subject to a minimum interest rate floor of 5.00%; (b) or if the daily floating LIBOR rate is not available, a base rate which means, for any day, a fluctuating rate per annum equal to the highest of: (i) the prime rate for such day plus 3.75% or (ii) the one-month LIBOR rate for such day, if available, plus 3.75%, in either case, subject to a minimum interest rate floor of 5.00%.

The Bank of America Loan Agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt and limitations on distributions by properties that serve as collateral for the line of credit. The Bank of America Loan Agreement also provides that an event of default under any other unsecured or recourse debt that we have in excess of $5,000,000 shall constitute an event of default under the Bank of America Loan Agreement. The Bank of America Loan Agreement also imposes the following financial covenants: (a) minimum liquidity thresholds; (b) a minimum ratio of operating cash flow to fixed charges; (c) a maximum ratio of liabilities to asset value; (d) a maximum distribution covenant; and (e) a minimum tangible net worth covenant. As of September 30, 2010, we were in compliance with all such covenants and requirements.

As of September 30, 2010 and December 31, 2009, borrowings under the line of credit totaled $12,650,000 and $0, respectively. The weighted-average interest rate of borrowings as of September 30, 2010 was 5.00% per annum. Additionally, our borrowing capacity under the line of credit was $17,150,000, which is secured by Lacombe Medical Office Building, Parkway Medical Center, Livingston Medical Arts Pavilion and St. Vincent Medical Office Building as of September 30, 2010.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

9. Identified Intangible Liabilities, Net

Identified intangible liabilities, net consisted of the following as of September 30, 2010 and December 31, 2009:

		September 30, 2010				December 31, 2009
Below market leases, net of accumulated amortization of $24,000 and $0 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 2.2 years and 0 years as of September 30, 2010 and December 31, 2009, respectively)		$	147,000			$	—

Amortization expense on below market leases for the three months ended September 30, 2010 and 2009 was $19,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009 was $24,000 and $0, respectively. Amortization expense on below market leases is recorded to rental income in our accompanying condensed consolidated statements of operations.

Estimated amortization expense on below market leases as of September 30, 2010, for the three months ending December 31, 2010 and each of the next four years ending December 31 and thereafter is as follows:

Year		Amount
2010		$	19,000
2011		$	65,000
2012		$	55,000
2013		$	8,000
2014		$	—
Thereafter		$	—

10. Commitments and Contingencies

Litigation

We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us, which if determined unfavorably to us, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Environmental Matters

We follow a policy of monitoring our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at our properties, we are not currently aware of any environmental liability with respect to our properties that would have a material effect on our consolidated financial position, results of operations or cash flows. Further, we are not aware of any material 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.

Other Organizational and Offering Expenses

Our organizational and offering expenses, other than selling commissions and the dealer manager fee, are being paid by our advisor or its affiliates on our behalf. Other organizational and offering expenses include all expenses (other than selling commissions and the dealer manager fee which generally represent 7.0% and 3.0%, respectively, of the gross proceeds of our offering) to be paid by us in connection with our offering. These other organizational and offering expenses will only become our liability to the extent other organizational and offering expenses do not exceed 1.0% of the gross proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP. As of September 30, 2010 and December 31, 2009, our advisor or its affiliates had incurred cumulative expenses on our behalf of $2,665,000 and $1,956,000, respectively, in excess of 1.0% of the gross proceeds of our offering, and therefore, these expenses are not recorded in our accompanying condensed consolidated financial statements as of September 30, 2010 and December 31, 2009. To the extent we raise additional funds from our offering, these amounts may become our liability.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

When recorded by us, other organizational expenses will be expensed as incurred, and offering expenses are charged to stockholders’ equity as such amounts are reimbursed to our advisor or its affiliates from the gross proceeds of our offering. See Note 11, Related Party Transactions — Offering Stage, for a further discussion of other organizational and offering expenses.

Other

Our other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In our view, these matters are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

11. Related Party Transactions

Fees and Expenses Paid to Affiliates

All of our executive officers and our non-independent directors are also executive officers and employees and/or holders of a direct or indirect interest in our advisor, our sponsor, Grubb & Ellis Equity Advisors or other affiliated entities. We entered into the Advisory Agreement with our advisor and a dealer manager agreement with Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities, or our dealer manager. These agreements entitle our advisor, our dealer manager and their affiliates to specified compensation for certain services, as well as, reimbursement of certain expenses. In the aggregate, for the three months ended September 30, 2010 and 2009, we incurred $6,206,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $14,050,000 and $0, respectively, in compensation and expense reimbursements to our advisor or its affiliates as detailed below.

Offering Stage

Selling Commissions

Our dealer manager receives selling commissions of up to 7.0% of the gross offering proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to participating broker-dealers. For the three months ended September 30, 2010 and 2009, we incurred $2,278,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $6,041,000 and $0, respectively, in selling commissions to our dealer manager. Such commissions are charged to stockholders’ equity as such amounts are reimbursed to our dealer manager from the gross proceeds of our offering.

Dealer Manager Fee

Our dealer manager receives a dealer manager fee of up to 3.0% of the gross offering proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP. Our dealer manager may re-allow all or a portion of these fees to participating broker-dealers. For the three months ended September 30, 2010 and 2009, we incurred $1,016,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $2,671,000 and $0, respectively, in dealer manager fees to our dealer manager. Such fees and reimbursements are charged to stockholders’ equity as such amounts are reimbursed to our dealer manager or its affiliates from the gross proceeds of our offering.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Other Organizational and Offering Expenses

Our organizational and offering expenses are paid by our advisor or Grubb & Ellis Equity Advisors on our behalf. Our advisor or Grubb & Ellis Equity Advisors are reimbursed for actual expenses incurred up to 1.0% of the gross offering proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP. For the three months ended September 30, 2010 and 2009, we incurred $337,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $893,000 and $0, respectively, in offering expenses to our advisor or Grubb & Ellis Equity Advisors. Other organizational expenses are expensed as incurred, and offering expenses are charged to stockholders’ equity as such amounts are reimbursed to our advisor or Grubb & Ellis Equity Advisors from the gross proceeds of our offering.

Acquisition and Development Stage

Acquisition Fee

Our advisor or its affiliates receive an acquisition fee of 2.75% of the contract purchase price for each property we acquire or 2.0% of the origination or acquisition price for any real estate-related investment we originate or acquire. Our advisor or its affiliates will be entitled to receive these acquisition fees for properties and real estate-related investments we acquire with funds raised in our offering, including acquisitions completed after the termination of the Advisory Agreement, or funded with net proceeds from the sale of a property or real estate-related investment, subject to certain conditions.

For the three months ended September 30, 2010 and 2009, we incurred $2,150,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $3,808,000 and $0, respectively, in acquisition fees to our advisor or its affiliates. Acquisition fees in connection with the acquisition of properties are expensed as incurred in accordance with ASC Topic 805 and are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

Development Fee

Our advisor or its affiliates will receive, in the event our advisor or its affiliates provide development-related services, a development fee in an amount that is usual and customary for comparable services rendered for similar projects in the geographic market where the services are provided; provided, however, that we will not pay a development fee to our advisor or its affiliates if our advisor elects to receive an acquisition fee based on the cost of such development.

For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur any development fees to our advisor or its affiliates.

Reimbursement of Acquisition Expenses

Our advisor or its affiliates are reimbursed for acquisition expenses related to selecting, evaluating and acquiring assets, which are reimbursed regardless of whether an asset is acquired. The reimbursement of acquisition expenses, acquisition fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate, 6.0% of the purchase price or total development costs, unless fees in excess of such limits are approved by a majority of our disinterested independent directors. As of September 30, 2010 and December 31, 2009, such fees and expenses did not exceed 6.0% of the purchase price of our acquisitions.

For the three months ended September 30, 2010 and 2009, we incurred $13,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $24,000 and $0, respectively, in acquisition expenses to our advisor or its affiliates. Reimbursement of acquisition expenses are expensed as incurred in accordance with ASC Topic 805 and are included in acquisition related expenses in our accompanying condensed consolidated statements of operations.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Operational Stage

Asset Management Fee

Our advisor or its affiliates are paid a monthly fee for services rendered in connection with the management of our assets equal to one-twelfth of 0.85% of average invested assets, subject to our stockholders receiving distributions in an amount equal to 5.0% per annum, cumulative, non-compounded, of invested capital. For such purposes, average invested assets means the average of the aggregate book value of our assets invested in real estate properties and real estate-related investments, before deducting depreciation, amortization, bad debt and other similar non-cash reserves, computed by taking the average of such values at the end of each month during the period of calculation; and invested capital means, for a specified period, the aggregate issue price of shares of our common stock purchased by our stockholders, reduced by distributions of net sales proceeds by us to our stockholders and by any amounts paid by us to repurchase shares of our common stock pursuant to our share repurchase plan.

For the three months ended September 30, 2010 and 2009, we incurred $189,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $274,000 and $0, respectively, in asset management fees to our advisor or its affiliates, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

Property Management Fee

Our advisor or its affiliates are paid a monthly property management fee of up to 4.0% of the gross monthly cash receipts from each property managed by our advisor or its affiliates. Our advisor or its affiliates may sub-contract its duties to any third-party, including for fees less than the property management fees payable to our advisor or its affiliates. In addition to the above property management fee, for each property managed directly by entities other than our advisor or its affiliates, we will pay our advisor or its affiliates a monthly oversight fee of up to 1.0% of the gross cash receipts from the property; provided, however, that in no event will we pay both a property management fee and an oversight fee to our advisor or its affiliates with respect to the same building.

For the three months ended September 30, 2010 and 2009, we incurred $83,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $127,000 and $0, respectively, in property management fees and oversight fees to our advisor or its affiliates, which is included in rental expenses in our accompanying condensed consolidated statements of operations.

On-site Personnel and Engineering Payroll

We reimburse our advisor or its affiliates for on-site personnel and engineering incurred on our behalf. For the three months ended September 30, 2010 and 2009, we incurred $21,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $23,000 and $0, respectively, in payroll for on-site personnel and engineering to our advisor or its affiliates, which is included in rental expenses in our accompanying condensed consolidated statements of operations.

Lease Fees

We may pay our advisor or its affiliates a separate fee for any leasing activities in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Such fee is generally expected to range from 3.0% to 8.0% of the gross revenues generated during the initial term of the lease.

For the three months ended September 30, 2010 and 2009, we incurred $53,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $53,000 and $0, respectively, in lease fees to our advisor or its affiliates, which is capitalized as lease commissions and included in other assets, net in our accompanying condensed consolidated balance sheets.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Construction Management Fee

In the event that our advisor or its affiliates assist with planning and coordinating the construction of any capital or tenant improvements, our advisor or its affiliates will be paid a construction management fee of up to 5.0% of the cost of such improvements. For the three months ended September 30, 2010 and 2009, we incurred $2,000 and $0, respectively, in construction management fees to our advisor or its affiliates. For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $2,000 and $0, respectively, in construction management fees to our advisor or its affiliates. Construction management fees are capitalized as part of the associated asset and included in operating properties, net on our accompanying condensed consolidated balance sheets.

Operating Expenses

We reimburse our advisor or its affiliates for operating expenses incurred in rendering services to us, subject to certain limitations. However, we cannot reimburse our advisor or its affiliates at the end of any fiscal quarter for total operating expenses that, in the four consecutive fiscal quarters then ended, exceed the greater of: (i) 2.0% of our average invested assets, as defined in the Advisory Agreement, or (ii) 25.0% of our net income, as defined in the Advisory Agreement, unless our independent directors determine that such excess expenses are justified based on unusual and non-recurring factors. For the 12 months ended September 30, 2010, our operating expenses exceeded this limitation by $481,000. Our operating expenses as a percentage of average invested assets and as a percentage of net income were 3.3% and (29.8)%, respectively, for the 12 months ended September 30, 2010. We raised the minimum offering and had funds held in escrow released to us to commence real estate operations in October 2009. We purchased our first property in March 2010. At this early stage of our operations, our general and administrative expenses are relatively high compared with our funds from operations and our average invested assets. Our board of directors determined that the relationship of our general and administrative expenses to our funds from operations and our average invested assets was justified for the 12 months ended September 30, 2010 given the costs of operating a public company and the early stage of our operations.

For the three months ended September 30, 2010 and 2009, Grubb & Ellis Equity Advisors incurred operating expenses on our behalf of $8,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, Grubb & Ellis Equity Advisors incurred operating expenses on our behalf of $22,000 and $0, respectively, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

Related Party Services Agreement

We entered into a services agreement, effective September 21, 2009, or the Transfer Agent Services Agreement, with Grubb & Ellis Equity Advisors, Transfer Agent, LLC, formerly known as Grubb & Ellis Investor Solutions, LLC, or our transfer agent, for transfer agent and investor services. The Transfer Agent Services Agreement has an initial one-year term and shall thereafter automatically be renewed for successive one-year terms. Since our transfer agent is an affiliate of our advisor, the terms of this agreement were approved and determined by a majority of our directors, including a majority of our independent directors, as fair and reasonable to us and at fees which are no greater than that which would be paid to an unaffiliated party for similar services. The Transfer Agent Services Agreement requires our transfer agent to provide us with a 180 day advance written notice for any termination, while we have the right to terminate upon 60 days advance written notice.

For the three months ended September 30, 2010 and 2009, we incurred $30,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $73,000 and $0, respectively, for investor services that our transfer agent provided to us, which is included in general and administrative in our accompanying condensed consolidated statements of operations.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

For the three months ended September 30, 2010 and 2009, Grubb & Ellis Equity Advisors incurred expenses of $14,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, Grubb & Ellis Equity Advisors incurred expenses of $37,000 and $0, respectively, in subscription agreement processing services that our transfer agent provided to us. As an other organizational and offering expense, these subscription agreement processing expenses will only become our liability to the extent cumulative other organizational and offering expenses do not exceed 1.0% of the gross proceeds from the sale of shares of our common stock in our offering, other than shares of our common stock sold pursuant to the DRIP.

Compensation for Additional Services

Our advisor or its affiliates are paid for services performed for us other than those required to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of compensation for these services must be approved by a majority of our board of directors, including a majority of our independent directors, and cannot exceed an amount that would be paid to unaffiliated parties for similar services. For the three months ended September 30, 2010 and 2009, we incurred $26,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we incurred $39,000 and $0, respectively, for internal controls compliance services our advisor or its affiliates provided to us.

Liquidity Stage

Disposition Fees

For services relating to the sale of one or more properties, our advisor or its affiliates will be paid a disposition fee up to the lesser of 2.0% of the contract sales price or 50.0% of a customary competitive real estate commission given the circumstances surrounding the sale, in each case as determined by our board of directors, including a majority of our independent directors, upon the provision of a substantial amount of the services in the sales effort. The amount of disposition fees paid, when added to the real estate commissions paid to unaffiliated parties, will not exceed the lesser of the customary competitive real estate commission or an amount equal to 6.0% of the contract sales price. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur any disposition fees to our advisor or its affiliates.

Subordinated Participation Interest

Subordinated Distribution of Net Sales Proceeds

In the event of liquidation, our advisor will be paid a subordinated distribution of net sales proceeds. The distribution will be equal to 15.0% of the net proceeds from the sales of properties, after distributions to our stockholders, in the aggregate, of (1) a full return of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) plus (2) an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock, as adjusted for distributions of net sale proceeds. Actual amounts to be received depend on the sale prices of properties upon liquidation. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur any such distributions to our advisor.

Subordinated Distribution upon Listing

Upon the listing of shares of our common stock on a national securities exchange, our advisor will be paid a distribution equal to 15.0% of the amount by which (1) the market value of our outstanding common stock at listing plus distributions paid prior to listing exceeds (2) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the amount of cash that, if distributed to stockholders as of the date of listing would have provided them an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the date of listing. Actual amounts to be received depend upon the market value of our outstanding stock at the time of listing among other factors. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not incur any such distributions to our advisor.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Subordinated Distribution Upon Termination

Upon termination or non-renewal of the Advisory Agreement, our advisor will be entitled to a subordinated distribution from our operating partnership equal to 15.0% of the amount, if any, by which (1) the appraised value of our assets on the termination date, less any indebtedness secured by such assets, plus total distributions paid through the termination date, exceeds (2) the sum of the total amount of capital raised from stockholders (less amounts paid to repurchase shares of our common stock pursuant to our share repurchase plan) and the total amount of cash that, if distributed to them as of the termination date, would have provided them an annual 8.0% cumulative, non-compounded return on the gross proceeds from the sale of shares of our common stock through the termination date. In addition, our advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing or other liquidity event, including a liquidation, sale of substantially all of our assets or merger in which our stockholders receive, in exchange for their shares of our common stock, shares of a company that are traded on a national securities exchange.

As of September 30, 2010 and December 31, 2009, we had not recorded any charges to earnings related to the subordinated distribution upon termination.

Fees Payable Upon Internalization of the Advisor

Prior to June 1, 2010, to the extent that our board of directors determined that it was in the best interests of our stockholders to internalize (acquire from our advisor) any management functions provided by our advisor, the compensation payable to our advisor for such specific internalization would be negotiated and agreed upon by our independent directors and our advisor. Effective June 1, 2010, we amended the Advisory Agreement to eliminate any compensation or remuneration payable by us or our operating partnership to our advisor or any of its affiliates in connection with any internalization in the future. However, this amendment is not intended to limit any other compensation or distributions that we or our operating partnership may pay our advisor in accordance with the Advisory Agreement or any other agreement, including but not limited to the agreement of limited partnership of our operating partnership.

Accounts Payable Due to Affiliates

The following amounts were outstanding to affiliates as of September 30, 2010 and December 31, 2009:

Fee		September 30, 2010				December 31, 2009
Operating Expenses		$	26,000			$	65,000
Construction Management Fees			2,000				—
Offering Costs			50,000				150,000
Acquisition Related Expenses			9,000				—
Asset and Property Management Fees			121,000				—
Lease Commissions			11,000				—
On-site Personnel and Engineering Payroll			18,000				—
Selling Commissions and Dealer Manager Fees			227,000				132,000
		$	464,000			$	347,000

12. Equity

Preferred Stock

Our charter authorizes us to issue 200,000,000 shares of our preferred stock, par value $0.01 per share. As of September 30, 2010 and December 31, 2009, no shares of preferred stock were issued and outstanding.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Common Stock

We are offering and selling to the public up to 300,000,000 shares of our common stock, par value $0.01 per share, for $10.00 per share and up to 30,000,000 shares of our common stock, par value $0.01 per share, to be issued pursuant to the DRIP for $9.50 per share. Our charter authorizes us to issue 1,000,000,000 shares of our common stock.

On February 4, 2009, our advisor purchased 20,000 shares of common stock for total cash consideration of $200,000 and was admitted as our initial stockholder. We used the proceeds from the sale of shares of our common stock to our advisor to make an initial capital contribution to our operating partnership.

On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock to our independent directors. On June 8, 2010, in connection with their re-election, we granted an aggregate of 7,500 shares of our restricted common stock to our independent directors. Through September 30, 2010, we issued 10,427,527 shares of our common stock in connection with our offering and 114,983 shares of our common stock pursuant to the DRIP, and we had also repurchased 11,000 shares of our common stock under our share repurchase plan. As of September 30, 2010 and December 31, 2009, we had 10,574,010 and 1,532,268 shares of our common stock issued and outstanding.

Noncontrolling Interests

On February 4, 2009, our advisor made an initial capital contribution of $2,000 to our operating partnership in exchange for 200 partnership units.

As of September 30, 2010 and December 31, 2009, we owned a 99.99% general partnership interest in our operating partnership and our advisor owned a 0.01% limited partnership interest in our operating partnership. As such, 0.01% of the earnings of our operating partnership are allocated to noncontrolling interests, subject to certain limitations.

In addition, as of September 30, 2010, we owned a 98.75% interest in the consolidated limited liability company that owns Pocatello East Medical Office Building, or the Pocatello East MOB property, that was purchased on July 27, 2010. As such, 1.25% of the earnings of the Pocatello East MOB property are allocated to noncontrolling interests. As of September 30, 2010, the balance was comprised of the noncontrolling interest’s initial contribution, distributions and 1.25% of the earnings at the Pocatello East MOB property.

Distribution Reinvestment Plan

We adopted the DRIP, which allows stockholders to purchase additional shares of our common stock through the reinvestment of distributions, subject to certain conditions. We registered and reserved 30,000,000 shares of our common stock for sale pursuant to the DRIP in our offering. For the three months ended September 30, 2010 and 2009, $590,000 and $0, respectively, in distributions were reinvested and 62,098 and 0 shares of our common stock, respectively, were issued pursuant to the DRIP. For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, $1,092,000 and $0, respectively, in distributions were reinvested and 114,983 and 0 shares of our common stock, respectively, were issued pursuant to the DRIP. As of September 30, 2010 and December 31, 2009, a total of $1,092,000 and $0, respectively, in distributions were reinvested and 114,983 and 0 shares of our common stock, respectively, were issued pursuant to the DRIP.

Share Repurchase Plan

Our board of directors has approved a share repurchase plan. Our share repurchase plan allows for repurchases of shares of our common stock by us when certain criteria are met. Share repurchases will be made at the sole discretion of our board of directors. All repurchases are subject to a one-year holding period, except for repurchases made in connection with a stockholder’s death or “qualifying disability,” as defined in our share repurchase plan. Subject to the availability of the funds for share repurchases, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year; provided, however, that shares subject to a repurchase requested upon the death of a stockholder will not be subject to this cap. Funds for the repurchase of shares of our common stock will come exclusively from the cumulative proceeds we receive from the sale of shares of our common stock pursuant to the DRIP.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The prices per share at which we will repurchase shares of our common stock will range, depending on the length of time the stockholder held such shares, from 92.5% to 100%, of the price paid per share to acquire such shares from us. However, if shares of our common stock are to be repurchased in connection with a stockholder’s death or qualifying disability, the repurchase price will be no less than 100% of the price paid to acquire the shares of our common stock from us.

For the three months ended September 30, 2010 and 2009, we repurchased 11,000 shares of our common stock for an aggregate of $110,000 and 0 shares of our common stock for an aggregate of $0, respectively. For the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we repurchased 11,000 shares of our common stock for an aggregate of $110,000 and 0 shares of our common stock for an aggregate of $0, respectively. As of September 30, 2010 and December 31, 2009, we had repurchased 11,000 shares of our common stock for an aggregate amount of $110,000 and 0 shares of our common stock for an aggregate amount of $0, respectively.

2009 Incentive Plan

We adopted our incentive plan, pursuant to which our board of directors or a committee of our independent directors may make grants of options, restricted common stock awards, stock purchase rights, stock appreciation rights or other awards to our independent directors, employees and consultants. The maximum number of shares of our common stock that may be issued pursuant to our incentive plan is 2,000,000.

On October 21, 2009, we granted an aggregate of 15,000 shares of our restricted common stock, as defined in our incentive plan, to our independent directors in connection with their initial election to our board of directors, of which 20.0% vested on the date of grant and 20.0% will vest on each of the first four anniversaries of the date of grant. On June 8, 2010, in connection with their re-election, we granted an aggregate of 7,500 shares of our restricted common stock, as defined in our incentive plan, to our independent directors, which will vest over the same period described above. The fair value of each share of our restricted common stock was estimated at the date of grant at $10.00 per share, the per share price of shares of our common stock in our offering, and with respect to the initial 20.0% of shares that vested on the date of grant, expensed as compensation immediately, and with respect to the remaining shares, amortized on a straight-line basis over the vesting period. Shares of our restricted common stock may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such restrictions expire upon vesting. Shares of our restricted common stock have full voting rights and rights to dividends. For the three months ended September 30, 2010 and 2009, we recognized compensation expense of $11,000 and $0, respectively, and for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we recognized compensation expense of $42,000 and $0, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three months ended September 30, 2010 and 2009, for the nine months ended September 30, 2010 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, we did not assume any forfeitures. Stock compensation expense is included in general and administrative in our accompanying condensed consolidated statements of operations.

As of September 30, 2010 and December 31, 2009, there was $147,000 and $115,000, respectively, of total unrecognized compensation expense related to the nonvested shares of our restricted common stock. This expense is expected to be recognized over a remaining weighted average period of 3.27 years.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

As of September 30, 2010 and December 31, 2009, the fair value of the nonvested shares of our restricted common stock was $180,000 and $120,000, respectively. A summary of the status of the nonvested shares of our restricted common stock as of September 30, 2010 and December 31, 2009, and the changes for the nine months ended September 30, 2010, is presented below:

						Weighted
		Number of Nonvested				Average Grant
		Shares of Our Restricted				Date Fair
		Common Stock				Value
Balance — December 31, 2009			12,000			$	10.00
Granted			7,500				10.00
Vested			(1,500	)			10.00
Forfeited			—				—
Balance — September 30, 2010			18,000			$	10.00
Expected to vest — September 30, 2010			18,000			$	10.00

13. Fair Value of Financial Instruments

Financial Instruments Reported at Fair Value

Derivative Financial Instrument

We use interest rate swaps to manage interest rate risk associated with floating rate debt. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

To comply with the provisions of ASC Topic 820, 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. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our interest rate swap fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this instrument utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparty. However, as of September 30, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our interest rate swap. As a result, we have determined that our interest rate swap valuation in its entirety is classified in Level 2 of the fair value hierarchy.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Assets and liabilities at fair value

The table below presents our assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

		Quoted Prices in
		Active Markets for								Significant
		Identical Assets				Significant Other				Unobservable
		and Liabilities				Observable Inputs				Inputs
		(Level 1 )				(Level 2)				(Level 3)				Total
Liabilities:
Derivative financial instrument		$	—			$	(503,000	)		$	—			$	(503,000	)
Total liabilities at fair value		$	—			$	(503,000	)		$	—			$	(503,000	)

We did not have any fair value measurements using significant unobservable inputs (Level 3) as of September 30, 2010.

Financial Instruments Disclosed at Fair Value

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial instruments, whether or not recognized on the face of the balance sheet. Fair value is defined under ASC Topic 820.

Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, real estate and escrow deposits, accounts and other receivables, accounts payable and accrued liabilities, accounts payable due to affiliates, mortgage loan payables, net and borrowings under the line of credit.

We consider the carrying values of cash and cash equivalents, restricted cash, real estate and escrow deposits, accounts and other receivables and accounts payable and accrued liabilities to approximate fair value for these financial instruments because of the short period of time between origination of the instruments and their expected realization. The fair value of accounts payable due to affiliates is not determinable due to the related party nature of the accounts payable.

The fair value of the mortgage loan payables is estimated using borrowing rates available to us for debt instruments with similar terms and maturities. As of September 30, 2010, the fair value of the mortgage loan payables were $42,144,000 compared to the carrying value of $42,128,000. The fair value of the line of credit as of September 30, 2010 was $12,644,000, compared to a carrying value of $12,650,000. We did not have any mortgage loan payables or the line of credit as of December 31, 2009.

14. Business Combinations

For the nine months ended September 30, 2010, we completed 10 acquisitions comprising 19 buildings and 676,000 square feet of GLA. The aggregate purchase price was $138,028,000, plus closing costs and acquisition fees of $4,794,000, which are included in acquisition related expenses in our accompanying condensed consolidated statements of operations. See Note 3, Real Estate Investments, for a listing of the properties acquired, the dates of acquisition and the amount of financing initially incurred or assumed in connection with such acquisition.

Results of operations for the property acquisitions are reflected in our accompanying condensed consolidated statements of operations for the nine months ended September 30, 2010 for the periods subsequent to the acquisition dates. For the period from the acquisition date through September 30, 2010, we recognized the following amounts of revenues and net income (loss) for the property acquisitions:

																																		Monument
																																		Long-Term
		Lacombe				Center for								Highlands				Muskogee Long-				St. Vincent				Livingston				Pocatello East				Acute Care
		Medical Office				Neurosurgery				Parkway				Ranch Medical				Term Acute				Medical Office				Medical Arts				Medical Office				Hospital				Virginia SNF
		Building				and Spine				Medical Center				Pavilion				Care Hospital				Building				Pavilion				Building				Portfolio				Portfolio
Revenues		$	470,000			$	414,000			$	829,000			$	506,000			$	376,000			$	417,000			$	236,000			$	348,000			$	226,000			$	188,000
Net income (loss)		$	142,000			$	(307,000	)		$	19,000			$	(40,000	)		$	194,000			$	32,000			$	73,000			$	106,000			$	99,000			$	88,000

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The fair value of our 10 acquisitions at the time of acquisition is shown below:

																																		Monument
																																		Long-Term
		Lacombe				Center for								Highlands				Muskogee Long-				St. Vincent				Livingston				Pocatello East				Acute Care
		Medical Office				Neurosurgery				Parkway				Ranch Medical				Term Acute				Medical Office				Medical Arts				Medical Office				Hospital				Virginia SNF
		Building				and Spine				Medical Center				Pavilion				Care Hospital				Building				Pavilion				Building				Portfolio				Portfolio
Land		$	409,000			$	319,000			$	1,320,000			$	1,234,000			$	379,000			$	1,568,000			$	—			$	—			$	1,795,000			$	4,405,000
Building and improvements			5,438,000				4,688,000				7,192,000				5,444,000				8,314,000				6,746,000				4,976,000				14,140,000				13,176,000				37,709,000
In place leases			512,000				575,000				969,000				668,000				897,000				741,000				519,000				663,000				1,377,000				2,837,000
Tenant relationships			458,000				585,000				1,318,000				999,000				1,395,000				963,000				313,000				547,000				660,000				2,449,000
Leasehold interest			—				—				—				—				—				—				149,000				—				—				—
Master lease			—				—				—				—				—				—				—				450,000				—				—
Above market leases			—				327,000				97,000				27,000				—				107,000				473,000				—				—				—
Total assets acquired			6,817,000				6,494,000				10,896,000				8,372,000				10,985,000				10,125,000				6,430,000				15,800,000				17,008,000				47,400,000
Mortgage loan payables, net			—				(3,025,000	)			—				(4,414,000	)			—				—				—				—				—				—
Below market leases			—				—				(41,000	)			—				—				(50,000	)			(80,000	)			—				—				—
Derivative financial instrument			—				(310,000	)			—				—				—				—				—				—				—				—
Other liabilities			—				—				—				—				—				—				—				—				—				(2,400,000	)
Total liabilities assumed			—				(3,335,000	)			(41,000	)			(4,414,000	)			—				(50,000	)			(80,000	)			—				—				(2,400,000	)
Net assets acquired		$	6,817,000			$	3,159,000			$	10,855,000			$	3,958,000			$	10,985,000			$	10,075,000			$	6,350,000			$	15,800,000			$	17,008,000			$	45,000,000

Assuming the property acquisitions discussed above had occurred on January 1, 2010, for the three and nine months ended September 30, 2010, pro forma revenues, net loss, net loss attributable to controlling interests and net loss per common share attributable to controlling interests — basic and diluted would have been as follows:

		Three Months				Nine Months
		Ended				Ended
		September 30, 2010				September 30, 2010
Revenues		$	4,089,000			$	12,151,000
Net loss		$	(147,000	)		$	(5,052,000	)
Net loss attributable to controlling interests		$	(145,000	)		$	(5,051,000	)
Net loss per common share attributable to controlling interests — basic and diluted		$	(0.01	)		$	(0.44	)

Assuming the property acquisitions discussed above had occurred on January 7, 2009, for the three months ended September 30, 2009 and for the period from January 7, 2009 (Date of Inception) through September 30, 2009, pro forma revenues, net loss, net income (loss) attributable to controlling interests and net income (loss) per common share attributable to controlling interest — basic and diluted would have been as follows:

						Period from
						January 7, 2009
		Three Months				(Date of Inception)
		Ended				through
		September 30, 2009				September 30, 2009
Revenues		$	4,111,000			$	11,929,000
Net income (loss)		$	315,000			$	(4,169,000	)
Net income (loss) attributable to controlling interests		$	315,000			$	(4,167,000	)
Net income (loss) per common share attributable to controlling interests — basic and diluted		$	0.03			$	(0.36	)

The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

15. Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk are primarily cash and cash equivalents, escrow deposits, restricted cash and accounts and other receivables. Cash is generally invested in investment-grade, short-term instruments with a maturity of three months or less when purchased. We have cash in financial institutions that is insured by the Federal Deposit Insurance Corporation, or FDIC. As of September 30, 2010 and December 31, 2009, we had cash and cash equivalents, escrow deposits and restricted cash accounts in excess of FDIC insured limits. We believe this risk is not significant. Concentration of credit risk with respect to accounts receivable from tenants is limited. We perform credit evaluations of prospective tenants, and security deposits are obtained upon lease execution.

Grubb & Ellis Healthcare REIT II, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

As of September 30, 2010, we owned properties in four states for which each state accounted for 10.0% or more of our total revenues for the nine months ended September 30, 2010. The properties in Ohio, Colorado, Louisiana and Minnesota accounted for 31.1%, 12.6%, 11.7% and 10.3%, respectively, of our total revenues for the nine months ended September 30, 2010. Accordingly, there is a geographic concentration of risk subject to fluctuations in each state’s economy.

For the nine months ended September 30, 2010, three of our tenants at our consolidated properties accounted for 10.0% or more of our aggregate annual rental income, as follows:

						Percentage of						GLA
		2010 Annual Base				2010 Annual						(Square				Lease Expiration
Tenant		Rent*				Base Rent				Property		Feet)				Date
Kissito Healthcare		$	2,250,000				16.8	%		Virginia Skilled Nursing Facility Portfolio			144,000			01/31/25
Laurel Health Care Company		$	2,034,000				15.2	%		Virginia Skilled Nursing Facility Portfolio			88,000			various - 2016 to 2025
Landmark Real Estate Holdings, LLC		$	1,522,000				11.3	%		Monument LTACH Portfolio			53,000			08/31/25