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EX-31.1 - EX-31.1 - T REIT LIQUIDATING TRUST | c13954exv31w1.htm |
EX-32.1 - EX-32.1 - T REIT LIQUIDATING TRUST | c13954exv32w1.htm |
EX-21.1 - EX-21.1 - T REIT LIQUIDATING TRUST | c13954exv21w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
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: 0-49782*
T REIT Liquidating Trust
(Exact name of registrant as specified in its charter)
Virginia
|
26-0536128 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1551 N. Tustin Avenue, Suite 200, Santa Ana, California | 92705 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (714) 667-8252
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
None | None |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.* Yes o No o
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.* Yes o No o
Indicate by check mark whether registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.* þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of June 30, 2010. Not applicable.
As of March 11, 2011, there were 4,605,000 units of beneficial interest in T REIT Liquidating
Trust outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
* | T REIT Liquidating Trust is the transferee of the assets and liabilities of T REIT, Inc., and files reports under the Commission file number for T REIT, Inc. T REIT, Inc. filed a Form 15 on July 20, 2007, indicating its notice of termination of registration and filing requirements. |
T REIT LIQUIDATING TRUST
TABLE OF CONTENTS
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PART I |
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PART II |
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PART III |
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PART IV |
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36 | ||||||||
47 | ||||||||
EX-21.1 | ||||||||
EX-31.1 | ||||||||
EX-32.1 |
Table of Contents
PART I
Item 1. | Business. |
The use of the words we, us, or our refers to T REIT Liquidating Trust and its
subsidiaries, except where the context otherwise requires.
Overview and Plan of Liquidation
T REIT, Inc., or T REIT, was formed in December 1998 in the Commonwealth of Virginia and
qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended. T REIT was organized to acquire, manage and invest in a
diversified portfolio of real estate projects of office, industrial, retail and service properties.
T REIT was formed with the intent to be listed on a national stock exchange, quoted on a quotation
system of a national securities association or merged with an entity whose shares are listed or
quoted. In 2005, as a result of: (i) then current market conditions; (ii) the increasing costs of
corporate compliance (including, without limitation, all federal, state and local regulatory
requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act); and (iii) the possible need to reduce monthly distributions, the T REIT board
of directors determined that a liquidation would provide shareholders with a greater return on
their investment over a reasonable period of time than through implementation of other alternatives
considered.
On June 3, 2005, the board of directors of T REIT approved a plan of liquidation which was
thereafter approved by the shareholders of T REIT at its 2005 Annual Meeting of Shareholders held
on July 27, 2005. The T REIT plan of liquidation, or the plan of liquidation, contemplated the
orderly sale of all of T REITs assets, the payment of its liabilities, the winding up of
operations and the dissolution of T REIT. The board of directors decision to adopt the plan of
liquidation followed a lengthy process in which the board of directors and management reviewed a
number of strategic alternatives with the goal of maximizing shareholder value. T REIT engaged an
independent third party to perform financial advisory services in connection with T REITs plan of
liquidation, including rendering an opinion as to whether T REITs net real estate liquidation
value range estimate and estimated per share distribution range were reasonable. The plan of
liquidation gave T REITs board of directors the power to sell any and all of its assets without
further approval by its shareholders and provided that liquidating distributions be made to its
shareholders as determined by T REITs board of directors. The plan of liquidation also provided
for the transfer of T REITs remaining assets and liabilities to a liquidating trust if T REIT was
unable to sell its assets and pay its liabilities within 24 months of its shareholders approval of
the plan of liquidation (which was July 27, 2007). On May 10, 2007, T REITs board of directors
approved the transfer and assignment of T REITs assets to a liquidating trust.
We were organized on July 16, 2007 as a liquidating trust pursuant to T REITs plan of
liquidation. On July 20, 2007, in accordance with the Agreement and Declaration of Trust, or the
Liquidating Trust Agreement, by and between T REIT and W. Brand Inlow, or our Trustee, T REIT
transferred its then remaining assets and liabilities to us pursuant to the Liquidating Trust
Agreement. Mr. Inlow previously served as an independent director of T REIT and as the chairman of
T REITs board of directors. Upon the transfer of the assets and liabilities to us, each
shareholder of T REIT as of July 16, 2007, or the Record Date, automatically became the holder of
one unit of beneficial interest, or unit, in T REIT Liquidating Trust for each share of T REITs
common stock then currently held of record by such shareholder. Following the conversion of shares
to units of beneficial interest, all outstanding shares of T REITs common stock were deemed
cancelled. The rights of beneficiaries in their beneficial interests are not represented by any
form of certificate or other instrument. Shareholders of T REIT on the Record Date were not
required to take any action to receive units of beneficial interests. On the date of the
conversion, the economic value of each unit of beneficial interest was equivalent to the economic
value of a share of T REITs common stock. On July 20, 2007, T REIT filed a Form 15 with the United
States Securities and Exchange Commission, or the SEC, to terminate the registration of T REITs
common stock under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and T REIT
announced that it would cease filing reports under the Exchange Act. Our Trustee will issue to
beneficiaries and file with the SEC Annual Reports on Form 10-K and Current Reports on Form 8-K
upon the occurrence of a material event relating to us.
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Our purpose is to wind up the affairs of T REIT by liquidating the remaining assets,
distributing the proceeds from the liquidation of our remaining assets to the holders of units,
each a beneficiary and, collectively, our beneficiaries, and paying all liabilities, costs and
expenses of T REIT and T REIT Liquidating Trust.
Pursuant to the transfer of assets and liabilities from T REIT to us, we acquired a 10.3%
interest in the Congress Center, located in Chicago, Illinois, or the Congress Center property, or
our unconsolidated property, and assumed approximately $9,828,000 of indebtedness, representing the
proportionate share of a secured mortgage loan then outstanding on the Congress Center property. We
hold our interest in the Congress Center property pursuant to a 100.0% membership interest in
TREIT-Congress Center, LLC, which in turn holds a 35.5% membership interest in NNN Congress Center,
LLC. NNN Congress Center , LLC holds a 28.9% interest in the Congress Center property. Although we
acquired additional assets from T REIT, including interests in certain bank accounts, accounts
receivable and assets for estimated receipts in excess of estimated costs during liquidation, our
interest in the Congress Center property is our only material remaining asset. We intend to
complete the plan of liquidation by either selling our unconsolidated property interest or
participating in the sale of the Congress Center property with the other joint owners of the
property. In each case, we refer to such a sale as the sale or disposition of our remaining
asset. Although we can provide no assurances, we currently expect to sell our interest in the
Congress Center property by December 31, 2012 and anticipate completing the plan of liquidation by
March 31, 2013.
Our Advisor
Grubb & Ellis Realty Investors, LLC (formerly known as Triple Net Properties, LLC), or Grubb &
Ellis Realty Investors, or our Advisor, manages our day-to-day business affairs and assets and
carries out the directives of our Trustee pursuant to an advisory agreement, or the Advisory
Agreement. Our Advisor is a Virginia limited liability company that was formed in April 1998 to
advise syndicated limited partnerships, limited liability companies and other entities regarding
the acquisition, management and disposition of real estate assets. Our Advisor advises us as well
as certain other entities, which have an ownership interest in the Congress Center property, with
respect to the management and eventual disposition of the Congress Center property.
Liquidation Update
We are focused on improving rental income and cash flow by aggressively marketing rentable
space and extending and renewing existing leases for the Congress Center property. In January 2010,
we completed the extension of a 91,000 square foot lease with Akzo Nobel, Inc. through 2019. In
addition, in June 2010, we executed a 10-year lease (five years firm) for approximately 44,000
square feet of previously vacant space that will be occupied by the U.S. Department of Justice
beginning in the third quarter of 2011. Further, in October 2010, we executed a lease amendment
with North American Company Life and Health Insurance for an early extension of 42,000 square feet
through February 2022, as well as the surrender of 9,000 square feet.
Our existence was to terminate initially upon the earliest of (i) the distribution of all of
our assets in accordance with the terms of Liquidating Trust Agreement or (ii) the expiration of a
period of three years from the date assets were first transferred to us, or July 20, 2010. However,
we were able to extend our existence beyond the three-year term to July 20, 2013 as a result of our
Trustee determining that an extension is reasonably necessary to fulfill our purpose and our
receipt of additional No-Action Relief from the Staff of the SEC from compliance with certain
registration and reporting requirements of the Exchange Act. Although we can provide no assurances,
we currently expect to sell our interest in the Congress Center property by December 31, 2012 and
anticipate completing the plan of liquidation by March 31, 2013.
Current Investment Objectives and Strategies
In accordance with the plan of liquidation, our primary objective is to obtain the highest
possible sales value for our interest in the Congress Center property, while maintaining current
value and income from this investment. Due to the adoption of the plan of liquidation, we will not
acquire any new properties, and we are focused on liquidating our remaining asset. However, we
cannot assure our beneficiaries that we will achieve these objectives or that the capital investment of our
beneficiaries will not decrease.
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Operating Strategies
In accordance with our plan of liquidation, our primary operating strategy is to enhance the
performance and value of our interest in the Congress Center property through management strategies
designed to address the needs of current and prospective tenants. Our management strategies
include:
| managing costs and seeking to minimize operating expenses through centralized management, leasing, marketing, financing, accounting, renovation and data processing activities; |
| maintaining or improving rental income and cash flow by aggressively marketing rentable space and extending and renewing existing leases; and |
| emphasizing regular maintenance and periodic renovation to meet the needs of tenants and to maximize long-term returns. |
Disposition Strategies
In accordance with our plan of liquidation, we currently consider various factors when
evaluating the potential disposition of our interest in the Congress Center property. These factors
include, without limitation, the following:
| the ability to sell our interest in the Congress Center property at the highest possible price in order to maximize the return to the beneficiaries; and |
| the ability of prospective buyers to finance their acquisition of the Congress Center property. |
Tax Treatment
We issue an annual information statement to our beneficiaries with tax information for their
tax returns. Beneficiaries are urged to consult with their own tax advisors as to their own filing
requirements and the appropriate tax reporting of this information on their returns.
Reports to Beneficiaries
Our Trustee is expected to issue annual reports to our beneficiaries showing our assets and
liabilities at the end of each fiscal year and our receipts and disbursements for the period. The
annual reports also describe changes in our assets during the reporting period and the actions
taken by our Trustee during the period. Our Trustee files with the SEC (i) an Annual Report on Form
10-K and (ii) a Current Report on Form 8-K upon the occurrence of a material event relating to us.
Meetings of Beneficiaries; Removal of Trustee
Generally, there will be no meetings of our beneficiaries. However, our Trustee may at any
time call a meeting of our beneficiaries to be held at such time and at such place as our Trustee
shall determine. In addition, holders of at least 25% of the units held by all beneficiaries may
require our Trustee to call a meeting of our beneficiaries. Our Trustee may be removed at any time,
with cause, by beneficiaries having aggregate units of at least a majority of the total units held
by all beneficiaries. Our Trustee may be removed at any time, without cause, by beneficiaries
having aggregate units of at least two-thirds of the total units held by all beneficiaries.
Distributions
During the years ended December 31, 2010, 2009 and 2008, we did not make any distributions to
our beneficiaries. We estimate that we will make future aggregate cash distributions of
approximately $1,579,000, or $0.34 per unit, based upon estimated net proceeds from the sale of our
remaining asset, the estimated timing of such sale, amounts required to settle known liabilities,
the levels of reserves deemed necessary or appropriate for known and unknown liabilities, and other
considerations. Because the estimate of additional cash distributions is based on various
assumptions and projections, there can be no assurance that the actual amount of distributions will
not differ materially from our estimate.
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As of December 31, 2010, we estimate that the aggregate net proceeds from the liquidation of T
REIT will be approximately $52,179,000 (of which approximately $50,600,000 has already been paid to
T REIT shareholders prior to the transfer of T REITs assets and liabilities to us) and we expect
that our beneficiaries will receive approximately $11.33 per unit in aggregate liquidating
distributions (of which $10.99 per share has already been paid to T REIT shareholders prior to the
transfer of T REITs assets and liabilities to us).
Competition
We compete with a considerable number of other real estate companies to lease office space,
some of which may have greater marketing and financial resources than we do. Principal factors of
competition in our business are the quality of properties (including the design and condition of
improvements), leasing terms (including rent and other charges and allowances for tenant
improvements), attractiveness and convenience of location, the quality and breadth of tenant
services provided, and the reputation as an owner and operator of quality office properties in the
relevant market. Our ability to compete also depends upon, among other factors, trends of the
national and local economies, financial condition and operating results of current and prospective
tenants, availability and cost of capital, including capital raised by incurring debt, construction
and renovation costs, taxes, governmental regulations, legislation and population trends.
In selling the Congress Center property, we are in competition with other sellers of similar
properties to locate suitable purchasers, which may result in us receiving lower net proceeds than
our estimated liquidation proceeds.
As of December 31, 2010, we have a 10.3% unconsolidated ownership interest in the Congress
Center property. Other entities managed by our Advisor also own interests in this property, as well
as other properties located in Chicago, Illinois. Our property may face competition in this region
from such other properties owned, operated or managed by our Advisor or our Advisors affiliates.
Our Advisor or its affiliates have interests that may vary from ours in this geographic market.
Government Regulations
Many laws and governmental regulations are applicable to our property and changes in these
laws and regulations, or their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act. Under the Americans with
Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for
access and use by disabled persons. Although we believe that we are in substantial compliance with
present requirements of the ADA, the Congress Center property has not been audited, nor have
investigations of the Congress Center property been conducted to determine compliance. We may incur
additional costs in connection with the ADA. Additional federal, state and local laws also may
require modifications to the Congress Center property or restrict our ability to renovate the
Congress Center property. We cannot predict the cost of compliance with the ADA or other
legislation. If we incur substantial costs to comply with the ADA or any other legislation, our
financial condition, results of operations, cash flow and ability to satisfy our debt service
obligations and pay distributions could be adversely affected.
Costs of Government Environmental Regulation and Private Litigation. Environmental laws and
regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic
substances which may be on the Congress Center property. These laws could impose liability without
regard to whether we are responsible for the presence or release of the hazardous materials.
Government investigations and remediation actions may have substantial costs and the presence of
hazardous substances on the Congress Center property could result in personal injury or similar
claims by private plaintiffs. Various laws also impose liability on persons who arrange for the
disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of
hazardous substances at the disposal or treatment facility. These laws often impose liability
whether or not the person arranging for the disposal ever owned or operated the disposal facility.
As the owner and operator of the Congress Center property, we may be deemed to have arranged for
the disposal or treatment of hazardous or toxic substances.
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Use of Hazardous Substances by Some of Our Tenants. Some of our tenants may handle hazardous
substances and wastes on the Congress Center property as part of their routine operations.
Environmental laws and regulations
subject these tenants, and potentially us, to liability resulting from such activities. We
require our tenants, in their leases, to comply with these environmental laws and regulations and
to indemnify us for any related liabilities. We are unaware of any material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum products in connection
with the Congress Center property.
Other Federal, State and Local Regulations. The Congress Center property is subject to various
federal, state and local regulatory requirements, such as state and local fire and life safety
requirements. If we fail to comply with these various requirements, we may incur governmental fines
or private damage awards. While we believe that the Congress Center property is currently in
material compliance with all of these regulatory requirements, we do not know whether existing
requirements will change or whether future requirements will require us to make significant
unanticipated expenditures that will adversely affect our ability to make distributions to our
beneficiaries. We believe, based in part on engineering reports which we generally obtain at the
time we acquired our interest in the Congress Center property, that the Congress Center property
complies in all material respects with current regulations. However, if we were required to make
significant expenditures under applicable regulations, our financial condition, results of
operations, cash flow and ability to satisfy our debt service obligations and to pay distributions
could be adversely affected.
Significant Tenants
As of December 31, 2010, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2010, as follows:
Percentage of | Lease | |||||||||||||||
2010 Annual | 2010 Annual | Square Footage | Expiration | |||||||||||||
Tenant | Base Rent (1) | Base Rent | (Approximate) | Date | ||||||||||||
U.S. Department of Homeland Security |
$ | 3,603,000 | 28.3 | % | 76,000 | Apr. 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,708,000 | 21.3 | % | 111,000 | Various (2) | ||||||||||
Akzo Nobel, Inc. |
$ | 2,176,000 | 17.1 | % | 91,000 | Dec. 2019 | ||||||||||
U.S. Department of Treasury |
$ | 1,709,000 | 13.4 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,274,000 | 10.0 | % | 50,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of December 31, 2010. | |
(2) | The lease with respect to 9,000 square feet expires in June 2011, and the lease with respect to 50,000 square feet expires in February 2012. The lease for 42,000 square feet expires in February 2022, and the remaining 10,000 square feet is leased on a month-to-month basis. |
We are also subject to a concentration of regional economic exposure in the Midwest region of
the United States, as our sole remaining asset consists of a 10.3% interest in the Congress Center
property, located in Chicago, Illinois. Regional and local economic downturns in the Midwest and
Illinois could adversely impact our operations.
Employees
We have no employees or executive officers. Substantially all work performed for us is
performed by employees and executive officers of our Advisor and its affiliates.
Financial Information About Industry Segments
We internally evaluate the Congress Center property and our interest therein as one industry
segment and, accordingly, we do not report segment information.
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Item 1A. | Risk Factors. |
Risks Associated With Our Liquidation
If we are unable to find a buyer for our one remaining unconsolidated property at our expected
sales price, our liquidating distributions to our beneficiaries may be delayed and/or reduced.
As of March 11, 2011, the Congress Center property is not subject to a binding sales agreement
providing for the sale of our entire interest in the property. In calculating the estimated range
of liquidating distributions to our beneficiaries, we assumed that we would be able to find a buyer
for the Congress Center property at an amount based on our best estimate of market value for the
property. However, we may have overestimated the sales price that we will ultimately be able to
obtain for this asset. For example, in order to find a buyer in a timely manner, we may be required
to lower our asking price below the low end of our current estimate of the propertys fair value.
If we are not able to find a buyer for this asset in a timely manner or if we have overestimated
the sales price we will receive, our liquidating distributions to our beneficiaries would be
delayed and/or reduced. Furthermore, the projected amount of liquidating distributions to our
beneficiaries is based upon the appraisal of our property, but real estate market values are
constantly changing and fluctuate with changes in interest rates, supply and demand dynamics,
occupancy percentages, lease rates, the availability of suitable buyers, the perceived quality and
dependability of cash flows from tenancies and a number of other factors, both local and national.
The net liquidation proceeds from the Congress Center property may also be affected by the terms of
prepayment or assumption costs associated with debt encumbering the property. In addition,
co-ownership matters, transactional fees and expenses, environmental contamination at our property
or unknown liabilities, if any, may adversely impact the net liquidation proceeds from the asset.
The downturn in the credit markets may increase the cost of borrowing, and may make it difficult
for prospective buyers of the Congress Center property to obtain financing, which would have a
material adverse effect on our liquidation.
Ongoing events in the financial markets have had an adverse impact on the credit markets and,
as a result, credit has become more expensive and difficult to obtain. Most lenders are imposing
more stringent restrictions on the terms of credit and there may be a general reduction in the
amount of credit available in the markets in which we conduct business. The negative impact on the
tightening of the credit markets may have a material adverse effect on prospective buyers of the
Congress Center property resulting from, but not limited to, an inability to assume the current
loan on the Congress Center property which matures on October 1, 2014 and/or otherwise finance the
acquisition of the Congress Center property on favorable terms, if at all, increased financing
costs, stricter loan-to-value ratios requiring significantly higher cash down payments upon
purchase or financing with increasingly restrictive covenants.
The negative impact of the adverse changes in the credit markets on the real estate sector
generally or on prospective buyers inability to obtain financing on favorable terms, if at all,
may have a material adverse effect on our liquidation.
Our ability to dispose of our interest in the Congress Center property and our ability to pay
distributions to our beneficiaries are subject to general economic and regulatory factors we cannot
control or predict.
Our liquidation is subject to the risks of a national economic slowdown or disruption, other
changes in national, regional or local economic conditions or changes in tax, real estate,
environmental or zoning laws. The following factors may affect income from the Congress Center
property, which would have a materially adverse effect on our ability to dispose of our interest in
the Congress Center property, and subsequently our ability to pay distributions to our
beneficiaries:
| poor economic times may result in defaults by tenants at the Congress Center property. We may also be required to provide rent concessions or reduced rental rates to maintain or increase occupancy levels; |
| job transfers and layoffs may cause vacancies to increase and a lack of future population and job growth may make it difficult to maintain or increase occupancy levels; |
| increases in supply of competing properties or decreases in demand for the Congress Center property may impact our ability to maintain or increase occupancy levels; |
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| changes in interest rates and availability of debt financing could render the sale of the Congress Center property difficult or unattractive; |
| periods of high interest rates may reduce cash flow from leveraged property; |
| increased insurance premiums, real estate taxes or energy or other expenses may reduce funds available for distribution or, to the extent such increases are passed through to tenants, may lead to tenant defaults. Also, any such increased expenses may make it difficult to increase rents to tenants on turnover, which may limit our ability to increase our returns; and |
| inability to increase or maintain the current occupancy rate and/or further deterioration of property values may prevent prospective buyers from obtaining financing for the acquisition of the Congress Center property due to stricter loan to value ratios, which would increase the amount of cash needed to purchase the property. |
We may be unable to sell our interest in a limited liability company at our expected value or reach
an agreement with our co-owners of the Congress Center property on sales terms of this property,
which would delay and possibly reduce liquidating distributions to our beneficiaries.
Our investment in the Congress Center property is held as a member of a limited liability
company, or LLC, that holds an undivided tenant-in-common, or TIC, interest in the property. Under
the liquidation basis of accounting, we account for this interest at its estimated fair value. As
of December 31, 2010, our proportionate share of the estimated fair value of this property was
$469,000. Because of the nature of joint ownership, we will need to agree with our co-owners on the
terms of the property sale before the sale can be affected. There can be no assurance that we will
agree with our co-owners on satisfactory sales terms for this property. If the parties are unable
to agree, the matter could ultimately be presented to a court of law, and a judicial partition
could be sought. A failure to reach agreement with these parties regarding the sales terms of this
property may significantly delay the sale of the property, which would delay and possibly reduce
liquidating distributions to our beneficiaries. We may be unable to receive our expected value for
this property because we hold a minority interest in the LLC and, thus, cannot sell our property
interest held in the LLC or force the sale of the Congress Center property.
Our co-ownership arrangements with affiliated entities may not reflect solely our beneficiaries
best interest and may subject our investment in Congress Center to increased risks.
We acquired our interest in the Congress Center property through a co-ownership arrangement
with affiliates of our Advisor. Each co-owner is required to approve all sales, refinancings,
leases and lease amendments. This acquisition was financed, in part, by loans under which we may
have been or are jointly and severally liable for the entire loan amount along with the other
co-owner(s). The terms of this co-ownership arrangement may be more favorable to the co-owner(s)
than to our beneficiaries. In addition, investing in properties through co-ownership arrangements
subjects those investments to risks not present in a wholly-owned property, including, among
others, the following:
| the risk that the co-owner(s) in the investment might become bankrupt; |
| the risk that the co-owner(s) may at any time have economic or business interests or goals which are inconsistent with our business interests or goals; |
| the risk that the co-owner(s) may not be able to make required payments on loans under which we are jointly and severally liable; |
| the risk that all the co-owners may not approve refinancings, leases and lease amendments requiring unanimous consent of co-owners that would have adverse consequences for our beneficiaries; or |
| the risk that the co-owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as disapproving the sale of the property. |
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Actions by co-owner(s) requiring unanimous consent of co-owners might have the result of
blocking actions that are in our best interest subjecting the applicable property to liabilities in
excess of those otherwise contemplated and may have the effect of reducing our cash available for
distribution to our beneficiaries. It also may be difficult for us to sell our interest in any
co-ownership arrangement at the time we deem best for our beneficiaries.
If any of the parties to a future sale agreement default thereunder, or if a sale does not
otherwise close, our liquidating distributions to our beneficiaries may be delayed and/or reduced.
The consummation of any future potential sales transaction is subject to the satisfaction of
applicable closing conditions. If the transaction contemplated by the future sale agreement does
not close because of a buyer default, failure of a closing condition or for any other reason, we
will need to locate a new buyer for the asset, which we may be unable to do promptly or at a price
or on terms that are as favorable as the failed transaction. We will also incur additional costs
involved in locating a new buyer and negotiating a new sale agreement for the applicable asset.
These additional costs are not included in our projections. In the event that we incur these
additional costs, our liquidating distributions to our beneficiaries may be delayed and/or reduced.
We may delay and/or reduce our estimated liquidating distributions to our beneficiaries.
As of March 11, 2011, we estimate that our net proceeds from liquidation will be approximately
$52,179,000 (of which $50,600,000 was paid to T REIT shareholders prior to the transfer of T REITs
assets and liabilities to us) and we expect that our beneficiaries will receive approximately
$11.33 per unit in liquidating distributions (of which $10.99 per share was paid to T REIT
shareholders prior to the transfer of T REITs assets and liabilities to us), which we anticipate
paying by March 31, 2013. However, our expectations about the amount of liquidating distributions
that we will make and when we will make them are based on many estimates and assumptions, one or
more of which may prove to be incorrect. As a result, the actual amount of liquidating
distributions we pay to our beneficiaries may be more or less than we currently estimate. In
addition, the liquidating distributions may be paid later than we predict.
We have terminated our regular monthly distributions and future liquidating distributions will be
determined at the sole discretion of our Trustee.
In accordance with the plan of liquidation, regular monthly distributions to T REIT
shareholders were terminated effective August 1, 2005. Future liquidating distributions to our
beneficiaries will be made from net proceeds received by us from the sale of our one remaining
unconsolidated property, and will be determined at the sole discretion of our Trustee. Liquidating
distribution amounts to our beneficiaries will depend on net proceeds received from the sale of our
one remaining unconsolidated property, our anticipated cash needs to satisfy liquidation and other
expenses, financial condition and capital requirements and other factors our Trustee may deem
relevant. Our ability to pay distributions to our beneficiaries may be adversely affected by the
risks described herein.
The plan of liquidation allows for the sale of our interest in the Congress Center property to
affiliates, but only if our Trustee approves the sale.
The plan of liquidation provides that we may sell our interest in the Congress Center property
to one of our affiliates or an affiliate of our Advisor, but only if the transaction is approved by
our Trustee. If we enter such a transaction, we expect that our Trustee will require that an
independent third party opine to us as to the fairness of the consideration to be received by us in
such transaction, from a financial point of view, or conduct an appraisal of the applicable
property as a condition to their approval. In no event will our Trustee approve a transaction if:
(i) an independent third party concludes after a review of the information then available,
including any pending offers, letters of intent, contracts for sale, appraisals or other data, that
the consideration to be received by us is not fair to us from a financial point of view; (ii) an
independent third party, concludes that the consideration to be received is less than the appraised
value of the applicable property; or (iii) we have received a higher offer for the applicable
property from a credible party with whom we reasonably believe is ready, able and willing to close
the transaction on the contract terms. In the event that our Trustee does not approve a sale to our
affiliate or an affiliate of our Advisor, we may not be able to dispose of our interest in the
Congress Center property, which would affect our ability to pay liquidating distributions to our
beneficiaries.
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Decreases in property values may reduce the amount that we receive upon the sale of our interest in
the Congress Center property.
The underlying value of the Congress Center property may be reduced by a number of factors
that are beyond our control, including, without limitation, the following:
| adverse changes in economic conditions; |
| the financial performance of our tenants, and the ability of our tenants to satisfy their obligations under their leases; |
| terminations of leases by our tenants; |
| competition; and |
| changes in real estate tax rates and other operating expenses. |
Any reduction in the value of the Congress Center property would make it more difficult for us
to sell the asset for the amount that we have estimated. Reductions in the amount that we receive
when we sell our interest in the Congress Center property would reduce the payment of liquidating
distributions to our beneficiaries.
If we are unable to maintain the occupancy rates of currently leased space and lease currently
available space, if tenants default under their leases or other obligations to us during the
liquidation process or if our cash flow during the liquidation is otherwise less than we expect,
our liquidating distributions to our beneficiaries may be delayed and/or reduced.
In calculating our estimated liquidating distributions to our beneficiaries, we assumed that
we would maintain the occupancy rates of currently-leased space, that we would be able to rent
certain currently available space at market rents and that we would not experience any significant
tenant defaults during the liquidation process that were not subsequently cured. Negative trends in
one or more of these factors during the liquidation process may adversely affect the resale value
of the Congress Center property, which would hinder our ability to sell the property and reduce our
liquidating distributions to our beneficiaries. To the extent that we receive less rental income
than we expect during the liquidation process, our liquidating distributions to our beneficiaries
will be reduced. We may also decide in the event of a tenant default to restructure the lease,
which could require us to substantially reduce the rent payable to us under the lease, or make
other modifications that are unfavorable to us, which could decrease or delay the payment of
liquidating distributions to our beneficiaries.
If our liquidation costs or unpaid liabilities are greater than we expect, our liquidating
distributions to our beneficiaries may be delayed and/or reduced.
Before making the final liquidating distribution to our beneficiaries, we will need to pay or
arrange for the payment of all of our transaction costs in the liquidation, and all other costs and
all valid claims of our creditors. Our Trustee may also decide to acquire one or more insurance
policies covering unknown or contingent claims against us, for which we would pay a premium which
has not yet been determined. Our Trustee may also decide to establish a reserve fund to pay these
contingent claims. The total amount of transaction costs in the liquidation is not yet final, and,
therefore, we have used estimates of these costs in calculating the amounts of our projected
liquidating distributions to our beneficiaries. To the extent that we have underestimated these
costs in calculating our projections, our actual net liquidation value may be lower than our
estimated range. In addition, if the claims of our creditors are greater than we have anticipated
or we decide to acquire one or more insurance policies covering unknown or contingent claims
against us, our liquidating distributions to our beneficiaries may be delayed and/or reduced.
Further, if a reserve fund is established, payment of liquidating distributions to our
beneficiaries may be delayed and/or reduced.
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If we are not able to sell the Congress Center property in a timely manner, we may experience
severe liquidity problems, may not be able to meet our obligations to our creditors and ultimately
may become subject to bankruptcy proceedings.
In the event we are not able to sell the Congress Center property within a reasonable period
of time and for a reasonable amount, or if our expenses exceed our estimates, we may experience
severe liquidity problems and not be able to meet our financial obligations to our creditors in a
timely manner. If we cannot meet our obligations to our creditors in a timely manner, we may
ultimately become subject to bankruptcy proceedings.
There can be no assurance that the plan of liquidation will result in greater returns to our
beneficiaries on their investment within a reasonable period of time, than our beneficiaries would
receive through other alternatives reasonably available to us.
While T REITs board of directors and special committee each believed that a liquidation would
be more likely to provide our beneficiaries with a greater return on their investment within a
reasonable period of time than our beneficiaries would receive through other alternatives
reasonably available to us at the time, such belief relied upon certain assumptions and judgments
concerning future events which may be unreliable or incorrect.
We may be unable to secure funds for future capital improvements, which could adversely impact our
ability to attract or retain tenants, and subsequently pay liquidating distributions to our
beneficiaries.
In order to attract and retain tenants, the Congress Center property may be required to expend
funds for capital improvements. In addition, the Congress Center property may require substantial
funds for renovations in order to be sold, upgraded or repositioned in the market. If the Congress
Center property has insufficient capital reserves, it will have to obtain financing from other
sources. The Congress Center property has established capital reserves in an amount it, in its
discretion, believes is necessary. The lender also may require escrow of capital reserves in excess
of any established reserves. If these reserves or any reserves otherwise established are designated
for other uses or are insufficient to meet the Congress Center propertys cash needs, the Congress
Center property may have to obtain financing from either affiliated or unaffiliated sources to fund
cash requirements. We cannot assure our beneficiaries that sufficient financing will be available
to the Congress Center property or, if available, will be available on economically feasible terms
or on terms that would be considered acceptable. Moreover, certain reserves required by the lender
may be designated for specific uses and may not be available for capital purposes such as future
capital improvements. Additional borrowing for capital improvements at the Congress Center property
will increase interest expense, which could have a negative impact on our proportionate share of
the proceeds from the sale of the Congress Center property, and therefore, our ability to pay
liquidating distributions to our beneficiaries may be adversely affected.
The Congress Center property is subject to property taxes that may increase in the future, which
could adversely affect our ability to sell our interest in the Congress Center property and to
subsequently pay liquidating distributions to our beneficiaries.
The Congress Center property is subject to property taxes that may increase as tax rates
change and as the Congress Center property is reassessed by taxing authorities. If property taxes
increase, our ability to sell our interest in the Congress Center property and subsequently pay
liquidating distributions to our beneficiaries could be adversely affected.
If our Advisor is unable to retain key executives and employees sufficient to complete the plan of
liquidation in a reasonably expeditious manner, our liquidating distributions might be delayed
and/or reduced.
Our ability to locate qualified buyers for our remaining asset and to negotiate and complete
any such sale, depends to a large extent upon the experience and abilities of our Advisors
officers and employees, their familiarity with our remaining asset and any counter-parties to any
future sale agreements and the market for our unconsolidated property, as well as their ability to
efficiently manage our Advisor and the professionals in the sales process. We face the risk that
these individuals might resign and seek other employment rather than remain with our Advisor
throughout the process of liquidation, which could adversely affect our ability to complete the
plan of liquidation in a reasonably expeditious manner and our prospects of selling our remaining
asset at an expected price. If our Advisor: (i) is unable to retain appropriate qualified officers
and employees to complete our plan of liquidation in a reasonably expeditious manner; (ii) suffers
or is distracted by adverse financial or operational problems in connection with its operations
unrelated to us; and/or (iii) is unable to allocate sufficient resources to
oversee and perform our operations for any reason, then our liquidating distributions to our
beneficiaries may be reduced and/or delayed.
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Our beneficiaries may not receive any profits resulting from the sale of our interest in the
Congress Center property, or receive such profits in a timely manner, because we may provide
financing to the purchaser of such property.
In accordance with our plan of liquidation, our beneficiaries may experience a delay before
receiving their share of the net proceeds of such liquidation. In liquidation, we may sell our
interest in the Congress Center property either subject to or upon the assumption of any then
outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a
purchase money obligation secured by a mortgage on the asset at the time of sale as partial payment
thereof. We do not have any limitations or restrictions on our right to take such purchase money
obligations. To the extent we receive promissory notes or other property in lieu of cash from the
sale, such proceeds, other than any interest payable on those proceeds, will not be included in net
sale proceeds until and to the extent the promissory notes or other property are actually paid,
sold, refinanced or otherwise disposed of. In many cases, we may receive initial down payments in
an amount less than the selling price and subsequent payments may be spread over a number of years.
In such event, our beneficiaries may experience a delay in the distribution of the net proceeds of
a sale until such time as the installment payments are paid and not in default.
Our Trustee may amend the plan of liquidation without further beneficiary approval.
Our Trustee may amend the plan of liquidation without further approval from our beneficiaries,
to the extent permitted by Virginia law. Thus, to the extent that Virginia law permits us to so do,
we may decide to conduct the liquidation differently than previously disclosed to beneficiaries.
Our Trustee has the authority to sell our interest in the Congress Center property under terms less
favorable than those assumed for the purpose of estimating our net liquidation value range.
Our Trustee has the authority to sell our interest in the Congress Center property on such
terms and to such parties as our Trustee determines, in his sole discretion. Our beneficiaries will
have no subsequent opportunity to vote on such matters and will, therefore, have no right to
approve or disapprove the terms of such sale. Accordingly, our beneficiaries must rely solely on
our Trustees judgment with respect to the sale process, and our Trustees judgment may not always
be the best judgment when evaluating in hindsight.
The plan of liquidation may lead to litigation which could result in substantial costs and distract
our Trustee.
Historically, extraordinary corporate actions by a company, such as the plan of liquidation,
may sometimes lead to securities class action lawsuits being filed against that company. We may
become involved in this type of litigation as a result of the plan of liquidation. As of March 11,
2011, no such lawsuits relative to the plan of liquidation have been filed. However, if such a
lawsuit is filed against us, the litigation is likely to be expensive and, even if we ultimately
prevail, the process will divert our Trustees attention from implementing the plan of liquidation
and otherwise operating our business. If we do not prevail in any such lawsuit which may be filed
against us in the future, we may be liable for damages. In such event, we cannot predict the amount
of any such damages; however, they may be significant and may reduce our cash available for
liquidating distributions to our beneficiaries.
Our Advisor, its employees and its affiliates have interests that differ from our beneficiaries as
a result of the liquidation.
Our Advisor, its employees and its affiliates have interests in the liquidation that are
different from our beneficiaries. Our Trustee is aware of these actual and potential conflicts of
interest. Some of the conflicts of interest presented by the liquidation are summarized below.
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Our Advisor or its affiliates receive compensation under an Advisory Agreement, including fees
for disposing of our remaining asset. Our advisor has engaged Triple Net Properties Realty, Inc.,
or Realty, an affiliate of our Advisor, to provide various services to us in connection with our
remaining asset, including disposing of our
remaining asset. In accordance with the plan of liquidation, our Advisor or Realty will be
paid to liquidate our remaining asset pursuant to the Advisory Agreement. If we sell the
unconsolidated property, such fee will be the lesser of: (i) 3.0% of the contracted sales price of
the Congress Center property; or (ii) 50.0% of the competitive, market-based real estate
commission. Additionally, the property disposition fee paid to our Advisor and Realty shall not
exceed, when added to the sums we pay to any unaffiliated parties in connection with the
disposition of the property: (i) up to 6.0% of the contracted sales price, or (ii) the competitive,
market based real estate commission. Based on our estimated sales price as of December 31, 2010, we
estimate that pursuant to the Advisory Agreement we will pay a fee to our Advisor or Realty of
approximately $152,000 for disposing of our unconsolidated property during liquidation. Our Advisor
or Realty also have agreements with certain affiliated co-owners of our property, pursuant to which
our Advisor will also receive fees for the disposition of the affiliated co-owners interests in
the Congress Center property. Based on our estimated sales price as of December 31, 2010, we
estimate that the total fees that will be received by our advisor or Realty from the affiliated
co-owners will be approximately $1,332,000, which includes the fees to be received by our Advisor
or Realty under the Advisory Agreement. Moreover, if we sell our unconsolidated property to one of
our affiliates or an affiliate of our Advisor, our Advisor or Realty may receive additional fees
from the purchaser of the property.
Our Trustee owns 552 units, and therefore, in accordance with the plan of liquidation, based
on the net assets in liquidation as of December 31, 2010, plus liquidating distributions through
December 31, 2010, will be entitled to receive approximately $6,000 in distributions. These
estimates per unit include projections of costs and expenses expected to be incurred during the
period required to complete the plan of liquidation. These projections could change favorably or
unfavorably based on the timing of any sale, the performance of the asset and as a result of
changes in the underlying assumptions of the projected cash flows.
Pursuant to the plan of liquidation, our Trustee has discretion to pay up to an aggregate of
$300,000 in retention and incentive based bonuses to some of the employees of our Advisor from time
to time. Prior to T REITs transfer of assets and liabilities to us on July 20, 2007, $245,000 in
retention and incentive bonuses were paid by T REIT. We have not paid any retention or incentive
bonuses since July 20, 2007.
Our beneficiaries could be liable to the extent of liquidating distributions received from us if
contingent reserves are insufficient to satisfy our liabilities.
If we fail to create an adequate contingency reserve for payment of our expenses and
liabilities or if the contingency reserve and the assets held by us are less than the amount
ultimately found payable in respect of expenses and liabilities, each of our beneficiaries could be
held liable for the payment to creditors of such beneficiarys pro rata portion of the excess,
limited to the amounts previously received by the beneficiary in distributions from us.
If a court holds at any time that we have failed to make adequate provision for our expenses
and liabilities or if the amount ultimately required to be paid in respect of such liabilities
exceeds the amount available from the contingency reserve and the assets of the liquidating trust,
our creditors could seek an injunction to prevent us from making distributions under our plan of
liquidation on the grounds that the amounts to be distributed are needed to provide for the payment
of our expenses and liabilities. Any such action could delay or substantially diminish the cash
distributions to be made to our beneficiaries under the plan of liquidation.
We may have underestimated the amount of prepayment fees or defeasance charges on our mortgages,
which could result in us being unable to find a buyer willing or able to assume the mortgages and
which could lead to a delay or reduction in liquidating distributions to our beneficiaries.
In calculating the estimated fair value of the Congress Center property, and therefore, our
estimated per unit distribution amount, we have assumed that any purchaser of the Congress Center
property will assume the mortgage on the underlying property, which contains penalties in the event
of the prepayment of that mortgage. The sale of our remaining asset pursuant to our plan of
liquidation will trigger substantial penalties unless the purchaser assumes (and/or is allowed to
assume) the corresponding mortgage. We may be unsuccessful in negotiating the assumption of any
underlying mortgage in connection with the sale of our remaining asset, which could negatively
affect the amount of cash available for distribution to our beneficiaries under the plan of
liquidation.
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We may incur increasingly significant costs in connection with Sarbanes-Oxley compliance and we may
become subject to liability for any failure to comply.
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies have increased the costs of corporate governance, reporting and disclosure
practices which are required of us. We expect that our efforts to continue to comply with the
Sarbanes-Oxley Act and applicable laws and regulations will continue to involve significant, and
potentially increasing, costs. In addition, these laws, rules and regulations create new legal
bases for administrative enforcement, civil and criminal proceedings against us in case of
non-compliance, thereby increasing our risks of liability and potential sanctions.
While we are not aware of any material non-compliance with the Sarbanes-Oxley Act and related
laws and regulations, we were formed prior to the enactment of these corporate governance standards
and as a result we did not have all necessary procedures and policies in place at the time of their
enactment. Any failure to comply with the Sarbanes-Oxley Act could result in fees, fines, penalties
or administrative remedies, which could reduce and/or delay the amount of liquidating distributions
to our beneficiaries under the plan of liquidation.
We do not have an executed advisory agreement, and we could lose the services of our Advisor, which
may increase operating expenses, and delay and/or reduce our liquidating distributions.
The Advisory Agreement between our Advisor and T REIT expired on February 22, 2005 and was not
renewed. However, our Advisor continued to advise T REIT, and, following the transfer of assets and
liabilities to us, continues to advise us, on a month-to-month basis under the terms of the expired
Advisory Agreement. Under the terms of the expired Advisory Agreement, our Advisor currently
manages our day-to-day business affairs and carries out the directives of our Trustee. If we are
unable to continue to retain the services of our Advisor on terms as favorable as our current
Advisory Agreement, or at all, our operating expenses may increase. We would also incur additional
transition costs if we were either to become self-managed or enter an advisory relationship with a
new advisor. Additionally, if we become self-managed or engage a new advisor, we may be unable to
complete the plan of liquidation in as expeditious a manner as might otherwise be the case or on
terms as favorable to us as our Advisor may be able to do so, because of the loss of our Advisors
experience and familiarity with our remaining asset and business.
Other Risks of Our Business
We depend upon our tenants to pay rent, and their inability to pay rent may substantially reduce
our revenues and cash available for distribution to our beneficiaries.
Our investment in the Congress Center property is subject to varying degrees of risk that
generally arise from the ownership of real estate. The value of our property interest and the
ability to make distributions to our beneficiaries depend upon the ability of the tenants at our
property to generate enough income in excess of applicable operating expenses to make their lease
payments to us. Changes beyond our control may adversely affect the tenants ability to make their
lease payments to us and, in such event, would substantially reduce both our income from operations
and our ability to make distributions to our beneficiaries. These changes include, among others,
the following:
| downturns in national, regional or local economic conditions where our property is located, which generally will negatively impact the demand for office space and rental rates; |
| changes in local market conditions such as an oversupply of office properties, including space available by sublease, or a reduction in demand for the lease of office properties, making it more difficult for us to lease space at attractive rental rates or at all; |
| competition from other available office properties owned by others, which could cause us to lose current or prospective tenants or cause us to reduce rental rates to competitive levels; |
| our ability to pay for adequate maintenance, insurance, utility, security and other operating costs, including real estate taxes and debt service payments, that are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from a property; and |
| changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. |
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Due to these changes, among others, tenants and lease guarantors, if any, may be unable to
make their lease payments. A default by a tenant or the failure of a tenants guarantor to fulfill
its obligations to us, or an early termination of a lease as a result of a tenant default or
otherwise could, depending upon the size of the leased premises and our Advisors ability to
successfully find a substitute tenant, have an adverse effect on our revenues and cash available
for distribution to our beneficiaries.
Our use of borrowings on the Congress Center property could result in its foreclosure and
unexpected debt service expenses upon refinancing, both of which could have an adverse impact on
our operations and cash flow. Additionally, restrictive covenants in our loan documents may
restrict our operating activities.
We rely on borrowings to partially fund capital expenditures and other items. As of December
30, 2010, there was $92,054,000 of debt outstanding related to the Congress Center property, our
proportionate share of which was $9,414,000. Accordingly, we are subject to the risks normally
associated with debt financing, including, without limitation, the risk that our cash flow may not
be sufficient to cover required debt service payments. There is also a risk that, if necessary,
existing indebtedness will not be able to be refinanced or that the terms of such refinancing will
not be as favorable as the terms of the existing indebtedness.
In addition, if we cannot meet our required mortgage payment obligations, the Congress Center
property could be foreclosed upon by, or otherwise transferred to, the lender, with a consequent
loss of income and asset value to us. For tax purposes, a foreclosure on our property would be
treated as a sale of the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our
tax basis in the property, we would recognize taxable income on foreclosure, but we may not receive
any cash proceeds.
The mortgage on the Congress Center property contains customary restrictive covenants,
including provisions that limit the borrowing subsidiarys ability, without the prior consent of
the lender, to incur additional indebtedness, further mortgage or transfer the applicable property,
discontinue insurance coverage, change the conduct of its business or make loans or advances to,
enter into any transaction of merger or consolidation with any third party. In addition, any future
lines of credit or loans may contain financial covenants, further restrictive covenants and other
obligations.
If we materially breach such covenants or obligations under the Congress Center loan
agreement, the lender may have the right to seize our income from the property or legally declare a
default on the loan obligation, require us to repay the debt immediately and foreclose on the
property, among other remedies. If we were to breach such covenants or obligations, we may then
have to sell the Congress Center property either at a loss or at a time that prevents us from
achieving a higher price. Any failure to pay our indebtedness when due or failure to cure events of
default could result in higher interest rates during the period of the loan default and could
ultimately result in the loss of the property through foreclosure. Additionally, if the lender were
to seize our income from the property, we would no longer have any discretion over the use of the
income, which may adversely impact our ability to make liquidating distributions to our
beneficiaries.
Due to the risks involved in the ownership of real estate, there is no guarantee of any return on
our beneficiaries investments and our beneficiaries may lose some or all of their investments.
By owning units of beneficial interest, our beneficiaries are subject to the risks associated
with owning real estate. Ownership of real estate is subject to significant risks. The performance
of our beneficiaries investment in us is subject to risks related to the ownership and operation
of real estate, including, without limitation, the following:
| changes in the general economic climate; |
| changes in local conditions such as an oversupply of space or reduction in demand for real estate; |
| changes in interest rates and the availability of financing; and | ||
| changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes. |
If our unconsolidated property decreases in value, the value of our beneficiaries investment
will likewise decrease and our beneficiaries could lose some or all of their investment.
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If the Congress Center property is unable to generate sufficient funds to pay its expenses,
liabilities or distributions, our liquidating distributions to our beneficiaries may be reduced
and/or delayed.
If the Congress Center property is unable to generate sufficient funds to pay its expenses,
liabilities or distributions, the Congress Center property may need to borrow funds from affiliates
or third parties to pay such expenses, liabilities or distributions and incur additional interest
expense. The payment of interest expenses may reduce the amount available for distributions to us
which may then reduce or delay the timing of our liquidating distributions to our beneficiaries
since the Congress Center property is our one remaining unconsolidated property and source of
revenue.
The Congress Center property faces significant competition, which could cause a delay or reduction
in liquidating distributions to our beneficiaries.
We face significant competition from other owners, operators and developers of office
properties. The Congress Center property faces competition from similar properties owned by others
in the same market and also from new construction of similar properties. Such competition may
affect our ability to attract and retain tenants and may reduce the rents we are able to charge.
These competing properties may have vacancy rates higher than the Congress Center property, which
may cause their owners to rent space at lower rental rates than those charged by us or to provide
greater tenant improvement allowances or other leasing concessions than we provide to our tenants.
As a result, we may be required to provide rent concessions, incur charges for tenant improvements
and other inducements, or we may not be able to timely lease the space, all of which would
adversely impact our liquidity and net assets in liquidation, which could reduce distributions to
our beneficiaries.
At the time we sell our interest in the Congress Center property, we will be in competition
with sellers of similar properties to locate suitable purchasers, which may result in us receiving
lower proceeds from the disposal or result in us not being able to dispose of the property due to
the lack of an acceptable return.
Due to our ownership of only a single property interest in the Congress Center property, we are
dependent upon those tenants that generate significant rental income at Congress Center, which may
have a negative impact on our financial condition if these tenants are unable to meet their rental
obligations to us, or if we are unable to retain our current tenants.
As of December 31, 2010, rent paid by the tenants at the Congress Center property represented
100% of our annualized revenues. The revenue generated by the Congress Center property is
substantially dependent on our ability to retain our current tenants and on the financial condition
of the significant tenants at the property. One of our current tenants, with leases representing
approximately 10% of the gross leasable area, or GLA, of the Congress Center property, has leases
that will expire within the next 12 months. Our inability to retain our significant tenants or any
event of bankruptcy, insolvency or a general downturn in the business of any of our significant
tenants may result in the failure or delay of such tenants rental payments to us, which may have
an adverse impact on our financial performance and our ability to pay distributions to our
beneficiaries.
Lack of diversification and illiquidity of real estate may make it difficult for us to sell or
recover our investment in the Congress Center property.
Our business is subject to risks associated with an investment solely in real estate. Real
estate investments are relatively illiquid. Pursuant to our plan of liquidation, we expect to sell
the Congress Center property by December 31, 2012. However, due to the illiquid nature of real
estate, we may not recoup the estimated fair value we have recorded as of December 31, 2010 by
December 31, 2012. We cannot provide assurance that we will be able to dispose of the Congress
Center property by December 31, 2012, which could adversely impact the timing and amount of
distributions.
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Lack of geographic diversity may expose us to regional economic downturns that could adversely
impact our operations or our ability to recover our investment in the Congress Center property.
Our portfolio lacks geographic diversity due to the fact that, as of December 31, 2010, we
only have one unconsolidated property located in Chicago, Illinois. The geographic concentration of
the Congress Center property exposes us to regional and local economic downturns. A regional
recession impacting this state could adversely affect our ability to generate or increase operating
revenues, attract new tenants or dispose of the Congress Center property. In addition, our property
may face competition in this geographic region from other properties owned, operated or managed by
our Advisor or its affiliates or third parties. Our Advisor or its affiliates have interests that
may vary from ours in such geographic markets.
Losses for which we either could not or did not obtain insurance will adversely affect our earnings
and we may be unable to comply with insurance requirements contained in mortgage or other
agreements due to high insurance costs.
We endeavor to maintain comprehensive insurance on the property we own, including liability
and fire and extended coverage, in amounts sufficient to permit the replacement of the one
remaining unconsolidated property in the event of a total loss, subject to applicable deductibles.
However, we could still suffer a loss due to the cost to repair any damage to the one remaining
unconsolidated property that is not insured or is underinsured. There are types of losses,
generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, floods or
acts of God that are either uninsurable or not economically insurable. If such a catastrophic event
were to occur, or cause the destruction of our one remaining unconsolidated property, we could lose
both our invested capital and anticipated profits from such one remaining unconsolidated property.
In addition, we could default under debt or other agreements if the cost and/or availability
of certain types of insurance make it impractical or impossible to comply with covenants relating
to the insurance we are required to maintain under such agreements, including insurance carrier
rating requirements. In such instances, we may be required to self-insure against certain losses or
seek other forms of financial assurance. Additionally, inflation, changes in building codes and
ordinances, environmental considerations and other factors also might make it infeasible to use
insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances,
the insurance proceeds received by us might not be adequate to restore our economic position with
respect to the affected property.
There is no public market for our units of beneficial interest and the units of beneficial interest
may not be transferred except by operation of law or upon the death of a beneficiary.
Our beneficiaries will not be able to transfer their units other than in limited
circumstances. The units of beneficial interest are not and will not be listed on any exchange,
quoted by a securities broker or dealer, nor admitted for trading in any market, including the
over-the-counter market. The units of beneficial interest are not transferable except by will,
intestate succession or operation of law or upon the death of a beneficiary.
The Congress Center property was purchased at a time when the commercial real estate market was
experiencing substantial influxes of capital investment and competition for properties; therefore,
the Congress Center property may not maintain its current value or may further decrease in value.
The commercial real estate market experienced a substantial influx of capital from investors
prior to the recent market turmoil. This substantial flow of capital, combined with significant
competition for real estate, resulted in inflated purchase prices for such assets. The Congress
Center property was purchased in such an environment, therefore we are subject to the risk that if
the real estate market ceases to attract the same level of capital investment in the future as it
has attracted, or if the number of companies seeking to acquire such assets decreases, our returns
will be lower. The current estimated value of the Congress Center property is less than our
purchase price and we can give no assurance that the property will maintain its current value, or
that the value will not continue to decrease even further.
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Our success is dependent on the performance of our Advisor, its executive officers and employees.
Our ability to achieve our investment objectives and to conduct our operations is dependent
upon the performance of our Advisor, its executive officers and its employees in the determination
of any financing arrangements, the management and disposition of our assets and the operation of
our day-to-day activities. We rely on the management ability of our Advisor as well as the
management of any entities or ventures in which we co-invest. If our Advisor suffers or is
distracted by adverse financial or operational problems in connection with its operations unrelated
to us, our Advisors ability to allocate time and/or resources to our operations may be adversely
affected. If our Advisor is unable to allocate sufficient resources to oversee and perform our
operations for any reason, our results of operations would be adversely impacted.
Our Advisor has become aware of bankruptcy filings effected by two unaffiliated, individual
investor entities, who are minority owners in two TIC programs that were originally sponsored by
our Advisor. Our Advisor provided non-recourse/carve-out guarantees for each of these properties,
which only impose liability on our Advisor if certain acts prohibited by the loan documents take
place. Liability under these non-recourse/carve-out guarantees may be triggered by the voluntary
bankruptcy filings made by the two unaffiliated, individual investor entities. As a consequence of
these bankruptcy filings, our Advisor may become liable under these guarantees and related
indemnification obligations for the benefit of the mortgage lender in connection with these TIC
programs. While our Advisors ultimate liability under these guarantees is uncertain as a result of
numerous factors, including, without limitation, the amount of the lenders credit bids at the time
of foreclosure, the ultimate disposition of the individual bankruptcy proceedings, and the defenses
our Advisor may raise under the guarantees, such liability may be in an amount in excess of our
Advisors net worth. Our Advisor is investigating the facts and circumstances surrounding these
events, and the potential liabilities related thereto, and intends to vigorously dispute any
imposition of any liability under any such guarantee or indemnity obligation.
Our Advisor has also been involved in multiple legal proceedings with respect to one of these
TIC programs, including an action pending in state court in Austin, Texas, or the Texas Action, and
an arbitration proceeding being conducted in California, or the Arbitration. In the Texas Action,
our Advisor and an affiliate are pursuing claims against the developers and sellers of the property
and other defendants to recover damages arising from undisclosed ground movement. The outcome of
the Texas Action, and the damages, if any, that our Advisor and its affiliate will recover, are
uncertain. In the Arbitration, TIC investors are asserting, among other things, that our Advisor
should bear responsibility for alleged diminution in the value of the property and their
investments as a result of ground movement. The Arbitration has been bifurcated into two phases. In
the first phase, the arbitrator ruled in favor of the TIC investors, finding, among other things,
that the TIC investors had properly terminated the property management agreement for cause. The
second phase of the Arbitration involves the TICs claims for damages. The hearing will be
conducted in June 2011 and will result in the arbitrators determination of whether the TICs have
proven any of their claims and what damages, if any, should be awarded against our Advisor. Our
Advisor is vigorously defending against those claims. Our Advisor has tendered this matter to its
insurance carriers for indemnification and will vigorously pursue coverage. While the outcome of
the second phase of the Arbitration is uncertain, an adverse determination by the arbitrator could
result in a material and adverse effect on our Advisors financial condition, results of operations
and cash flows.
Our success is dependent on the performance of our Advisor, which could be adversely impacted by
the performance of its parent company.
Our Advisor is a wholly owned direct subsidiary of NNN Realty Advisors, Inc., or NNNRA, which
is a wholly owned indirect subsidiary of Grubb & Ellis Company, or Grubb & Ellis. Our ability to
achieve our investment objectives and to conduct our operations is dependent upon the performance
of our Advisor, its executive officers and its employees. If our Advisor suffers or is distracted
by adverse financial or operational problems in connection with NNNRA or Grubb & Ellis, our
Advisors ability to allocate time and/or resources to our operations may be adversely affected. If
our Advisor is unable to allocate sufficient resources to oversee and perform our operations for
any reason, our results of operations would be adversely impacted.
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NNNRA is a guarantor on the mortgage loans of several TIC programs that it has sponsored.
Under the guaranty agreements, NNNRA is required to maintain a specified level of minimum net
worth. As of December 31, 2010, NNNRAs net worth was below the contractually specified levels with
respect to approximately 30 percent of its managed TIC programs. While this circumstance does not,
in and of itself, create any direct recourse liability for
NNNRA, failure to meet the minimum net worth on these programs could result in the imposition
of an event of default under these TIC loan agreements and NNNRA potentially becoming liable for up
to $6.0 million, in the aggregate, of certain partial-recourse guarantee obligations of the
underlying mortgage debt for certain of these TIC programs. To date, no events of default have been
declared.
In addition, Grubb & Ellis business is sensitive to trends in the general economy, as well as
the commercial real estate and credit markets. The current macroeconomic environment and
accompanying credit crisis has negatively impacted the value of commercial real estate assets,
contributing to a general slowdown in Grubb & Ellis industry, which Grubb & Ellis anticipates will
continue through 2011. A prolonged and pronounced recession could continue or accelerate the
reduction in overall transaction volume and size of sales and leasing activities that Grubb & Ellis
has already experienced, and could continue to put downward pressure on Grubb & Ellis revenues and
operating results. To the extent that any decline in Grubb & Ellis revenues and operating results
impacts the performance of NNNRA or our Advisor, our financial condition and results of operations
could also suffer.
The conflicts of interest of our Advisors executives and employees with us mean we will not be
managed by our Advisor solely in the best interests of our beneficiaries.
Our Advisors executives and employees have conflicts of interest relating to the management
of our business and property. Accordingly, those parties may make decisions or take actions based
on factors other than in the best interest of our beneficiaries.
Our Advisor also advises G REIT Liquidating Trust and manages NNN 2002 Value Fund, LLC and
NNN 2003 Value Fund, LLC, as well as other private tenant-in-common programs and other real estate
investment programs, all of which may compete with us or otherwise have similar business interests
and/or investment objectives. Additionally, our Advisor is a wholly owned indirect subsidiary of
Grubb & Ellis Company, or Grubb & Ellis, and certain executive officers and employees of our
Advisor own de-minimus interests in Grubb & Ellis. As officers, directors, and partial owners of
entities that do business with us or that have interests in competition with our own interests,
these individuals will experience conflicts between their obligations to us and their obligations
to, and pecuniary interests in, our Advisor, Grubb & Ellis and its affiliated entities. These
conflicts of interest could:
| limit the time and services that our Advisor devotes to us, because it will be providing similar services to G REIT Liquidating Trust, NNN 2002 Value Fund, LLC and NNN 2003 Value Fund, LLC and other real estate programs and properties; |
| impair our ability to compete for tenants in geographic areas where other properties are advised by our Advisor and its affiliates; and |
| impair our ability to compete for the disposition of properties with other real estate entities that are also advised by our Advisor and its affiliates and seeking to dispose of properties at or about the same time as us. |
If our Advisor or its affiliates breach their fiduciary obligations to us, we may not meet our
investment objectives, which could reduce the expected cash available for distribution to our
beneficiaries.
Increases in our insurance rates could adversely affect our cash flow and our ability to make
liquidating distributions to our beneficiaries.
We cannot assure that we will be able to renew our insurance coverage at our current or
reasonable rates or that we can estimate the amount of potential increases of policy premiums. As a
result, our cash flow could be adversely impacted by increased premiums. In addition, the sales
price of the Congress Center property may be affected by rising insurance costs and adversely
affect our ability to make liquidating distributions to our beneficiaries.
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We are currently involved in litigation, which could reduce the amount of our liquidation
distributions.
On February 11, 2004, Clearview Properties, or Clearview, filed a petition in the District
Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One
Corporation, Clarion Partners, LLC, and
Granite Partners I, LLC, three unaffiliated entities, and T REIT, our Advisor and Realty, or
collectively, the Triple Net Entities. The complaint alleged that the Triple Net Entities willfully
and intentionally interfered with an agreement between Property One and Clearview for the sale of
certain real property located in Houston, Texas by Property One to Clearview. On January 7, 2005,
Clearview filed an amended complaint which also alleged that the Triple Net Entities breached a
contract between Clearview and the Triple Net Entities for the sale of the Houston, Texas property
by Clearview to the Triple Net Entities and for conspiracy with Property One to breach this
contract. On March 25, 2005, Clearview filed a further amended complaint which named T REIT, L.P.
as an additional Triple Net Entity defendant and dropped Realty as a defendant. On May 4, 2005, the
court denied a motion for summary judgment filed by the Triple Net Entities. On July 28, 2005, the
Triple Net Entities filed their second amended motion for summary judgment to dismiss the claims
against them, which was granted in favor of the Triple Net Entities by the court on August 8, 2005.
On December 12, 2005, a one-day trial was held to determine the Triple Net Entities ability to
recover from Clearview, attorneys fees, expenses and costs incurred in this case as provided for
pursuant to the terms of the agreements underlying Clearviews breach of contract claims against
the Triple Net Entities. On May 17, 2006, the court entered a final judgment awarding T REIT, L.P.
$212,000 in attorneys fees for services rendered, $25,000 for attorneys fees if Clearview
unsuccessfully appeals the case to the court of appeals, and $13,000 for attorneys fees if
Clearview unsuccessfully appeals the case to the Texas Supreme Court. Thereafter, Clearview
appealed the case to the Fourteenth Court of Appeals. On January 29, 2009, the Fourteenth Court of
Appeals affirmed the trial courts summary judgment, reversed T REIT, L.P.s attorneys fees award,
and remanded the attorneys fee issue for a further proceeding. Clearview then filed a petition for
review with the Supreme Court of Texas, which was subsequently denied on January 15, 2010. On March
8, 2010, Clearview filed a motion for rehearing with the Supreme Court of Texas on issues unrelated
to the Triple Net Entities. The Supreme Court of Texas denied Clearviews motion for rehearing on
April 16, 2010. We are unable to determine the probability of the outcome or the amount or range of
any potential recovery. If Clearview prevails in this action, it could have a material adverse
effect upon the funds available for distributions to our beneficiaries.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have
available to pay liquidating distributions.
The Federal Deposit Insurance Corporation, or FDIC, currently insures amounts up to $250,000
per depositor per insured bank. From time to time, we may have cash and cash equivalents deposited
in certain financial institutions in excess of federally insured levels. If any of the banking
institutions in which we have deposited funds ultimately fails, we may lose the amount of our
deposits over any federally insured amount. The loss of our deposits could reduce the amount of
cash we have available to repay debt obligations, fund operations and distribute to beneficiaries,
which could result in a decline in the value of our beneficiaries investments.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Item 2. | Properties. |
Real Estate Investments
As of December 31, 2010, we owned a 10.3% interest in the Congress Center property. Our
interest in the Congress Center property is held as a member of an LLC that owns a TIC interest in
the property. The following table presents certain information about the Congress Center property
as of December 31, 2010:
Property | GLA | % | Date | Annual | Physical | Annual Rent | ||||||||||||||||||||||
Property Name | Location | (Sq Ft) | Owned | Acquired | Rent(1) | Occupancy(2) | Per Sq Ft(3) | |||||||||||||||||||||
Congress Center |
Chicago, IL | 520,000 | 10.3 | % | 1/9/03 | $ | 12,734,000 | 81 | % | $ | 30.25 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of December 31, 2010. | |
(2) | Physical occupancy as of December 31, 2010. | |
(3) | Average effective annual rent per occupied square foot as of December 31, 2010. |
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Prior to the adoption of our plan of liquidation, our investment in unconsolidated real estate
was accounted for under the equity method. Under the liquidation basis of accounting, our
investment in unconsolidated real estate is recorded at fair value (on an undiscounted basis). The
following information generally applies to the Congress Center property as of December 31, 2010:
| we have no plans for any material renovations, improvements or development of the property, except in accordance with planned budgets and executed leases; and |
| our property is located in a market where we are subject to competition for attracting new tenants and retaining current tenants. |
Ownership of Congress Center
The following is a summary of our relationship with entities with ownership interests in the
Congress Center property as of December 31, 2010:
Indebtedness
As of December 31, 2010, there were two secured mortgage loans outstanding related to the
Congress Center property, our proportionate share of which approximates $9,414,000. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations, and Note
7, Commitments and Contingencies, to the consolidated financial statements included with this
report.
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Item 3. | Legal Proceedings. |
Clearview Litigation
On February 11, 2004, Clearview Properties, or Clearview, filed a petition in the District
Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One
Corporation, Clarion Partners, LLC, and Granite Partners I, LLC, three unaffiliated entities, and T
REIT, our Advisor and Realty, or collectively, the Triple Net Entities. The complaint alleged that
the Triple Net Entities willfully and intentionally interfered with an agreement between Property
One and Clearview for the sale of certain real property located in Houston, Texas by Property One
to Clearview. On January 7, 2005, Clearview filed an amended complaint which also alleged that the
Triple Net Entities breached a contract between Clearview and the Triple Net Entities for the sale
of the Houston, Texas property by Clearview to the Triple Net Entities and for conspiracy with
Property One to breach this contract. On March 25, 2005, Clearview filed a further amended
complaint which named T REIT, L.P. as an additional Triple Net Entity defendant and dropped Realty
as a defendant. On May 4, 2005, the court denied a motion for summary judgment filed by the Triple
Net Entities. On July 28, 2005, the Triple Net Entities filed their second amended motion for
summary judgment to dismiss the claims against them, which was granted in favor of the Triple Net
Entities by the court on August 8, 2005. On December 12, 2005, a one-day trial was held to
determine the Triple Net Entities ability to recover from Clearview, attorneys fees, expenses and
costs incurred in this case as provided for pursuant to the terms of the agreements underlying
Clearviews breach of contract claims against the Triple Net Entities. On May 17, 2006, the court
entered a final judgment awarding T REIT, L.P. $212,000 in attorneys fees for services rendered,
$25,000 for attorneys fees if Clearview unsuccessfully appeals the case to the court of appeals,
and $13,000 for attorneys fees if Clearview unsuccessfully appeals the case to the Texas Supreme
Court. Thereafter, Clearview appealed the case to the Fourteenth Court of Appeals. On January 29,
2009, the Fourteenth Court of Appeals affirmed the trial courts summary judgment, reversed T REIT,
L.P.s attorneys fees award, and remanded the attorneys fee issue for a further proceeding.
Clearview then filed a petition for review with the Supreme Court of Texas, which was subsequently
denied on January 15, 2010. On March 8, 2010, Clearview filed a motion for rehearing with the
Supreme Court of Texas on matters unrelated to the Triple Net Entities. The Supreme Court of Texas
denied Clearviews motion for rehearing on April 16, 2010. We are unable to determine the
probability of the outcome or the amount or range of any potential recovery.
Other than the above, to our knowledge, there is no material pending legal proceedings. We
also have routine litigation incidental to the business to which we are a party or of which certain
of our properties are subject.
Item 4. | [Removed and Reserved.] |
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PART II
Item 5. | Market for Registrants Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities. |
Market Information
There is no public market for the units of beneficial interest in T REIT Liquidating Trust.
The units of beneficial interest are not and will not be listed on any exchange, quoted by a
securities broker or dealer, nor admitted for trading in any market, including the over-the-counter
market. The units of beneficial interests are not transferable except by operation of law, will or
intestate succession.
Beneficiaries
As of March 11, 2011, we had 1,904 beneficiaries.
Distributions
During the years ended December 31, 2010, 2009 and 2008, we did not make any distributions to
our beneficiaries.
Equity Compensation Plan Information
In accordance with the plan of liquidation, all outstanding options under T REITs equity
compensation plans were forfeited and the plans were terminated. We have no equity compensation
plans as of December 31, 2010.
Item 6. | Selected Financial Data. |
The following should be read with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements and the notes
thereto. The results for the period from July 20, 2007 through December 31, 2007 are not comparable
to any prior period because we began operations as of July 20, 2007. Our historical results are not
necessarily indicative of results for any future period.
As of December 31, | ||||||||||||||||
2010 | 2009 | 2008 | 2007 | |||||||||||||
Statement of Net Assets: |
||||||||||||||||
Total assets |
$ | 1,579,000 | $ | 1,714,000 | $ | 3,777,000 | $ | 6,007,000 | ||||||||
Net assets in liquidation(1) |
$ | 1,579,000 | $ | 1,714,000 | $ | 3,777,000 | $ | 6,007,000 | ||||||||
Net asset value per unit(1) |
$ | 0.34 | $ | 0.37 | $ | 0.82 | $ | 1.30 |
Period from | ||||||||||||||||
July 20, 2007 | ||||||||||||||||
through | ||||||||||||||||
Year Ended December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2008 | 2007 | |||||||||||||
Statement of Changes in Net Assets: |
||||||||||||||||
Net assets in liquidation, beginning of
period |
$ | 1,714,000 | $ | 3,777,000 | $ | 6,007,000 | $ | | ||||||||
Net assets contributed to T REIT
Liquidating Trust on July 20, 2007 |
| | | 6,861,000 | ||||||||||||
Changes to asset for estimated receipts
in excess of estimated costs during
liquidation |
(238,000 | ) | 365,000 | 46,000 | (134,000 | ) | ||||||||||
Net increase (decrease) in fair value |
103,000 | (2,428,000 | ) | (2,276,000 | ) | (720,000 | ) | |||||||||
Change in net assets in liquidation |
(135,000 | ) | (2,063,000 | ) | (2,230,000 | ) | 6,007,000 | |||||||||
Net assets in liquidation, end of period |
$ | 1,579,000 | $ | 1,714,000 | $ | 3,777,000 | $ | 6,007,000 | ||||||||
(1) | The net assets in liquidation as of December 31, 2010 of $1,579,000 plus the cumulative liquidating distributions through December 31, 2010 of approximately $50,600,000 (which were paid to T REIT shareholders prior to the transfer of T REITs assets and liabilities to us) would result in liquidating distributions per unit of approximately $11.33 as of December 31, 2010. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us or our refers to T REIT Liquidating Trust and its
subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our consolidated financial
statements and notes accompanying this Annual Report on Form 10-K. Such consolidated
financial statements and information have been prepared to reflect our net assets in liquidation as
of December 31, 2010 and 2009 (liquidation basis), together with the changes in net assets for the
years ended December 31, 2010, 2009 and 2008.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ
materially from those included in the forward-looking statements. We intend these forward-looking
statements to be covered by the safe-harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes
of complying with those safe-harbor provisions. Forward-looking statements, which are based on our
assumptions and describe future plans, strategies and expectations for ourselves, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of our future plans or strategies is inherently uncertain. Factors which could have a material
adverse affect on our operations and our future prospects on a consolidated basis include, without
limitation, the following: changes in economic conditions generally and the real estate market
specifically; legislative/regulatory changes; availability of capital; changes in interest rates;
competition in the real estate industry; supply and demand for operating properties in our current
market areas and changes in accounting principles generally accepted in the United States of
America, or GAAP; predictions of the amount of liquidating distributions to be received by our
beneficiaries; statements regarding the timing of asset dispositions and the sales price we will
receive for assets; the effect of the liquidation; the availability of buyers to acquire our
properties we make available for sale; the availability of financing; the absence of material
litigation; our ongoing relationship with our Advisor; litigation, including, without limitation,
the implementation and completion of the plan of liquidation.
These risks and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. We make no representations or
warranties (express or implied) about the accuracy of any such forward-looking statements contained
in this report, and, unless otherwise required by law, we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future events, or otherwise.
Additional information concerning us and our business, including additional factors that could
materially affect our financial results, is included herein and in our other filings with the
United States Securities and Exchange Commission, or the SEC.
Overview and Plan of Liquidation
T REIT, Inc., or T REIT, was formed in December 1998 in the Commonwealth of Virginia and
qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended. T REIT was organized to acquire, manage and invest in a
diversified portfolio of real estate projects of office, industrial, retail and service properties.
T REIT was formed with the intent to be listed on a national stock exchange, quoted on a quotation
system of a national securities association or merged with an entity whose shares are listed or
quoted. In 2005, as a result of: (i) then current market conditions; (ii) the increasing costs of
corporate compliance (including, without limitation, all federal, state and local regulatory
requirements applicable to us, including the
Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act); and (iii) the possible
need to reduce monthly distributions, the T REIT board of directors determined that a liquidation
would provide shareholders with a greater return on their investment over a reasonable period of
time than through implementation of other alternatives considered.
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On June 3, 2005, the board of directors of T REIT approved a plan of liquidation which was
thereafter approved by the shareholders of T REIT at its 2005 Annual Meeting of Shareholders held
on July 27, 2005. The T REIT plan of liquidation, or the plan of liquidation, contemplated the
orderly sale of all of T REITs assets, the payment of its liabilities, the winding up of
operations and the dissolution of T REIT. The board of directors decision to adopt the plan of
liquidation followed a lengthy process in which the board of directors and management reviewed a
number of strategic alternatives with the goal of maximizing shareholder value. T REIT engaged an
independent third party to perform financial advisory services in connection with T REITs plan of
liquidation, including rendering an opinion as to whether T REITs net real estate liquidation
value range estimate and estimated per share distribution range were reasonable. The plan of
liquidation gave T REITs board of directors the power to sell any and all of its assets without
further approval by its shareholders and provided that liquidating distributions be made to its
shareholders as determined by T REITs board of directors. The plan of liquidation also provided
for the transfer of T REITs remaining assets and liabilities to a liquidating trust if T REIT was
unable to sell its assets and pay its liabilities within 24 months of its shareholders approval of
the plan of liquidation (which was July 27, 2007). On May 10, 2007, T REITs board of directors
approved the transfer and assignment of T REITs assets to a liquidating trust.
We were organized on July 16, 2007 as a liquidating trust pursuant to T REITs plan of
liquidation. On July 20, 2007, in accordance with the Agreement and Declaration of Trust, or the
Liquidating Trust Agreement, by and between T REIT and W. Brand Inlow, or our Trustee, T REIT
transferred its then remaining assets and liabilities to us pursuant to the Liquidating Trust
Agreement. Mr. Inlow previously served as an independent director of T REIT and as the chairman of
T REITs board of directors. Upon the transfer of the assets and liabilities to us, each
shareholder of T REIT as of July 16, 2007, or the Record Date, automatically became the holder of
one unit of beneficial interest, or unit, in T REIT Liquidating Trust for each share of T REITs
common stock then currently held of record by such shareholder. Following the conversion of shares
to units of beneficial interest, all outstanding shares of T REITs common stock were deemed
cancelled. The rights of beneficiaries in their beneficial interests are not represented by any
form of certificate or other instrument. Shareholders of T REIT on the Record Date were not
required to take any action to receive units of beneficial interests. On the date of the
conversion, the economic value of each unit of beneficial interest was equivalent to the economic
value of a share of T REITs common stock. On July 20, 2007, T REIT filed a Form 15 with the SEC,
to terminate the registration of T REITs common stock under the Exchange Act, and T REIT announced
that it would cease filing reports under the Exchange Act. Our Trustee will issue to beneficiaries
and file with the SEC Annual Reports on Form 10-K and Current Reports on Form 8-K upon the
occurrence of a material event relating to us.
Our purpose is to wind up the affairs of T REIT by liquidating the remaining assets,
distributing the proceeds from the liquidation of our remaining assets to the holders of units,
each a beneficiary and, collectively, our beneficiaries, and paying all liabilities, costs and
expenses of T REIT and T REIT Liquidating Trust. Our existence was to terminate initially upon the
earliest of (i) the distribution of all of our assets in accordance with the terms of Liquidating
Trust Agreement, or (ii) the expiration of a period of three years from the date assets were first
transferred to us, or July 20, 2010. However, we were able to extend our existence beyond the
three-year term to July 20, 2013 as a result of our Trustee determining that an extension is
reasonably necessary to fulfill our purpose and our receipt of additional No-Action Relief from the
Staff of the SEC from compliance with certain registration and reporting requirements of the
Exchange Act.
Pursuant to the transfer of assets and liabilities from T REIT to us, we acquired a 10.3%
interest in the Congress Center, located in Chicago, Illinois, or the Congress Center property, or
our unconsolidated property, and assumed approximately $9,828,000 of indebtedness, representing the
proportionate share of a secured mortgage loan then outstanding on the Congress Center property. We
hold our interest in the Congress Center property pursuant to a 100.0% membership interest in
TREIT-Congress Center, LLC, which in turn holds a 35.5% membership interest in NNN Congress Center,
LLC. NNN Congress Center , LLC holds a 28.9% interest in the Congress Center property. Although we
acquired additional assets from T REIT, including interests in certain bank accounts, accounts
receivable and assets for estimated receipts in excess of estimated costs during liquidation, our
interest in the Congress Center property is our only material remaining asset. We intend to
complete the plan of liquidation by either selling our unconsolidated property interest or
participating in the sale of the Congress Center property with the other joint owners of the
property. In each case, we refer to such a sale as the sale or disposition of our
remaining asset. Although we can provide no assurances, we currently expect to sell our
interest in the Congress Center property by December 31, 2012 and anticipate completing the plan of
liquidation by March 31, 2013.
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Critical Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation
basis of accounting requires us to make estimates and judgments that affect the reported amounts of
assets (including net assets in liquidation), liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that our critical accounting policies
are those that require significant judgments and estimates. 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 vary from those
estimates, perhaps in material adverse ways, and those estimates could be different under different
assumptions or conditions.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, all assets have been adjusted to their estimated
fair values (on an undiscounted basis). Liabilities, including estimated costs associated with
implementing and completing our plan of liquidation, were adjusted to their estimated settlement
amounts. The valuation of our investment in unconsolidated real estate is based on current
contracts, estimates and other indications of sales value net of estimated selling costs. Estimated
future cash flows from property operations were made based on the anticipated sale dates of the
asset. Due to the uncertainty in the timing of the anticipated sale date and the cash flows
therefrom, results may differ materially from amounts estimated. These amounts are presented in the
accompanying statement of net assets. The net assets represent the estimated liquidation value of
our assets available to our beneficiaries upon liquidation. The actual values realized for assets
and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts
estimated.
The Congress Center property is continually evaluated and we adjust our net real estate
liquidation value accordingly. It is our policy that when we execute a purchase and sale agreement
or become aware of market conditions or other circumstances that indicate that our current value
materially differs from our expected net sales price, we will adjust our liquidation value
accordingly.
Asset for Estimated Receipts in Excess of Estimated Costs During Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing our plan of
liquidation. We currently estimate that we will have operating cash inflows from our estimated
receipts in excess of the estimated costs during liquidation. These amounts can vary significantly
due to, among other things, the timing and estimates for executing and renewing leases, along with
the estimates of tenant improvements incurred and paid, the timing of the sale of the Congress
Center property, the timing and amounts associated with discharging known and contingent
liabilities and the costs associated with winding up our operations. These costs are estimated and
are expected to be paid over the remaining liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied by
the Congress Center property towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to the suspension
of distributions, we received approximately $24,000 per month in distributions from the Congress
Center property. In December 2009, a one-time distribution was paid to the Congress Center
propertys investors for year-end tax purposes. We received approximately $78,000 from this
one-time distribution.
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The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the year ended December 31, 2010 was as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2009 | and (Receipts) | Estimates | 2010 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,231,000 | $ | (1,000 | ) | $ | (144,000 | ) | $ | 1,086,000 | ||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(122,000 | ) | 91,000 | (185,000 | ) | (216,000 | ) | |||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 1,109,000 | $ | 90,000 | $ | (329,000 | ) | $ | 870,000 | |||||||
The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the year ended December 31, 2009 was as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2008 | and (Receipts) | Estimates | 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 933,000 | $ | (81,000 | ) | $ | 379,000 | $ | 1,231,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(195,000 | ) | 153,000 | (80,000 | ) | (122,000 | ) | |||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 738,000 | $ | 72,000 | $ | 299,000 | $ | 1,109,000 | ||||||||
Net Assets in Liquidation
The net assets in liquidation of $1,579,000 plus cumulative liquidating distributions of
$50,600,000 as of December 31, 2010 (which were paid to T REIT shareholders prior to the transfer
of T REITs assets and liabilities to us) would result in liquidating distributions to our
beneficiaries of approximately $11.33 per unit (of which $10.99 per share was paid to T REIT
shareholders prior to the transfer of T REITs assets and liabilities to us). These estimates for
liquidation distributions per unit include projections of costs and expenses expected to be
incurred during the period required to complete the plan of liquidation. These projections could
change materially based on the timing of any sale, the performance of the underlying asset and
change in the underlying assumptions of the projected cash flows.
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Investment in Unconsolidated Real Estate
In calculating the estimated amount of liquidating distributions to our beneficiaries, we
assumed that we would be able to locate a buyer for the Congress Center property at an amount based
on our best estimate of market value for the property. However, we may have overestimated the sales
price that we will ultimately be able to obtain for this asset. If the market value of the Congress
Center property declines more than 4.7% from our current estimate of the market value as of
December 31, 2010, our investment in unconsolidated real estate would be zero.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space, to lease currently available space and
space available from unscheduled lease terminations and the timing of the disposition of the
properties. Negative trends in one or more of these factors could adversely affect our rental
income in future periods.
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Scheduled Lease Expirations
As of December 31, 2010, the Congress Center property was 95% leased to 15 tenants and 81%
occupied by 13 tenants. Leases representing approximately 10% of the gross leaseable area expire
during 2011. Our leasing strategy through our plan of liquidation focuses on negotiating renewals
for leases scheduled to expire and identifying new tenants or existing tenants seeking additional
space for which we are unable to negotiate such renewals. For example, in January 2010, we
completed an early renewal on one of our major tenants, and extended their lease expiration from
December 2013 to December 2019.
Changes in Net Assets in Liquidation
For the year ended December 31, 2010
Net assets in liquidation decreased $135,000, or $0.03 per unit, during the year ended
December 31, 2010. The decrease in our net assets is the result of a decrease in estimated receipts
in excess of estimated costs during liquidation of $238,000, or $0.05 per unit, as a result of
changes in estimates of net cash flows of our one remaining unconsolidated property, partially
offset by an increase in the liquidation value of our one remaining unconsolidated property of
$103,000, or $0.02 per unit, as a result of an increase in the anticipated sales price as well as a
decrease in the balance of the mortgage loan as a result of the scheduled principal payments during
2010.
For the year ended December 31, 2009
Net assets in liquidation decreased $2,063,000, or $0.45 per unit, during the year ended
December 31, 2009. The primary reason for the decrease in our net assets is a decrease in the value
of our one remaining unconsolidated property of $2,356,000, or $0.51 per unit, as a result of a
decrease in the anticipated sales price, offset by an increase in estimated receipts in excess of
estimated costs during liquidation of $371,000 or $0.08 per unit, which was a result of changes in
estimates of net cash flows of our one remaining unconsolidated property.
For the year ended December 31, 2008
Net assets in liquidation decreased $2,230,000, or $0.48 per unit, during the year ended
December 31, 2008. The primary reason for the decrease in our net assets is a decrease in the value
of our one remaining unconsolidated property of $2,107,000, or $0.46 per unit, as a result of a
decrease in the anticipated sales price.
Liquidity and Capital Resources
As of December 31, 2010, our total assets and net assets in liquidation were $1,579,000. Our
ability to meet our obligations is contingent upon the disposition of our interest in the Congress
Center property in accordance with the plan of liquidation. Management estimates that the net
proceeds from the sale of our interest in the Congress Center property pursuant to our plan of
liquidation will be adequate to pay our obligations; however, we cannot provide any assurance as to
the price we will receive for the disposition of our interest in the Congress Center property or
the net proceeds therefrom.
Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from the operations and sale of the
Congress Center property will be sufficient to fund our cash needs for payment of expenses during
the liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied
towards future tenanting costs to lease spaces not covered by the lender reserve and to supplement
the lender reserve funding as necessary. Prior to the suspension of distributions, we received
approximately $24,000 per month in distributions from the Congress Center property. In December
2009, a one-time distribution was paid to the Congress Center propertys investors for year-end tax
purposes. We received approximately $78,000 from this one-time distribution. No distributions were
received in 2010.
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The plan of liquidation gives our Trustee the power to sell our interest in the Congress
Center property without further approval by our beneficiaries and provides that liquidating
distributions be made to our beneficiaries as determined at the discretion of our Trustee. Although
we can provide no assurances, we currently expect to sell the Congress Center property by December
31, 2012 and anticipate completing the plan of liquidation by March 31, 2013.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our liquidity needs
during the liquidation period. As of December 31, 2010, we estimate that we will have $216,000 of
commitments and expenditures during the remaining liquidation period, comprised of $216,000 of
liquidation costs. However, there can be no assurance that we will not exceed the amounts of these
estimated expenditures. An adverse change in the net cash flows from the unconsolidated operations
of the Congress Center property or net proceeds expected from the liquidation of the Congress
Center property may affect our ability to fund these items and may affect our ability to satisfy
the financial covenants under the mortgages on the Congress Center property. If we fail to meet our
financial covenants and are unable to reach a satisfactory resolution with the lenders, the
maturity dates for the secured notes on the Congress Center property could be accelerated. Any of
these circumstances could adversely affect our ability to fund working capital, liquidation costs
and unanticipated cash needs.
During the years ended December 31, 2010, 2009 and 2008, we paid no liquidating distributions.
Liquidating distributions will be determined in our Trustees sole discretion and are dependent on
a number of factors, including the amount of funds available for distribution, our financial
condition, and our capital expenditures on the Congress Center property, among other factors our
Trustee may deem relevant.
The stated range of beneficiary distributions disclosed in the plan of liquidation is an
estimate only and actual results may be higher or lower than estimated. The potential for variance
on either end of the range could occur for a variety of reasons, including, but not limited to:
(i) unanticipated costs could reduce net assets actually realized; (ii) if we wind up our business
significantly faster than anticipated, some of the anticipated costs may not be necessary and net
liquidation proceeds could be higher; (iii) a delay in our liquidation could result in higher than
anticipated costs and net liquidation proceeds could be lower; (iv) circumstances may change and
the actual net proceeds realized from the sale of some of the assets might be less, or
significantly less, than currently estimated, including, for among other reasons, the discovery of
new environmental issues or loss of a tenant or tenants; and (v) actual proceeds realized from the
sale of some of the assets may be higher than currently estimated if market values increase.
Subject to our Trustees actions and in accordance with the plan of liquidation, we expect to
meet our liquidity requirements through the completion of the liquidation, through retained cash
flow, disposition of assets, and unsecured borrowings. We do not intend to reserve funds to retire
existing debt upon maturity. We will, instead, seek to refinance such debt at maturity or retire
such debt through the disposition of the Congress Center property.
If we experience lower occupancy levels and reduced rental rates at the Congress Center
property, reduced revenues as a result of the sale of the Congress Center property, or increased
capital expenditures and leasing costs at the Congress Center property compared to historical
levels due to competitive market conditions for new and renewal leases, the effect would be a
reduction of our net assets in liquidation. This estimate is based on various assumptions which are
difficult to predict, including the levels of leasing activity and related leasing costs. Any
changes in these assumptions could adversely impact our financial results, our ability to pay
current liabilities as they come due and our other unanticipated cash needs.
Capital Resources
Prior to the adoption of the plan of liquidation, our primary sources of capital were our real
estate operations, our ability to leverage any increased market value in the real estate assets we
owned and our ability to obtain debt financing from third parties, including our Advisor or its
affiliates. Prior to July 1, 2008, our primary source of capital was distributions from the
Congress Center property. However, effective July 1, 2008, monthly distributions to the Congress
Center propertys investors were suspended, including distributions to us. As a result of this
suspension of monthly distributions, our sole source of cash flow is expected to be proceeds from
the anticipated sale of our interest in the Congress Center property. It is anticipated that funds
previously used for distributions will be applied towards future tenanting costs to lease spaces
not covered by the lender reserve and to supplement the lender reserve funding as necessary. Prior
to the suspension of distributions, we received approximately $24,000 per month in distributions
from the Congress Center property. In December 2009, a one-time distribution was paid to the
Congress Center propertys investors for year-end tax purposes. We received approximately $78,000
from this one-time distribution. No distributions were received in 2010.
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The primary uses of cash are to fund distributions to our beneficiaries and for operating
expenses. We may also regularly require capital to invest in the Congress Center property in
connection with routine capital improvements and leasing activities, including funding tenant
improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures
can vary significantly depending on negotiations with tenants and the willingness of tenants to pay
higher base rents over the life of the leases.
In accordance with the plan of liquidation, we anticipate our source for the payment of
liquidating distributions to our beneficiaries to be primarily from the net proceeds from the sale
of our interest in the Congress Center property.
We believe that our cash balance of $240,000 as of December 31, 2010 should provide sufficient
liquidity to meet our cash needs during the next 12 months from December 31, 2010. While we
anticipate that our existing cash balance will be sufficient to fund our cash needs for corporate
related expenses for the next 12 months, we can provide no assurances that this will be the case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,054,000 and $93,486,000 as of
December 31, 2010 and 2009, respectively. Our pro rata share of the mortgage debt was $9,414,000
and $9,564,000 as of December 31, 2010 and 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain
financial covenants and other requirements. As of December 31, 2010, the Congress Center property
was in compliance with all such requirements.
Commitments and Contingencies
Insurance Coverage
Property Damage, Business Interruption, Earthquake and Terrorism
The insurance coverage provided through third-party insurance carriers is subject to coverage
limitations. Should an uninsured or underinsured loss occur, we could lose all or a portion of our
investment in, and anticipated cash flows from, the Congress Center property. In addition, there
can be no assurance that third-party insurance carriers will be able to maintain reinsurance
sufficient to cover any losses that may be incurred.
Debt Service Requirements
As of December 31, 2010, all consolidated debt has been repaid in full.
Contractual Obligations
As of December 31, 2010, all consolidated contractual obligations have been repaid in full.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have, a current or future material effect on
our financial condition, changes in our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
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Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the
primary source of cash flows from operations. We expect that there will be provisions in the
majority of our tenant leases that would provide some protection from the impact of inflation.
These provisions include rent steps, reimbursement billings for operating expense pass-through
charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due
to the long-term nature of the leases, the leases may not re-set frequently enough to cover
inflation.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risks include risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. We believe that the primary market risk to which we would be exposed would
be an interest rate risk. As of December 31, 2010, we had no outstanding consolidated debt,
therefore, we believe we have no interest rate or market risk. Additionally, the unconsolidated
debt related to our interest in the Congress Center property is at a fixed interest rate.
Item 8. | Financial Statements and Supplementary Data. |
See the index at Item 15. Exhibits and Financial Statement Schedules.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
We did not employ independent accountants to perform an audit on the financial statements
contained in this Annual Report on Form 10-K.
Item 9A. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms, and that such
information is accumulated and communicated to us, including our Trustee, as appropriate, to allow
timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December
31, 2010 was conducted under the supervision and with the participation of our Trustee of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, our Trustee concluded that our
disclosure controls and procedures as of December 31, 2010 were effective for the purposes stated
above.
(b) Managements Report on Internal Control over Financial Reporting. Our Trustee is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the
supervision of our Trustee and with the participation of our Trustee and Advisor, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on our evaluation under the Internal Control-Integrated Framework, our Trustee concluded
that our internal control over financial reporting was effective as of December 31, 2010.
(c) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the year ended December 31, 2010,
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. | Other Information. |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
As of March 11, 2011, we have no directors or executive officers. Our Advisor manages our
day-to-day business affairs and assets, and carries out the directives of our Trustee.
The following biographical description sets forth information with respect to our Trustee as
of March 11, 2011.
W. Brand Inlow, age 57, has served as our Trustee since July 2007, having previously served as
an independent director of T REIT, Inc. from May 2002 to July 2007. He is a Principal, Co-Founder,
and serves as Director of Acquisitions for McCann Realty Partners, LLC, an apartment investment
company focusing on garden apartment communities in the Southeast formed in October 2004. Since
October 2003, Mr. Inlow has provided professional consulting services to the multifamily industry
on matters related to acquisitions, dispositions, asset management and property management
operations, and through an affiliation with LAS Realty in Richmond, Virginia conducts commercial
real estate brokerage. Mr. Inlow also is President of Jessies Wish, Inc., a Virginia non-profit
corporation dedicated to awareness, education and financial assistance for patients and families
dealing with eating disorders. Mr. Inlow served as President of Summit Realty Group, Inc. in
Richmond, Virginia, from September 2001 through October 2003. Prior to joining Summit Realty, from
November 1999 to September 2001 he was Vice President of Acquisitions for EEA Realty, LLC in
Alexandria, Virginia where he was responsible for the acquisition, disposition and financing of
company assets, which were primarily garden apartment properties. Prior to joining EEA Realty, from
November 1991 to November 1999, Mr. Inlow worked for United Dominion Realty Trust, Inc., a publicly
traded real estate investment trust, as Assistant Vice President and Senior Acquisition Analyst,
where he was responsible for the acquisition of garden apartment communities. Mr. Inlow also serves
as a trustee of G REIT Liquidating Trust and served as a director and audit committee member of
Grubb & Ellis Apartment REIT, Inc. from December 2005 to September 2007.
Audit Committee
We do not have an audit committee or other committee that performs similar functions and,
consequently, have not designated an audit committee financial expert. Due to our limited
operations and level of activity, which primarily includes the sale of the remaining asset and the
payment of outstanding obligations, our Trustee believes that the services of an audit committee
financial expert are not warranted.
Fiduciary Relationship of our Advisor to Us
Our Advisor is deemed to be in a fiduciary relationship with us pursuant to the Advisory
Agreement and under applicable law. Our Advisors fiduciary duties include responsibility for our
control and management and exercising good faith and integrity in handling our affairs. Our Advisor
has a fiduciary responsibility for the safekeeping and use of all of our funds and assets, whether
or not they are in its immediate possession and control, and may not use or permit another to use
such funds or assets in any manner except for our exclusive benefit.
Our funds will not be commingled with the funds of any other person or entity except for
operating revenue from our properties.
Our Advisor may employ persons or firms to carry out all or any portion of our business. Some
or all such persons or entities employed may be affiliates of our Advisor. It is not clear under
current law the extent, if any, that such parties will have a fiduciary duty to us or our
beneficiaries. Investors who have questions concerning the fiduciary duties of our advisor should
consult with their own legal counsel.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Code of Ethics
We have not adopted a code of ethics nor do we currently intend to due to the fact that we
have no employees and our Trustee manages our business and affairs. Nonetheless, our Trustee
intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC,
and compliance with applicable governmental laws and regulations.
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Item 11. | Executive Compensation. |
Trustee
Pursuant to the Liquidating Trust Agreement, Mr. Inlow receives $250 per month for services
rendered as our Trustee. Mr. Inlow was paid $3,000 in each of the years ended December 31, 2010,
2009 and 2008 for services rendered.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. |
Principal Beneficiaries
There is no public market for our units of beneficial interest. On July 16, 2007, T REIT
formally closed its stock transfer books. The units are not and will not be listed on any exchange,
quoted by a securities broker or dealer, nor admitted for trading in any market, including the
over-the-counter market. The units of beneficial interests are not transferable except by will, intestate succession or operation
of law.
The following table sets forth the beneficial ownership of units as of March 11, 2011, as to
(i) each beneficiary that is known by us to have beneficially owned more than five percent of the
units as of March 11, 2011; and (ii) our Trustee. All such information was provided by the person
listed. All percentages have been calculated as of and are based upon 4,605,000 units outstanding
at the close of business on such date.
The person in the table below has indicated that it has sole voting and investment power over
the units listed.
Number of | ||||||||
Units of | ||||||||
Beneficial | ||||||||
Interest | Percent of | |||||||
Name and Address of Beneficial Owner | Owned | Class | ||||||
W. Brand Inlow, Trustee(1) |
552 | * |
(1) | Mr. Inlows address is c/o T REIT Liquidating Trust, 1551 N. Tustin Avenue, Suite 300, Santa Ana, CA 92705. | |
* | Represents less than 1.0% of our outstanding units of beneficial interest. |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Our Advisor manages our day-to-day business affairs and assets and carries out the directives
of our Trustee. Our Advisor is a Virginia limited liability company that was formed in April 1998
to advise syndicated limited partnerships, limited liability companies, and other entities
regarding the acquisition, management and disposition of real estate assets. Prior to our
formation, our Advisor held 22,100 shares of common stock of T REIT, which were converted into
22,100 units. Our Advisor intends to retain such units while serving as our Advisor.
Advisory Agreement
The Advisory Agreement between our Advisor and T REIT expired on February 22, 2005 and was not
renewed for a consecutive one-year term. However, our Advisor continued to advise T REIT, and,
following the transfer of assets to us, continues to advise us, on a month-to-month basis under the
terms of the expired Advisory Agreement. Under the terms of the Advisory Agreement, our Advisor has
responsibility for our day-to-day operations, administers our accounting and bookkeeping functions,
serves as a consultant in connection with policy decisions to be made by our Trustee, manages our
unconsolidated property interest and renders other services deemed appropriate by our Trustee. Our
Advisor is entitled to reimbursement from us for expenses incurred in rendering its services,
subject to certain limitations. Fees and costs reimbursed to our Advisor cannot exceed the greater
of 2.0% of average invested assets, as defined in the Advisory Agreement, or 25.0% of net income
for the previous four quarters. For the years ended December 31, 2010, 2009 and 2008, such
reimbursement had not exceeded these limitations. We paid our Advisor approximately $9,000, $7,000
and $18,000, for services provided to us for the years ended December 31, 2010, 2009 and 2008,
respectively.
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Our Advisor may receive an annual asset management fee of up to 1.5% of our Average Invested
Assets, as defined in the Advisory Agreement. This fee will be paid or accrued quarterly, but will
not be paid until our beneficiaries have received distributions equal to a cumulative
non-compounded rate of 8.0% per annum on their investment in us. We incurred $5,000, $27,000 and
$62,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively,
and we paid our Advisor $4,000, $37,000 and $71,000 in asset management fees in the years ended
December 31, 2010, 2009 and 2008, respectively. Of the amounts paid in 2010, 2009 and 2008, $1,000,
$10,000 and $19,000 was for services provided in the prior year.
Property Management Fees
We pay our Advisor or its affiliate a property management fee equal to 5.0% of the gross
revenue from our properties. For the years ended December 31, 2010, 2009 and 2008, we did not incur
property management fees to our Advisor or its affiliate.
Real Estate Acquisition and Disposition Fees
Under the terms of the Advisory Agreement, our Advisor or its affiliate may receive
acquisition and disposition fees in connection with the acquisition or disposition of our
properties. We did not pay our Advisor or its affiliate any real estate acquisition or disposition
fees for the years ended December 31, 2010, 2009 and 2008.
Incentive Distributions
Our Advisor owned 100 non-voting incentive performance units in T REIT, L.P. (T REITs
operating partnership) and would have been entitled to incentive distributions of operating cash
flow, as defined in the T REIT Limited Partnership Agreement, after our beneficiaries have received
an 8.0% annual return on their invested capital. Pursuant to the approval of the plan of
liquidation by our beneficiaries, our Advisor permanently waived any distributions that it is or
may be entitled to receive in connection with its incentive performance units.
Incentive Bonuses and Milestone Payments
Our Trustee has discretion to pay up to an aggregate of $300,000 in retention and incentive
based bonuses to some of the employees of our Advisor from time to time. Prior to July 20, 2007,
$245,000 in retention and incentive bonuses were paid by T REIT. We have not paid any retention or
incentive bonuses since July 20, 2007.
Review, Approval or Ratification of Transactions with Related Persons
All transactions between us and any related person, including our Advisor and its affiliates,
are reviewed and approved by our Trustee. Additionally, the plan of liquidation provides that we
may sell our remaining asset to one of our affiliates or an affiliate of our Advisor. If we enter
such a transaction, we expect that our Trustee will require that an independent third party opine
to us as to the fairness of the consideration to be received by us in such transaction, from a
financial point of view, or conduct an appraisal of the applicable property as a condition to their
approval. In no event will our Trustee approve a transaction if: (i) an independent third party,
concludes after a review of the information then available, including any pending offers, letters
of intent, contracts for sale, appraisals or other data, that the consideration to be received by
us is not fair to us from a financial point of view; (ii) an independent third party, concludes
that the consideration to be received is less than the appraised value of the applicable property;
or (iii) we have received a higher offer for the applicable property from a credible party with
whom we reasonably believe is ready, able and willing to close the transaction on the contract
terms.
Item 14. | Principal Accounting Fees and Services. |
None.
35
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PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages | ||||
37 | ||||
38 | ||||
39 |
(a)(2) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information
is presented in the unaudited consolidated financial statements or related notes.
(a)(3) Exhibits:
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this annual report.
(b) Exhibits:
See item 15(a)(3) above.
(c) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information
is presented in the unaudited consolidated financial statements or related notes.
36
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T REIT LIQUIDATING TRUST
CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
As of December 31, 2010 and 2009
(Unaudited)
(Liquidation Basis)
As of December 31, 2010 and 2009
(Unaudited)
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Investment in unconsolidated real estate |
$ | 469,000 | $ | 275,000 | ||||
Cash and cash equivalents |
240,000 | 330,000 | ||||||
Asset for estimated receipts in excess of estimated costs during liquidation |
870,000 | 1,109,000 | ||||||
Total assets |
1,579,000 | 1,714,000 | ||||||
LIABILITIES |
||||||||
Commitments and contingencies (Note 7) |
||||||||
Net assets in liquidation |
$ | 1,579,000 | $ | 1,714,000 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
37
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T REIT LIQUIDATING TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
For the Years Ended December 31, 2010, 2009 and 2008
(Unaudited)
(Liquidation Basis)
For the Years Ended December 31, 2010, 2009 and 2008
(Unaudited)
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net assets in liquidation, beginning of period |
$ | 1,714,000 | $ | 3,777,000 | $ | 6,007,000 | ||||||
Changes in net assets in liquidation: |
||||||||||||
Changes to asset for estimated receipts in excess of estimated
costs during liquidation: |
||||||||||||
Operating income |
| (3,000 | ) | (25,000 | ) | |||||||
Distributions received from unconsolidated property |
| (78,000 | ) | (143,000 | ) | |||||||
Payments of liquidation costs and other amounts |
91,000 | 147,000 | 337,000 | |||||||||
Change in estimated receipts in excess of estimated costs
during liquidation |
(329,000 | ) | 299,000 | (123,000 | ) | |||||||
Net (decrease) increase in asset for estimated receipts in
excess of estimated costs during liquidation |
(238,000 | ) | 365,000 | 46,000 | ||||||||
Change in fair value of assets and liabilities: |
||||||||||||
Change in fair value of real estate investments |
194,000 | (2,356,000 | ) | (2,107,000 | ) | |||||||
Change in assets and liabilities due to activity in asset or
estimated receipts in excess of estimated costs during
liquidation |
(91,000 | ) | (72,000 | ) | (169,000 | ) | ||||||
Net increase (decrease) in fair value of assets and liabilities |
103,000 | (2,428,000 | ) | (2,276,000 | ) | |||||||
Change in net assets in liquidation |
(135,000 | ) | (2,063,000 | ) | (2,230,000 | ) | ||||||
Net assets in liquidation, end of period |
$ | 1,579,000 | $ | 1,714,000 | $ | 3,777,000 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
38
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization and Description of Business
The use of the words we, us, or our refers to T REIT Liquidating Trust and its
subsidiaries, except where the context otherwise requires.
T REIT, Inc., or T REIT, was formed in December 1998 in the Commonwealth of Virginia and
qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended. T REIT was organized to acquire, manage and invest in a
diversified portfolio of real estate projects of office, industrial, retail and service properties.
T REIT was formed with the intent to be listed on a national stock exchange, quoted on a quotation
system of a national securities association or merged with an entity whose shares are listed or
quoted. In 2005, as a result of: (i) then current market conditions; (ii) the increasing costs of
corporate compliance (including, without limitation, all federal, state and local regulatory
requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act); and (iii) the possible need to reduce monthly distributions, the T REIT board
of directors determined that a liquidation would provide shareholders with a greater return on
their investment over a reasonable period of time than through implementation of other alternatives
considered.
On June 3, 2005, the board of directors of T REIT approved a plan of liquidation which was
thereafter approved by the shareholders of T REIT at its 2005 Annual Meeting of Shareholders held
on July 27, 2005. The T REIT plan of liquidation, or the plan of liquidation, contemplated the
orderly sale of all of T REITs assets, the payment of its liabilities, the winding up of
operations and the dissolution of T REIT. The board of directors decision to adopt the plan of
liquidation followed a lengthy process in which the board of directors and management reviewed a
number of strategic alternatives with the goal of maximizing shareholder value. T REIT engaged an
independent third party to perform financial advisory services in connection with T REITs plan of
liquidation, including rendering an opinion as to whether T REITs net real estate liquidation
value range estimate and estimated per share distribution range were reasonable. The plan of
liquidation gave T REITs board of directors the power to sell any and all of its assets without
further approval by its shareholders and provided that liquidating distributions be made to its
shareholders as determined by T REITs board of directors. The plan of liquidation also provided
for the transfer of T REITs remaining assets and liabilities to a liquidating trust if T REIT was
unable to sell its assets and pay its liabilities within 24 months of its shareholders approval of
the plan of liquidation (which was July 27, 2007). On May 10, 2007, T REITs board of directors
approved the transfer and assignment of T REITs assets to a liquidating trust.
We were organized on July 16, 2007 as a liquidating trust pursuant to T REITs plan of
liquidation. On July 20, 2007, in accordance with the Agreement and Declaration of Trust, or the
Liquidating Trust Agreement, by and between T REIT and W. Brand Inlow, or our Trustee, T REIT
transferred its then remaining assets and liabilities to us pursuant to the Liquidating Trust
Agreement. Mr. Inlow previously served as an independent director of T REIT and as the chairman of
T REITs board of directors. Upon the transfer of the assets and liabilities to us, each
shareholder of T REIT as of July 16, 2007, or the Record Date, automatically became the holder of
one unit of beneficial interest, or unit, in T REIT Liquidating Trust for each share of T REITs
common stock then currently held of record by such shareholder. Following the conversion of shares
to units of beneficial interest, all outstanding shares of T REITs common stock were deemed
cancelled. The rights of beneficiaries in their beneficial interests are not represented by any
form of certificate or other instrument. Shareholders of T REIT on the Record Date were not
required to take any action to receive units of beneficial interests. On the date of the
conversion, the economic value of each unit of beneficial interest was equivalent to the economic
value of a share of T REITs common stock. On July 20, 2007, T REIT filed a Form 15 with the United
States Securities and Exchange Commission, or the SEC, to terminate the registration of T REITs
common stock under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and T REIT
announced that it would cease filing reports under the Exchange Act. Our Trustee will issue to
beneficiaries and file with the SEC Annual Reports on Form 10-K and Current Reports on Form 8-K
upon the occurrence of a material event relating to us.
Our purpose is to wind up the affairs of T REIT by liquidating the remaining assets,
distributing the proceeds from the liquidation of our remaining assets to the holders of units,
each a beneficiary and, collectively, our beneficiaries, and paying all liabilities, costs and
expenses of T REIT and T REIT Liquidating Trust. Our existence was to terminate initially upon the
earliest of (i) the distribution of all of our assets in accordance with the terms of Liquidating
Trust Agreement, or (ii) the expiration of a period of three years from the date assets were first
transferred to us, or July 20, 2010. However, we were able to extend our existence beyond the
three-year term to July 20, 2013 as a result of our Trustee determining that an extension is
reasonably necessary to fulfill our purpose and our receipt of additional No-Action Relief from the
Staff of the SEC from compliance with certain registration and reporting requirements of the
Exchange Act.
39
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Pursuant to the transfer of assets and liabilities from T REIT to us, we acquired a 10.3%
interest in the Congress Center, located in Chicago, Illinois, or the Congress Center property, or
our unconsolidated property, and assumed approximately $9,828,000 of indebtedness, representing the
proportionate share of a secured mortgage loan then outstanding on the Congress Center property. We
hold our interest in the Congress Center property pursuant to a 100.0% membership interest in
TREIT-Congress Center, LLC, which in turn holds a 35.5% membership interest in NNN Congress Center,
LLC. NNN Congress Center , LLC holds a 28.9% interest in the Congress Center property. Although we
acquired additional assets from T REIT, including interests in certain bank accounts, accounts
receivable and assets for estimated receipts in excess of estimated costs during liquidation, our
interest in the Congress Center property is our only material remaining asset. We intend to
complete the plan of liquidation by either selling our unconsolidated property interest or
participating in the sale of the Congress Center property with the other joint owners of the
property. In each case, we refer to such a sale as the sale or disposition of our remaining
asset. Although we can provide no assurances, we currently expect to sell our interest in the
Congress Center property by December 31, 2012 and anticipate completing the plan of liquidation by
March 31, 2013.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our consolidated financial statements. Such financial statements and accompanying
notes 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 the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation
basis of accounting requires us to make estimates and judgments that affect the reported amounts of
assets (including net assets in liquidation), liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that our critical accounting policies
are those that require significant judgments and estimates. 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 vary from those
estimates, perhaps in material adverse ways, and those estimates could be different under different
assumptions or conditions.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and any variable
interest entities, as defined in Financial Accounting Standards Board, Accounting Standards
Codification, or FASB Codification, Topic 810, Consolidation, that we have concluded should be
consolidated. All material intercompany transactions and account balances have been eliminated in
consolidation.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, all assets have been adjusted to their estimated
fair values (on an undiscounted basis). Liabilities, including estimated costs associated with
implementing and completing our plan of liquidation, were adjusted to their estimated settlement
amounts. The valuation of our investment in unconsolidated real estate is based on current
contracts, estimates and other indications of sales value net of estimated selling costs. Estimated
future cash flows from property operations were made based on the anticipated sale dates of the
asset. Due to the uncertainty in the timing of the anticipated sale date and the cash flows
therefrom, results may differ materially from amounts estimated. These amounts are presented in the
accompanying statement of net assets. The net assets represent the estimated liquidation value of
our assets available to our beneficiaries upon liquidation. The actual values realized for assets
and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts
estimated.
40
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The Congress Center property is continually evaluated and we adjust our net real estate
liquidation value accordingly. It is our policy that when we execute a purchase and sale agreement
or become aware of market conditions or other circumstances that indicate that our current value
materially differs from our expected net sales price, we will adjust our liquidation value
accordingly.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a maturity of three months
or less when purchased.
Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash investments and accounts receivable from tenants. Cash is generally placed in money
market accounts and the amount of credit exposure to any one commercial issuer is limited. We have
cash in financial institutions which is insured by the Federal Deposit Insurance Corporation, or
FDIC, up to $250,000 per depositor per insured bank. As of December 31, 2010, we had no cash
balances in excess of FDIC insured limits. 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.
We are also subject to a concentration of regional economic exposure in the Midwest region of
the United States as our sole remaining asset consists of a 10.3% interest in the Congress Center
property, located in Chicago, Illinois. Regional and local economic downturns in the Midwest and
Illinois could adversely impact our operations.
As of December 31, 2010, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2010, as follows:
Percentage of | Lease | |||||||||||||||
2010 Annual | 2010 Annual | Square Footage | Expiration | |||||||||||||
Tenant | Base Rent (1) | Base Rent | (Approximate) | Date | ||||||||||||
U.S. Department of Homeland Security |
$ | 3,603,000 | 28.3 | % | 76,000 | Apr. 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,708,000 | 21.3 | % | 111,000 | Various (2) | ||||||||||
Akzo Nobel, Inc. |
$ | 2,176,000 | 17.1 | % | 91,000 | Dec. 2019 | ||||||||||
U.S. Department of Treasury |
$ | 1,709,000 | 13.4 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,274,000 | 10.0 | % | 50,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of December 31, 2010. | |
(2) | The lease with respect to 9,000 square feet expires in June 2011, and the lease with respect to 50,000 square feet expires in February 2012. The lease for 42,000 square feet expires in February 2022, and the remaining 10,000 square feet is leased on a month-to-month basis. |
41
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of December 31, 2009, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2009, as follows:
Percentage of | Lease | |||||||||||||||
2009 Annual | 2009 Annual | Square Footage | Expiration | |||||||||||||
Tenant | Base Rent (1) | Base Rent | (Approximate) | Date | ||||||||||||
U.S. Department of Homeland Security |
$ | 3,538,000 | 28.6 | % | 76,000 | Apr. 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,472,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,131,000 | 17.3 | % | 91,000 | Dec. 2013 | ||||||||||
U.S. Department of Treasury |
$ | 1,677,000 | 13.5 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,249,000 | 10.1 | % | 37,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of December 31, 2009. |
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Income Taxes
We will be treated as a grantor trust for income tax purposes and accordingly, will not be
subject to federal or state income tax on any income earned or gain recognized by us. We will
recognize taxable gain or loss when an asset is disposed of for an amount greater or less than the
fair market value of such asset at the time it was transferred from T REIT to us. Our beneficiaries
will be treated as the owner of a pro rata portion of each asset, including cash, received by and
held by us and will be required to report on his or her federal and state income tax return his or
her pro rata share of taxable income, including gains and losses recognized by us. Accordingly,
there is no provision for federal or state income taxes in the accompanying consolidated financial
statements.
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in an unconsolidated office
building. As such, our operations have been aggregated into one reportable segment for all periods
presented.
3. Asset for Estimated Receipts in Excess of Estimated Costs during Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing our plan of
liquidation. We currently estimate that we will have operating cash inflows from our estimated
receipts in excess of the estimated costs during liquidation. These amounts can vary significantly
due to, among other things, the timing and estimates for executing and renewing leases, along with
the estimates of tenant improvements incurred and paid, the timing of the sale of the Congress
Center property, the timing and amounts associated with discharging known and contingent
liabilities and the costs associated with winding up our operations. These costs are estimated and
are expected to be paid over the remaining liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied by
the Congress Center property towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to the suspension
of distributions, we received approximately $24,000 per month in distributions from the Congress
Center property. In December 2009, a one-time distribution was paid to the Congress Center
propertys investors for year-end tax purposes. We received approximately $78,000 from this
one-time distribution.
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the year ended December 31, 2010 was as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2009 | and (Receipts) | Estimates | 2010 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,231,000 | $ | (1,000 | ) | $ | (144,000 | ) | $ | 1,086,000 | ||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(122,000 | ) | 91,000 | (185,000 | ) | (216,000 | ) | |||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 1,109,000 | $ | 90,000 | $ | (329,000 | ) | $ | 870,000 | |||||||
The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the year ended December 31, 2009 is as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2008 | and (Receipts) | Estimates | 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 933,000 | $ | (81,000 | ) | $ | 379,000 | $ | 1,231,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(195,000 | ) | 153,000 | (80,000 | ) | (122,000 | ) | |||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 738,000 | $ | 72,000 | $ | 299,000 | $ | 1,109,000 | ||||||||
4. Net Assets in Liquidation
Net assets in liquidation decreased $135,000, or $0.03 per unit, during the year ended
December 31, 2010. The decrease in our net assets is the result of a decrease in estimated receipts
in excess of estimated costs during liquidation of $238,000, or $0.05 per unit, as a result of
changes in estimates of net cash flows of our one remaining unconsolidated property, partially
offset by an increase in the liquidation value of our one remaining unconsolidated property of
$103,000, or $0.02 per unit, as a result of an increase in the anticipated sales price as well as a
decrease in the balance of the mortgage loan as a result of the scheduled principal payments during
2010.
Net assets in liquidation decreased $2,063,000, or $0.45 per unit, during the year ended
December 31, 2009. The primary reasons for the decrease in our net assets includes a decrease in
the value of our unconsolidated property of $2,356,000, or $0.51 per unit, as a result of a
decrease in the anticipated sales price, offset by an increase in the asset for estimated receipts
in excess of estimated costs of $371,000, or $0.08 per unit, which was a result of changes in net
cash flows our one remaining unconsolidated property.
Net assets in liquidation decreased $2,230,000, or $0.48 per unit, during the year ended
December 31, 2008. The primary reason for the decrease in our net assets is a decrease in the value
of our unconsolidated property of $2,107,000, or $0.46 per unit, as a result of a decrease in the
anticipated sales price.
The net assets in liquidation of $1,579,000, plus cumulative liquidating distributions of
$50,600,000 as of December 31, 2010 (which were paid to T REIT shareholders prior to the transfer
of T REITs assets and liabilities to us) would result in liquidating distributions to our
beneficiaries per unit of approximately $11.33 per unit (of which $10.99 per share was paid to T
REIT shareholders prior to the transfer of T REITs assets and liabilities to us). These estimates
for liquidation distributions per unit include projections of costs and expenses expected to be
incurred during the period required to complete the plan of liquidation. These projections could
change materially based on the timing of any sale, the performance of the underlying assets and any
changes in the underlying assumptions of the projected cash flows.
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
5. Real Estate Investments
As of December 31, 2010 and 2009, our real estate investment is comprised of a 10.3% interest
in the Congress Center property, located in Chicago, Illinois. We did not have any property
dispositions during the years ended December 31, 2010, 2009 and 2008.
6. Related Party Transactions
Advisory Agreement
Advisory Fees
The Advisory Agreement between our Advisor and T REIT expired on February 22, 2005 and was not
renewed for a consecutive one-year term. However, our Advisor continued to advise T REIT, and,
following the transfer of assets to us, continues to advise us, on a month-to-month basis under the
terms of the expired Advisory Agreement. Under the terms of the Advisory Agreement, our Advisor has
responsibility for our day-to-day operations, administers our accounting and bookkeeping functions,
serves as a consultant in connection with policy decisions to be made by our Trustee, manages our
unconsolidated property interest and renders other services deemed appropriate by our Trustee. Our
Advisor is entitled to reimbursement from us for expenses incurred in rendering its services,
subject to certain limitations. Fees and costs reimbursed to our Advisor cannot exceed the greater
of 2.0% of average invested assets, as defined in the Advisory Agreement, or 25.0% of net income
for the previous four quarters. For the years ended December 31, 2010, 2009 and 2008, such
reimbursement had not exceeded these limitations. We paid our Advisor approximately $9,000, $7,000
and $18,000, for services provided to us for the years ended December 31, 2010, 2009 and 2008,
respectively.
Our Advisor may receive an annual asset management fee of up to 1.5% of our Average Invested
Assets, as defined in the Advisory Agreement. This fee will be paid or accrued quarterly, but will
not be paid until our beneficiaries have received distributions equal to a cumulative
non-compounded rate of 8.0% per annum on their investment in us. We incurred $5,000, $27,000 and
$62,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively,
and we paid our Advisor $4,000, $37,000 and $71,000 in asset management fees in the years ended
December 31, 2010, 2009 and 2008, respectively. Of the amounts paid in 2010, 2009 and 2008,
$1,000, $10,000 and $19,000 was for services provided in the prior year.
Property Management Fees
We pay our Advisor or its affiliate a property management fee equal to 5.0% of the gross
revenue from our properties. For the years ended December 31, 2010, 2009 and 2008, we did not incur
property management fees to our Advisor or its affiliate.
Real Estate Acquisition and Disposition Fees
Under the terms of the Advisory Agreement, our Advisor or its affiliate may receive
acquisition and disposition fees in connection with the acquisition or disposition of our
properties. We did not pay our Advisor or its affiliate any real estate acquisition or disposition
fees for the years ended December 31, 2010, 2009 and 2008.
Incentive Distributions
Our Advisor owned 100 non-voting incentive performance units in T REIT, L.P. (T REITs
operating partnership) and would have been entitled to incentive distributions of operating cash
flow, as defined in the T REIT Limited Partnership Agreement, after our beneficiaries have received
an 8.0% annual return on their invested capital. Pursuant to the approval of the plan of
liquidation by our beneficiaries, our Advisor permanently waived any distributions that it is or
may be entitled to receive in connection with its incentive performance units.
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Incentive Bonuses and Milestone Payments
Our Trustee has discretion to pay up to an aggregate of $300,000 in retention and incentive
based bonuses to some of the employees of our Advisor from time to time. Prior to July 20, 2007,
$245,000 in retention and incentive bonuses were paid by T REIT. We have not paid any retention or
incentive bonuses since July 20, 2007.
Review, Approval or Ratification of Transactions with Related Persons
All transactions between us and any related person, including our Advisor and its affiliates,
are reviewed and approved by our Trustee. Additionally, the plan of liquidation provides that we
may sell our remaining asset to one of our affiliates or an affiliate of our Advisor. If we enter
such a transaction, we expect that our Trustee will require that an independent third party opine
to us as to the fairness of the consideration to be received by us in such transaction, from a
financial point of view, or conduct an appraisal of the applicable property as a condition to their
approval. In no event will our Trustee approve a transaction if: (i) an independent third party,
concludes after a review of the information then available, including any pending offers, letters
of intent, contracts for sale, appraisals or other data, that the consideration to be received by
us is not fair to us from a financial point of view; (ii) an independent third party, concludes
that the consideration to be received is less than the appraised value of the applicable property;
or (iii) we have received a higher offer for the applicable property from a credible party with
whom we reasonably believe is ready, able and willing to close the transaction on the contract
terms.
7. Commitments and Contingencies
Litigation
On February 11, 2004, Clearview Properties, or Clearview, filed a petition in the District
Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One
Corporation, Clarion Partners, LLC, and Granite Partners I, LLC, three unaffiliated entities, and T
REIT, our Advisor and Realty, or collectively, the Triple Net Entities. The complaint alleged that
the Triple Net Entities willfully and intentionally interfered with an agreement between Property
One and Clearview for the sale of certain real property located in Houston, Texas by Property One
to Clearview. On January 7, 2005, Clearview filed an amended complaint which also alleged that the
Triple Net Entities breached a contract between Clearview and the Triple Net Entities for the sale
of the Houston, Texas property by Clearview to the Triple Net Entities and for conspiracy with
Property One to breach this contract. On March 25, 2005, Clearview filed a further amended
complaint which named T REIT, L.P. as an additional Triple Net Entity defendant and dropped Realty
as a defendant. On May 4, 2005, the court denied a motion for summary judgment filed by the Triple
Net Entities. On July 28, 2005, the Triple Net Entities filed their second amended motion for
summary judgment to dismiss the claims against them, which was granted in favor of the Triple Net
Entities by the court on August 8, 2005. On December 12, 2005, a one-day trial was held to
determine the Triple Net Entities ability to recover from Clearview, attorneys fees, expenses and
costs incurred in this case as provided for pursuant to the terms of the agreements underlying
Clearviews breach of contract claims against the Triple Net Entities. On May 17, 2006, the court
entered a final judgment awarding T REIT, L.P. $212,000 in attorneys fees for services rendered,
$25,000 for attorneys fees if Clearview unsuccessfully appeals the case to the court of appeals,
and $13,000 for attorneys fees if Clearview unsuccessfully appeals the case to the Texas Supreme
Court. Thereafter, Clearview appealed the case to the Fourteenth Court of Appeals. On January 29,
2009, the Fourteenth Court of Appeals affirmed the trial courts summary judgment, reversed T REIT,
L.P.s attorneys fees award, and remanded the attorneys fee issue for a further proceeding.
Clearview then filed a petition for review with the Supreme Court of Texas, which was subsequently
denied on January 15, 2010. On March 8, 2010, Clearview filed a motion for rehearing with the
Supreme Court of Texas on issues unrelated to the Triple Net Entities. The Supreme Court of Texas
denied Clearviews motion for rehearing on April 16, 2010. We are unable to determine the
probability of the outcome or the amount or range of any potential recovery. If Clearview prevails
in this action, it could have a material adverse effect upon the funds available for distributions
to our beneficiaries.
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T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Other than as set forth above, to our knowledge, there are no material pending legal
proceedings. We also have routine litigation incidental to the business to which we are a party or
of which certain of our properties are subject.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,054,000 and $93,486,000 as of
December 31, 2010 and 2009, respectively. Our pro rata share of the mortgage debt was $9,414,000
and $9,564,000 as of December 31, 2010 and 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain
financial covenants and other requirements. As of December 31, 2010, the Congress Center property
was in compliance with all such requirements.
Environmental Matters
We have a policy for monitoring the Congress Center property for the presence of hazardous or
toxic substances. While there can be no assurance that a material environmental liability does not
exist, we are not currently aware of any environmental liability with respect to our one remaining
unconsolidated property that would have a material adverse effect on our cash flows, financial
condition or results of operations. Further, we are not aware of any environmental liability or any
unasserted claim or assessment with respect to an environmental liability that we believe would
require additional disclosure or the recording of a loss contingency.
Other
Our other commitments and contingencies include the usual obligations of a real estate company
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our financial position and consolidated results of operations.
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SIGNATURE
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
T REIT LIQUIDATING TRUST
(Registrant)
(Registrant)
By:
|
/s/ W. Brand inlow
|
Trustee |
Date: March 11, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following person on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/ W. Brand inlow
|
Trustee |
Date: March 11, 2011
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in the Annual Report on
Form 10-K for the fiscal year 2010 (and are numbered in accordance with Item 601 of Regulation
S-K).
Item | ||||
No. | Description | |||
2.1 | T REIT, Inc. Plan of Liquidation and Dissolution, as approved by shareholders on
July 27, 2005 and as currently in effect (included as Exhibit A to T REITs
Definitive Proxy Statement for the Annual Meeting of Shareholders filed on June
15, 2005 and incorporated herein by reference) |
|||
10.1 | Advisory Agreement between T REIT, Inc. and Triple Net Properties, LLC (included
as Exhibit 10.5 to Amendment No. 2 to T REITs Registration Statement on Form S-11
filed on October 13, 1999 (File No. 333-77229) and incorporated herein by
reference) |
|||
10.2 | Liquidating Trust Agreement, dated as of July 16, 2007, by and between T REIT,
Inc. and W. Brand Inlow, Trustee (included as Exhibit 10.1 to our Current Report
on Form 8-K filed July 20, 2007 and incorporated herein by reference) |
|||
21.1 | * | Subsidiaries of T REIT Liquidating Trust |
||
31.1 | ** | Certification of Trustee, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | ** | Certification of Trustee, pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
48