Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - NNN 2003 VALUE FUND LLC | c14311exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - NNN 2003 VALUE FUND LLC | c14311exv32w2.htm |
EX-21.1 - EXHIBIT 21.1 - NNN 2003 VALUE FUND LLC | c14311exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - NNN 2003 VALUE FUND LLC | c14311exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - NNN 2003 VALUE FUND LLC | c14311exv32w1.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: 0-51295
NNN 2003 VALUE FUND, LLC
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-0122092 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, Suite 300, Santa Ana, California (Address of principal executive offices) |
92705 (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:
Class A LLC Membership Interests
Class B LLC Membership Interests
Class C LLC Membership Interests
(Title of class)
Class B LLC Membership Interests
Class C LLC Membership Interests
(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 þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or 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
As of June 30, 2010, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of the outstanding units held by non-affiliates of the
registrant was approximately $49,850,000 (based on the price for which each unit was sold). No
established market exists for the registrants units.
As of March 18, 2011, there were 9,970 units of NNN 2003 Value Fund, LLC outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
NNN 2003 VALUE FUND, LLC
TABLE OF CONTENTS
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Exhibit 32.2 |
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PART I
Item 1. | Business. |
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
Our Company
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell our ownership interests in a
number of unspecified properties believed to have higher than average potential for capital
appreciation, or value-added properties. As of December 31, 2010, we held interests in three
commercial office properties, comprised of two consolidated properties and one unconsolidated
property. Our consolidated properties consist of Sevens Building, located in St. Louis, Missouri,
or the Sevens Building property, and Four Resource Square, located in Charlotte, North Carolina, or
the Four Resource Square property. Our unconsolidated property interest consists of an 8.5%
ownership interest in Enterprise Technology Center, located in Scotts Valley, California, or the
Enterprise Technology Center property. We currently intend to dispose of all of our remaining
properties and pay distributions to our unit holders from available funds, if any. We do not
anticipate acquiring any additional real estate properties at this time.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities as they come due. During the year ended December 31, 2010, we had a loss from
continuing operations of $6,623,000 and certain of our mortgage loans went into default.
Accordingly, there is substantial doubt about our ability to continue as a going concern.
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and is currently in default due
to non-payment of the outstanding principal balance upon maturity. The loan documents include an
option to extend the maturity date for an additional 12 months beyond October 31, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Sevens Building property is significantly less than the outstanding principal balance of the
mortgage loan, and we did not expect that the value of the property would exceed the principal
balance by the end of the potential extension term. As such, we had been in discussions with the
Sevens Building lender regarding our options for transferring the Sevens Building property to the
Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form of
transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. A successor trustee has been
appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens
Building property, which is set to take place on March 25, 2011.
In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
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Table of Contents
The maturities of the mortgage loans on the Sevens Building and Four Resource Square
properties, the subsequent sale of the Four Resource Square property to an entity affiliated with
its lender for no cash proceeds and the expected foreclosure of the Sevens Building property, which
we also expect will result in no cash proceeds, combined with our loss from continuing operations,
raises substantial doubt about our ability to continue as a going concern.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. While we
have no employees, certain executive officers and employees of our manager provide services to us
pursuant to the Operating Agreement. Our manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide certain services to us. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our manager prior to the termination of the Operating
Agreement or our dissolution, except for cause. The Management Agreement terminates with respect to
each of our properties upon the earlier of the sale of each respective property or December 31,
2013. Realty may be terminated without cause prior to the termination of the Management Agreement
or our dissolution, subject to certain conditions, including the payment by us to Realty of a
termination fee as provided in the Management Agreement.
Our managers principal executive offices are located at 1551 N. Tustin Avenue, Suite 300,
Santa Ana, California 92705 and its telephone number is (714) 667-8252. We make our periodic and
current reports available through our managers website at www.gbe-realtyinvestors.com as soon as
reasonably practicable after such materials are electronically filed with the United States
Securities and Exchange Commission, or the SEC. They are also available for printing when accessed
through our managers website. We do not maintain our own website or have an address or telephone
number separate from our manager. Since we pay fees to our manager for its services, we do not pay
rent for the use of their space.
Investment Objectives and Policies
Business Strategy
Our primary business strategy was to acquire, own, operate and subsequently sell our ownership
interests in a number of unspecified properties believed to have higher than average potential for
capital appreciation, or value-added properties. As of December 31, 2010, we held interests in
three commercial office properties, comprised of two consolidated properties and one unconsolidated
property. Our principal objectives initially were to: (i) have the potential within approximately
one to five years, subject to market conditions, to realize income on the sale of our properties;
(ii) realize income through the acquisition, operation, development and sale of our properties or
our interests in our properties; and (iii) make periodic distributions to our unit holders from
cash generated from operations and capital transactions. We currently intend to dispose of all of
our remaining properties and pay distributions to our unit holders from available funds, if any. We
do not anticipate acquiring any additional real estate properties at this time.
Operating Strategies
Our primary operating strategy is to maximize returns to our investors through strategies
designed to address the current economic and market factors adversely impacting our properties and
are aimed at: (i) preserving cash flow from our operations; (ii) minimizing losses from our
distressed assets; (iii) enhancing the performance and value of our properties where feasible; and
(iv) generating cash from the sale of the assets, if possible. Our management strategies include:
| disposing of our under-performing or non-performing assets through the sale of such properties or returning these properties to our mortgage lenders through a deed-in-lieu of foreclosure of the property; |
| improving rental income and cash flow of our properties by aggressively marketing rentable space, renewal of existing leases and raising rents when feasible; |
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| controlling operating expenses by centralization of asset and property management, leasing, marketing, accounting, renovation and data processing activities; |
| emphasizing regular maintenance and periodic renovation to meet the needs of current or prospective tenants in order to position our properties for sale at the highest possible price; and |
| refinancing properties when favorable terms are available to increase cash flow. |
Disposition Strategies
We consider various factors when evaluating potential property dispositions including, without
limitation, the following:
| our liquidity and capital needs; |
| our evaluation of outstanding debt, including maturity dates, defeasance costs (if applicable), assumability, loan-to-value ratio and ability to refinance; |
| our desire to exit non-performing markets and dispose of under- or non-performing assets; |
| whether the property is strategically located; |
| tenant composition and lease rollover for the property; |
| general economic conditions and outlook, including job growth in the local market; |
| the general quality of the asset; and |
| our ability to sell the property at a price we believe would provide the best return to our unit holders in light of all facts and circumstances. |
Our manager has total discretion with respect to the disposition of our ownership interests in
our properties.
Financing Policies
We have financed our investments through a combination of equity and secured debt. As of
December 31, 2010, our consolidated properties were subject to existing mortgage loans payable with
an aggregate principal balance of $43,471,000, consisting of $21,000,000, or 48.3%, of fixed rate
mortgage loans payable at a weighted-average interest rate of 10.95% per annum and $22,471,000, or
51.7%, of variable rate mortgage loans payable at a weighted-average interest rate of 7.26% per
annum.
From time to time, we may utilize certain derivative financial instruments to limit interest
rate risk. The derivatives we enter into are those which are used for hedging purposes rather than
speculation. As of December 31, 2010, we did not hold any derivative instruments.
Tax Status
We are a pass-through entity for income tax purposes, and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying consolidated statements of operations, except for insignificant amounts
related to state franchise and gross margin taxes.
Distribution Policy
We have three classes of membership interests, or units, each having different rights with
respect to distributions. As of December 31, 2010, 4,000 Class A units, 3,170 Class B units and
2,800 Class C units were outstanding. The rights and obligations of all unit holders are governed
by the Operating Agreement. The declaration of distributions
is determined by our manager. The timing and amount of distributions will depend on our actual
cash flow, financial condition, capital requirements and such other factors our manager may deem
relevant.
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Table of Contents
Effective November 1, 2008, we suspended monthly cash distributions to all unit holders.
Instead, we will pay periodic distributions to unit holders from available funds, if any. During
the years ended December 31, 2010, 2009 and 2008, we distributed $2,500,000, $0, and $2,908,000,
respectively, of available funds to our unit holders. In addition, we distributed $500,000 of
available funds to our unit holders on March 15, 2011.
Competition
We compete with a considerable number of other real estate companies seeking to lease space
and sell properties, 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 reputation as an owner and operator of properties in the
relevant market. Our ability to compete also depends on, among other factors, trends in the
national, regional 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.
When we dispose of our properties, we are in competition with sellers of similar properties to
locate suitable purchasers, which may result in us receiving lower net proceeds from the sale.
As of December 31, 2010, we held interests in three properties located in California, Missouri
and North Carolina. Our properties may face competition in these geographic regions from other
sellers, including other properties owned, operated or managed by our manager or its affiliates.
Government Regulation
Many laws and government regulations are applicable to our properties, 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, none of our properties have been audited, nor have investigations
of our properties 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
our properties or restrict our ability to renovate our properties. 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 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 our properties. 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 a 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 our properties, we may be deemed to have arranged for the disposal or treatment of hazardous or
toxic substances.
Use of Hazardous Substances by Some of our Tenants. Some of our tenants may handle hazardous
substances and wastes on our properties as part of their routine operations. Environmental laws and
regulations subject these tenants, and potentially us, to liability resulting from such activities.
We require 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 any of our properties.
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Other Federal, State and Local Regulations. Our properties are 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 our properties are 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. We
believe, based in part on engineering reports which are generally obtained at the time we acquire
the properties, that all of our properties comply 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 could be adversely affected.
Significant Tenants
As of December 31, 2010, one tenant at our consolidated properties represented 10.0% or more
of aggregate annual rental revenue, based on contractual base rent from leases in effect, as
follows:
Percentage of | ||||||||||||
2010 Annualized | Lease Expiration | |||||||||||
Tenant | Base Rent | Property | Date | |||||||||
McKesson Information Solutions, Inc. |
23.1 | % | Four Resource Square | 06/30/12 |
On January 20, 2011, the Four Resource Square property was sold to an entity affiliated
with the Four Resource Square lender for a sales price equal to the outstanding principal balance
of the mortgage loan of $21,977,000. We did not receive any cash proceeds from the sale of the
property.
Geographic Concentration
As of December 31, 2010, we held interests in two consolidated properties, with one property
each located in: (i) Missouri, which accounted for 52.7% of our annualized base rent; and (ii)
North Carolina, which accounted for 47.3% of our annualized base rent. Accordingly, there is a
geographic concentration of risk subject to fluctuations in each states economy.
Employees
We have no employees or executive officers. Substantially all work performed for us is
performed by employees and executive officers of our manager or its affiliates.
Financial Information About Segments
We are in the business of owning, managing, operating, leasing, developing, investing in and
disposing of office buildings and value-add commercial office properties. We internally evaluate
all of our properties as one industry segment and, accordingly, we do not report segment
information.
Item 1A. | Risk Factors. |
If we are unable to generate the necessary cash flows to meet our financial obligations, including
the payment of outstanding principal balances and accrued interest on our mortgage loans, our
lenders may declare us in default of the loans and exercise their remedies under the loan
agreements, including foreclosure on the properties, which could have a material adverse effect on
our financial position, results of operations and cash flows and has created substantial doubt
about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities as they come due. During the year ended December 31, 2010, we had a loss from
continuing operations of $6,623,000 and certain of our mortgage loans went into default.
Accordingly, there is substantial doubt about our ability to continue as a going concern.
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The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and is currently in default due
to non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
include an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property is significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, we had been in discussions
with the Sevens Building lender regarding our options for transferring the Sevens Building property
to the Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form
of transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. A successor trustee has been
appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens
Building property, which is set to take place on March 25, 2011.
In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
The maturities of the mortgage loans on the Sevens Building and Four Resource Square
properties, the subsequent sale of the Four Resource Square property to an entity affiliated with
its lender for no cash proceeds and the expected foreclosure of the Sevens Building property, which
we also expect will result in no cash proceeds, combined with our loss from continuing operations,
raises substantial doubt about our ability to continue as a going concern.
Our accompanying consolidated financial statements have been prepared assuming that we will be
able to continue as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the outcome of this
uncertainty.
We rely on the disposition of our properties to generate cash to fund our operations and pay
distributions to our unit holders.
On May 7, 2010, we sold Tiffany Square, located in Colorado Springs, Colorado, or the Tiffany
Square property, to Tiffany Square, LLC, an entity affiliated with the Tiffany Square lender, for a
sales price of $12,395,000, which was equal to the outstanding principal balance of the mortgage
loan. We did not receive any cash proceeds from the sale of the Tiffany Square property.
On June 2, 2010, we completed a deed-in-lieu of foreclosure transaction whereby we transferred
our ownership interest in Executive Center I, located in Dallas, Texas, or the Executive Center I
property, to the Executive Center I lender in exchange for complete cancellation of the loan
agreements and release of all of our liabilities, obligations and other indebtedness arising from
the loan agreements. At the time of transfer, the mortgage loan had an outstanding principal
balance of $4,590,000. We did not receive any cash proceeds from the transfer of the Executive
Center I property.
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As of December 31, 2010, we had two remaining consolidated properties, the Sevens Building and
Four Resource Square properties. The mortgage loan for the Sevens Building property, which had an
outstanding principal balance of $21,494,000 as of December 31, 2010, matured on October 31, 2010
and is currently in default due to non-payment of the outstanding principal balance upon maturity.
The mortgage loan documents include an option to extend the maturity date for an additional 12
months beyond October 31, 2010; however, we determined that it was not in the best interest of our
unit holders to attempt to extend the maturity date due to the unfavorable terms of the extension
option, including additional cash outlays for an extension fee and partial principal prepayment,
which we did not expect would be recovered through property operations over the subsequent 12
months. Further, the estimated value of the Sevens Building property is significantly less than the
outstanding principal balance of the mortgage loan, and we did not expect that the value of the
property would exceed the principal balance by the end of the potential extension term. As such, we
had been in discussions with the Sevens Building lender regarding our options for transferring the
Sevens Building property to the Sevens Building lender, including foreclosure, deed-in-lieu of
foreclosure, or another form of transfer. However, on March 7, 2011, we received a letter from the
Sevens Building lender indicating that it had initiated a foreclosure action on the Sevens Building
property pursuant to our default of the mortgage loan for the Sevens Building property. A successor
trustee has been appointed by the Sevens Building lender to conduct a public auction for the sale
of the Sevens Building property, which is set to take place on March 25, 2011.
In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
As a result of the dispositions of the Tiffany Square property, the Executive Center I
property and the Four Resource Square property for no cash proceeds, as well as the expected
foreclosure of the Sevens Building property, which is also expected to result in no cash proceeds
to us, our ability to generate cash to fund our operations and/or pay future distributions to our
unit holders is significantly limited.
Since our cash flow is not assured, we may not pay distributions in the future.
Our ability to pay distributions has been adversely affected by the risks described herein.
Effective November 1, 2008, we suspended monthly cash distributions to our unit holders. Although
we distributed $2,500,000 of available funds to our unit holders during the year ended December 31,
2010 and distributed $500,000 on March 15, 2011, we cannot assure our unit holders that we will be
able to pay distributions in the future. We also cannot assure our unit holders that the receipt of
proceeds from future property dispositions, if any, will necessarily increase our cash available
for distribution to our unit holders. Our total distributions to our unit holders will ultimately
be significantly less than their initial investment.
Our use of borrowings to fund or partially fund our previous acquisitions and improvements on
properties could result in foreclosures and unexpected debt service expenses upon refinancing, both
of which could have an adverse impact on our operations and cash flow, and restrictive covenants in
our mortgage loan documents may restrict our operating or disposition activities.
We have relied on and continue to rely on borrowings and other external sources of financing
to fund or partially fund the costs of our previous investments, capital expenditures and other
items. 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.
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In addition, if we cannot meet our required mortgage payment obligations, the property or
properties subject to such mortgage indebtedness could be foreclosed upon by, or otherwise
transferred to, their respective lenders, which would result in loss of income and asset value to
us. For tax purposes, a foreclosure of any of our properties 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 basis in the property,
we would recognize income on foreclosure, but we may not receive any cash proceeds.
The mortgages on our properties contain customary restrictive covenants such as satisfaction
of certain debt service coverage and other ratios. The mortgages also include provisions that may
limit our 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, or acquire the business, assets or equity of, any third party. In addition, any
future lines of credit or mortgage loans may contain financial covenants, further restrictive
covenants and other obligations.
We have materially breached certain covenants or obligations in our debt agreements. As a
result, the lender may seize our income from the property securing the mortgage loan or legally
declare a default on the obligation, require us to repay the debt immediately and foreclose on the
property securing the mortgage loan. We may then have to sell our properties either at a loss or at
a time that prevents us from achieving a higher price. The 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 our properties through foreclosure.
Additionally, if the lender were to seize the income from the property securing a mortgage loan, we
would no longer have any discretion over the use of the income, which may prevent us from making
distributions to our unit holders.
As discussed above in Item 1A., Risk Factors, the mortgage loan for the Sevens Building
property, which had an outstanding principal balance of $21,494,000 as of December 31, 2010,
matured on October 31, 2010 and is currently in default due to non-payment of the outstanding
principal balance upon maturity. On March 7, 2011, we received a letter from the Sevens Building
lender indicating that it had initiated a foreclosure action on the Sevens Building property
pursuant to our default on the mortgage loan for the Sevens Building property. A successor trustee
has been appointed by the Sevens Building lender to conduct a public auction for the sale of the
Sevens Building property, which is set to take place on March 25, 2010.
If we are not able to sell our properties 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 our properties 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.
Most, if not all, of our properties were purchased at a time when the commercial real estate market
was experiencing substantial influxes of capital investment and competition for properties;
therefore, our properties may not maintain their current value and may experience further decreases
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. Most, if not
all, of our properties were 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 values of all of our remaining properties are less
than our purchase price for such properties, and we can give no assurance that our properties will
maintain their current value, or that the value will not continue to decrease even further.
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Due to the risks involved in the ownership of real estate, including adverse real estate market
conditions and our dependence upon our tenants to pay rent, there is no guarantee of any return on
our unit holders investments and our unit holders may lose some or all of their remaining
investment.
Our investments are subject to varying degrees of risk that generally arise from the ownership
of real estate. Adverse changes at our properties beyond our control would substantially reduce our
income from operations and decrease the values of our properties. These changes include, among
others, the following:
| downturns in national, regional or local economic conditions where our properties are located, which generally will negatively impact the demand for office space and rental rates; |
| changes in local market conditions such as an oversupply, including space available by sublease, or a reduction in demand, making it more difficult for us to lease space at attractive rental rates or at all; |
| competition from other properties, which could cause us to lose current or prospective tenants or cause us to reduce rental rates; |
| the 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; |
| changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption; |
| changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes; and |
| changes in interest rates and the availability of financing. |
A default by a tenant or the failure of a tenants guarantor to fulfill its obligations, or
other early termination of a lease could, depending upon the size of the leased premises and our
managers ability to successfully find a substitute tenant, have a material adverse effect on our
revenues. As of December 31, 2010, rent paid by the ten largest tenants at our consolidated
properties represented 63.4% of our annualized rental revenues. Based upon the current estimated
values, our properties have decreased in value since we purchased them due to these changes, among
others, and may continue to decrease in value even further, therefore, the value of our unit
holders investments have likewise decreased and they may lose some or all of their remaining
investment.
If we do not meet certain minimum financial covenants required by loans secured by our properties,
or obtain waivers from the lenders, the lenders may declare us in default and exercise remedies
under the loan agreements, including foreclosures on the properties, which could have a material
adverse effect on our financial position, results of operations and cash flows and has created
substantial doubt about our ability to continue as a going concern.
Our existing mortgage loans payable contain restrictive financial and non-financial covenants
and certain of our mortgage loans payable require us to maintain specified financial ratios. Our
ability to comply with these covenants may be affected by many events beyond our control and our
future operating results may not allow us to comply with the covenants, or in the event of a
default, to remedy that default. Our failure to comply with those financial covenants, certain
non-financial covenants or to comply with the other restrictions contained in our existing credit
agreements could result in a default, which could cause such indebtedness under our existing credit
agreements to become immediately due and payable. In the event that we are in default, we may not
be able to access alternative funding sources, or, if available to us, we may not be able to do so
on favorable terms and conditions.
As of December 31, 2010, we were in default on the mortgage loan for the Sevens Building
property, which had an outstanding principal balance of $21,494,000 as of December 31, 2010. On
March 7, 2011, we received a letter from the Sevens Building lender indicating that it had
initiated a foreclosure action on the Sevens Building property pursuant to our default on the
mortgage loan for the Sevens Building property. A successor trustee has been appointed by the
Sevens Building lender to conduct a public auction for the sale of the Sevens Building property,
which is set to take place on March 25, 2010. The expected foreclosure of the Sevens Building
property, as well as the recent sale of the Four Resource Square property to an entity affiliated
with its lender for no cash proceeds, raises substantial doubt about our ability to continue as a
going concern.
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Upon the sale of our properties, we may have to pay prepayment fees or defeasance charges on our
mortgages.
Some of our mortgage loans may contain penalties in the event of the prepayment of that
mortgage. The sale of our remaining assets may 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
assets, which could negatively affect the amount of cash available for distribution to our unit
holders.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds
available for distribution to our unit holders.
We have financed or may refinance our properties using interest-only mortgage indebtedness.
During the interest-only period, the amount of each scheduled payment will be less than that of a
traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be
reduced (except in the case of prepayments) because there are no scheduled monthly payments of
principal during this period. After the interest-only period, we will be required either to make
scheduled payments of amortized principal and interest or to make a lump-sum or balloon payment
at maturity. These required principal or balloon payments will increase the amount of our scheduled
payments and may increase our risk of default under the related mortgage loan. If the mortgage loan
has an adjustable interest rate, the amount of our scheduled payments also may increase at a time
of rising interest rates. Increased payments and substantial principal or balloon maturity payments
will reduce the funds available for distribution to our unit holders because cash otherwise
available for distribution will be required to pay principal and interest associated with these
mortgage loans.
The ongoing market disruptions may adversely affect our operating results and financial condition.
The global financial markets have been undergoing pervasive and fundamental disruptions. The
continuation or intensification of any such volatility may have an adverse impact on the
availability of credit to businesses generally and could lead to a further weakening of the U.S.
and global economies. To the extent that turmoil in the financial markets continues and/or
intensifies, it has the potential to materially affect: (i) the value of our properties; (ii) our
ability to make principal and interest payments on, or refinance, any outstanding debt when due;
(iii) the ability of our tenants to enter into new leasing transactions or satisfy rental payments
under existing leases; and/or (iv) our ability to continue as a going concern. The ongoing market
disruptions could also affect our operating results and financial condition as follows:
| Debt and Equity Markets Our results of operations are sensitive to the volatility of the credit markets. The real estate debt markets have been experiencing volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold commercial mortgage-backed securities in the market. Credit spreads for major sources of capital have widened significantly as investors have demanded a higher risk premium. This is resulting in lenders increasing the cost for debt financing. This may result in our property operations generating lower overall economic returns and a reduced level of cash flows, which could potentially impact our ability to pay distributions to our unit holders. In addition, the ongoing dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (1) limits the ability of real estate investors to benefit from reduced real estate values or to realize enhanced returns on real estate investments; (2) has slowed real estate transaction activity; and (3) may result in an inability to refinance debt as it becomes due, all of which may reasonably be expected to have a material impact, favorable or unfavorable, on revenues, income and/or cash flows from the acquisition and operations of real estate and mortgage loans. In addition, the state of the debt markets could have an impact on the overall amount of capital being invested in real estate, which may result in price or value decreases of real estate assets and impact our ability to dispose of our properties. The negative impact on the credit markets may also have material adverse effect on prospective buyers of our properties resulting from, but not limited to, an inability to assume the current loans on our properties and /or otherwise finance the acquisition of our properties 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 and on the real estate sector generally may have a material adverse effect on our operations. |
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| Valuations The ongoing market volatility will likely make the valuation of our properties more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties that could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, which may require us to recognize further impairment charges in our statements of operations. |
| Government Intervention The pervasive and fundamental disruptions that the global financial markets have been undergoing have led to extensive and unprecedented governmental intervention. Although the government intervention is intended to stimulate the flow of capital and to undergird the U.S. economy in the short term, it is impossible to predict the actual effect of the government intervention and what effect, if any, additional interim or permanent governmental intervention may have on the financial markets and/or the effect of such intervention on us and our results of operations. In addition, there is a high likelihood that regulation of the financial markets will be significantly increased in the future, which could have a material impact on our operating results and financial condition. |
We may be unable to secure funding for future capital improvements, which could adversely impact
our ability to attract or retain tenants and subsequently fund our operations.
In order to attract and retain tenants, our properties may be required to expend funds for
capital improvements. In addition, our properties may require substantial funds for renovations in
order to be sold, upgraded or repositioned in the market. If any of our properties have
insufficient capital reserves, it would have to obtain financing from other sources. Our properties
have established capital reserves in amounts that we, in our discretion, believe are necessary.
However, lenders 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 a propertys cash needs, that property may have to obtain financing to fund
its cash requirements. We cannot assure our unit holders that sufficient financing will be
available to any of our properties or, if available, will be available to them on economically
feasible terms or on terms that would be considered acceptable. Moreover, certain reserves required
by lenders may be designated for specific uses and may not be available for capital purposes such
as future capital improvements. Additional borrowing for capital improvements will increase
interest expense, which could have a material adverse effect on our ability to fund our operations.
If we sell properties by providing financing to purchasers, defaults by the purchasers would
adversely affect our cash flows from operations.
If and when we sell our properties, we intend to use our best efforts to sell them for cash.
However, in some instances we may sell our properties by providing financing to purchasers. When we
provide financing to purchasers, we will bear the risk that the purchaser may default on its
obligations under the financing, which could negatively impact cash flows from operations. Even in
the absence of a purchaser default, the distribution of sale proceeds, or their reinvestment in
other assets, will be delayed until the promissory notes or other property we may accept upon the
sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive
initial down payments in cash and other property in the year of sale in an amount less than the
selling price, and subsequent payments will be spread over a number of years. If any purchaser
defaults under a financing arrangement with us, it could negatively impact our ability to pay cash
distributions to our unit holders.
If we are subjected to a forced or voluntary liquidation, our unit holders may not receive any
profits resulting from the sale of one of our properties, or receive such profits in a timely
manner, because we may provide financing to the purchaser of such property.
If we are subjected to a forced or voluntary liquidation, we may sell our properties 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 as
partial payment. We do not have any limitations or restrictions on our taking such purchase money
obligations. To the extent we receive promissory notes or other property instead of cash from
sales, 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 will receive initial down payments in
the year of sale in an amount less than the selling price and subsequent payments will be spread
over a number of years. Therefore, our unit holders may experience a delay in the distribution of
the proceeds of a sale until such time.
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Our results of operations, our ability to pay distributions to our unit holders and our ability to
dispose of our properties are subject to general economic and regulatory factors we cannot control
or predict.
Our results of operations are 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 have had an effect on income from
our properties, our ability to dispose of properties, and yields from our properties:
| poor economic times may result in defaults by tenants of our properties and borrowers. We have been 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 our properties may impact our ability to maintain or increase occupancy levels; |
| early termination of leases could lead to lower occupancy levels and reduced operating results; |
| changes in interest rates and availability of debt financing could render the sale of properties difficult or unattractive; |
| periods of high interest rates will reduce cash flow from leveraged properties; and |
| 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. |
Our previous acquisition strategy of purchasing value-added properties increases the risk of owning
real estate and has adversely affected our results of operations, our ability to pay distributions
to our unit holders and our ability to dispose of properties in a timely manner, and could continue
to do so in the future.
Our previous acquisition strategy of purchasing value-added properties subjects us to even
greater risks than those generally associated with investments in real estate. Value-added
properties generally have some negative component, such as location in a poor economic market,
significant vacancy, lower than average leasing rates or the need for capital improvements. If we
are unable to take advantage of the value-added component following our acquisition of a property,
we may be unable to generate adequate cash flows from that property. In addition, if we desire to
sell that property, we may not be able to generate a profit or even recoup the original purchase
price. As a result, our investment in value-added properties could reduce the amount of cash
generated from our results of operations, our ability to profitably dispose of our properties and
our ability to pay distributions to our unit holders.
Distributions paid by us have included, and may in the future include, a return of capital.
Distributions paid by us in the past have included a return of capital, and any future
distributions paid to our unit holders may include a return of capital, rather than a return on
capital for our unit holders.
Our properties face significant competition.
We face significant competition from other property owners, operators and developers. All or
substantially all of our properties face competition from similar properties in the same markets.
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 our properties,
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 are willing to
provide. This combination of circumstances could adversely affect our results of operations,
liquidity and financial condition, which could reduce distributions to our unit holders. 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
affect our results of operations, liquidity and financial condition. In the event that we elect to
acquire additional properties, we will compete with other buyers who are also interested in
acquiring such properties, which may result in an increase in the cost that we pay for such
properties or may result in us ultimately not being able to acquire such properties. At the time we
elect to dispose of our properties, we will be in competition with sellers of similar properties to
locate suitable purchasers, which may result in us receiving lower proceeds from their disposal or
receiving no net proceeds at all.
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We incur significant and potentially increasing costs in connection with Exchange Act and
Sarbanes-Oxley Act compliance and we may become subject to liability for any failure to comply.
As a result of our obligation to register our securities with the SEC under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, we are subject to Exchange Act rules and
related reporting requirements. This compliance with the reporting requirements of the Exchange Act
requires timely filing of Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current
Reports on Form 8-K, among other actions. Further, recently enacted and proposed laws, regulations
and standards relating to corporate governance and disclosure requirements applicable to public
companies, including the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and new
SEC regulations have increased the costs of corporate governance, reporting and disclosure
practices which are now required of us. Our efforts to comply with applicable laws and regulations,
including requirements of the Exchange Act and the Sarbanes-Oxley Act, are expected to involve
significant, and potentially increasing, costs. In addition, these laws, rules and regulations
create the potential for new legal bases for administrative enforcement, civil and criminal
proceedings against us in the event of non-compliance, thereby increasing our risks of liability
and potential sanctions.
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 now required of us. We were
formed prior to the enactment of these new corporate governance standards and did not intend to
become subject to those provisions. As a result, we did not have all of the 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.
Lack of diversification and illiquidity of real estate may make it difficult for us to sell
underperforming properties or recover our investment in one or more properties.
Our business is subject to risks associated with investment solely in real estate. Real estate
investments are relatively illiquid. Our ability to vary our portfolio in response to changes in
economic and other conditions is limited. We cannot provide assurance that we will be able to
dispose of a property when we want or need to. Consequently, the sales price for any property may
not recoup or exceed the amount of our investment.
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 one or more properties.
Our portfolio lacks geographic diversity due to the fact that, as of December 31, 2010, we
held property ownership interests in only three states: California, Missouri and North Carolina. As
of March 18, 2011, we hold property ownership interests in only California and Missouri. This
geographic concentration of properties exposes us to economic downturns in these regions, such as
business layoffs or downsizing, industry slowdowns, relocations of businesses, changing
demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure
quality, state budgetary constraints and priorities, increases in real estate and other taxes,
costs of complying with government regulations or increased regulation and other factors. A
recession in any of these states could adversely affect our ability to generate or increase
operating revenues, attract new tenants or dispose of properties. In addition, our properties may
face competition in these states from other properties owned, operated or managed by our manager or
its affiliates. Our manager or its affiliates have interests that may vary from our interests in
such states.
Our success is dependent on the performance of our manager, its executive officers and employees.
Our ability to achieve our investment objectives and to conduct our operations is dependent
upon the performance of our manager, 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 manager as well as the
management of any entities or ventures in which we co-invest. If our manager suffers or is
distracted by adverse financial or operational problems in connection with its
operations unrelated to us, our managers ability to allocate time and/or resources to our
operations may be adversely affected. If our manager 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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Our manager has become aware of bankruptcy filings effected by two unaffiliated, individual
investor entities, who are minority owners in two tenant-in-common, or TIC, programs that were
originally sponsored by our manager. Our manager provided non-recourse/carve-out guarantees for
each of these properties, which only impose liability on our Manager 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 manager 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 managers 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 manager may raise under the guarantees, such liability
may be in an amount in excess of our managers net worth. Our manager 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 manager 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 manager 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 manager and its affiliate will recover, are
uncertain. In the Arbitration, TIC investors are asserting, among other things, that our manager
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 manager. Our
manager is vigorously defending against those claims. Our manager 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 managers financial condition, results of operations
and cash flows.
Our success is dependent on the performance of our manager, which could be adversely impacted by
the performance of its parent company.
Our manager 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 manager, its executive officers and its employees. If our manager suffers or is distracted
by adverse financial or operational problems in connection with NNNRA or Grubb & Ellis, our
managers ability to allocate time and/or resources to our operations may be adversely affected. If
our manager is unable to allocate sufficient resources to oversee and perform our operations for
any reason, our results of operations would be adversely impacted.
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 manager,
our financial condition and results of operations could also suffer.
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Our properties may face competition from other properties owned, operated or managed by our manager
or its affiliates.
As of March 18, 2011, our manager or its affiliates, G REIT Liquidating Trust (successor of G
REIT, Inc.), T REIT Liquidating Trust (successor of T REIT, Inc.) and NNN 2002 Value Fund, LLC, or
NNN 2002 Value Fund, as well as other private TIC investment programs and other real estate
investment programs, currently own, operate or manage properties that may compete with our
properties in California and Missouri. These properties may compete with our properties, which may
affect: (i) our ability to attract and retain tenants; (ii) the rents we are able to charge; and
(iii) the value of our investments in our properties. Our managers or its affiliates interest in,
operation of, or management of these other properties may create conflicts between our managers
fiduciary obligations to us and its fiduciary obligations to, or pecuniary interest in, these
competing properties. Our managers management of these properties may also limit the time and
services that our manager devotes to us because it will be providing similar services to these
other properties.
Our managers past performance is not a predictor of our future results.
Neither the track record of our manager in managing us, nor its performance with entities
similar to ours, shall imply or predict (directly or indirectly) any level of our future
performance or the future performance of our manager. Our managers performance and our performance
is dependent on future events and is, therefore, inherently uncertain. Past performance cannot be
relied upon to predict future events for a variety of factors, including, without limitation,
varying business strategies, different local and national economic circumstances, different supply
and demand characteristics relevant to buyers and sellers of assets, varying degrees of competition
and varying circumstances pertaining to the capital markets.
Our co-ownership arrangements with affiliated entities may not reflect solely our unit holders
best interests and may subject these investments to increased risks.
We have acquired our interests in the Enterprise Technology Center property through
co-ownership arrangements with one or more affiliates of our manager and/or entities that are also
managed by our manager. The terms of these co-ownership arrangements may be more favorable to the
other co-owners than to our unit holders. In addition, key decisions, such as a sale, refinancing
and new or amended leases, must be approved by the unanimous consent of the co-owners.
Our co-ownership arrangements contain risks not present in wholly owned properties.
Investing in properties through co-ownership arrangements, including investments held through
TIC investment programs or through partial ownership interests in limited liability companies,
subjects those investments to risks not present in a wholly owned property, including, without
limitation, 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 be unable 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 unit holders, |
| the risk that the co-owner(s) may breach the terms of a loan secured by a co-owned property, thereby triggering an event of default that affords the lender the right to exercise all of its remedies under the loan documents, including possible foreclosure of the entire property; 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 selling a property at a time when it would have adverse consequences to us. |
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Actions by co-owner(s) might have the result of subjecting the applicable property to
liabilities in excess of those otherwise contemplated and may have the effect of reducing our
available cash. The co-ownership arrangements generally limit our ability to manage properties in
our sole judgment and best interests including, without limitation, decisions regarding capital
improvements, renewing or entering new tenant leases, refinancing a property or selling a property.
It also may be difficult for us to sell our interest in any co-ownership arrangement at the time we
deem it best for our unit holders.
The conflicts of interest of our manager and its executive officers with us may mean that we will
not be managed by our manager solely in the best interests of our unit holders.
Our managers executives 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 unit holders.
Our manager also advises G REIT Liquidating Trust and T REIT Liquidating Trust and manages NNN
2002 Value Fund, as well as other private TIC programs and other real estate investment programs,
all of which may compete with us or otherwise have similar business interests and/or investment
objectives. Some of the executive officers of our manager also serve as officers and directors of
such programs.
Additionally, our manager is a wholly owned indirect subsidiary of Grubb & Ellis and certain
executive officers and employees of our manager own de-minimis 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 manager, Grubb & Ellis
and their affiliated entities. These conflicts of interest could:
| limit the time and services that our manager devotes to us, because it will be providing similar services to G REIT Liquidating Trust, T REIT Liquidating Trust, NNN 2002 Value Fund and other real estate investment programs and properties; |
| impair our ability to compete for tenants in geographic areas where other properties are advised by our manager and its affiliates; and |
| impair our ability to compete for the acquisition or disposition of properties with other real estate entities that are also advised by our manager and its affiliates and seeking to acquire or dispose of properties at or about the same time as us. |
If our manager breaches its fiduciary obligations to us, we may not meet our investment
objectives, which could reduce the expected cash available for distribution to our unit holders.
We may dispose of assets to affiliates of our manager, which could result in us entering into
transactions on less favorable terms than we would receive from a third party.
We may dispose of assets to affiliates of our manager. Affiliates of our manager may make
substantial profits in connection with such transactions and may owe fiduciary and/or other duties
to the selling or purchasing entity in these transactions, and conflicts of interest between us and
the selling or purchasing entities could exist in such transactions. These conflicts could result
in transactions based on terms that are less favorable to us than we would receive from a third
party.
The absence of arms length bargaining may mean that our agreements are not as favorable to unit
holders as these agreements otherwise would have been.
Any existing or future agreements between us and our manager, Realty or their affiliates were
not and will not be reached through arms length negotiations. Thus, such agreements may not solely
reflect our unit holders interests as a unit holder. For example, the Operating Agreement and the
Management Agreement were not the result of
arms length negotiations. As a result, these agreements may be relatively more favorable to
the other counterparty than to us.
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Losses for which we either could not or did not obtain insurance will significantly increase our
losses 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 properties we own, including liability
and fire and extended coverage, in amounts sufficient to permit the replacement of the properties
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 properties 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 one or more of our
properties, we could lose both our invested capital and anticipated profits from such properties.
Additionally, 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. 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.
Increases in our insurance rates could adversely affect our cash flow and our ability to fund our
operations.
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.
Furthermore, most, if not all, of our mortgage loans contain restrictive covenants regarding the
ratings of our insurance carriers, which we may not be able to comply with if our insurance
carriers do not have the required ratings and we are unable to obtain new policies from properly
rated insurance carriers without undue cost to us. As a result, our cash flow could be adversely
impacted by increased premiums. In addition, the sales prices of our properties may be affected by
these rising costs and adversely affect our ability to fund our operations.
Terrorist attacks and other acts of violence or war may affect the markets in which we operate and
have a material adverse effect on our financial condition, results of operations and our unit
holders investment.
Terrorist attacks may negatively affect our operations and our unit holders investment. We
have acquired real estate assets located in areas that are susceptible to attack. These attacks may
directly impact the value of our assets through damage, destruction, loss or increased security
costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage
to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply
increase the premiums we pay for coverage against property and casualty claims. Further, certain
losses resulting from these types of events are uninsurable or not insurable at reasonable costs.
More generally, any terrorist attack, other act of violence or war, including armed conflicts,
could result in increased volatility in, or damage to, the U.S. and worldwide financial markets and
economy, all of which could adversely affect our tenants ability to pay rent on their leases or
our ability to borrow money, which could have a material adverse effect on our financial condition,
results of operations and our unit holders investment.
Costs of complying with governmental laws and regulations related to environmental protection and
human health and safety may be high.
All real property investments and the operations conducted in connection with such investments
are subject to federal, state and local laws and regulations relating to environmental protection
and human health and safety. Some of these laws and regulations may impose joint and several
liability on customers, owners or operators for the costs to investigate or remediate contaminated
properties, regardless of fault or whether the acts causing the contamination were legal.
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Under various federal, state and local environmental laws, a current or previous owner or
operator of real property may be liable for the cost of removing or remediating hazardous or toxic
substances on such real property.
Such laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In addition, the presence of
hazardous substances, or the failure to properly remediate those substances, may adversely affect
our ability to sell, rent or pledge such real property as collateral for future borrowings.
Environmental laws also may impose restrictions on the manner in which real property may be used or
businesses may be operated. Some of these laws and regulations have been amended so as to require
compliance with new or more stringent standards as of future dates. Compliance with new or more
stringent laws or regulations or stricter interpretation of existing laws may require us to incur
material expenditures. Future laws, ordinances or regulations may impose material environmental
liability. Additionally, our tenants operations, the existing condition of land when we buy it,
operations in the vicinity of our real properties, such as the presence of underground storage
tanks, or activities of unrelated third parties may affect our real properties. In addition, there
are various local, state and federal fire, health, life-safety and similar regulations with which
we may be required to comply, and which may subject us to liability in the form of fines or damages
for noncompliance. In connection with the acquisition and ownership of our real properties, we may
be exposed to such costs in connection with such regulations. The cost of defending against
environmental claims, of any damages or fines we must pay, of compliance with environmental
regulatory requirements or of remediating any contaminated real property could materially and
adversely affect our business, lower the value of our assets or results of operations and,
consequently, lower the amounts available for distribution to our unit holders.
There is currently no public market for our units. Therefore, it will likely be difficult for our
unit holders to sell their units and, if our unit holders are able to sell their units, they may
elect to do so at a substantial discount from the price our unit holders paid.
There currently is no public market for our units. Additionally, the Operating Agreement
contains restrictions on the ownership and transfer of our unit holders units, and these
restrictions may inhibit our unit holders ability to sell their units. It may be difficult for our
unit holders to sell their units promptly or at all. If our unit holders are able to sell their
units, our unit holders may only be able to do so at a substantial discount from the price our unit
holders paid.
We could be treated as a publicly traded partnership for U.S. federal income tax purposes.
We could be deemed to be a publicly traded partnership for U.S. federal income tax purposes if
our interests are either (i) traded on an established securities market, or (ii) readily tradable
on a secondary market (or the substantial equivalent thereof). If we are treated as a publicly
traded partnership, we may be taxed as a corporation unless we meet certain requirements as to the
nature of our income. In such circumstances, our income (including gains from the sale of our
assets, if any) would be subject to corporate-level tax, which could reduce distributions to our
unit holders. While we do not believe that we will be taxed as a corporation, we have not requested
a ruling from the Internal Revenue Service, or the IRS, and there can be no assurance that the IRS
will not successfully challenge our status as a partnership.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have
available to repay debt obligations and fund operations.
The Federal Deposit Insurance Corporation, or FDIC, insures amounts up to $250,000 per
depositor per insured bank. We currently 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 and fund operations, which could result in a decline in the
value of our unit holders investments.
Our properties are subject to property taxes that may increase in the future, which could adversely
affect our ability to sell them to fund our operations.
Our properties are subject to property taxes that may increase as tax rates change and as they
are reassessed by taxing authorities. If property taxes increase, our ability to fund our
operations and sell our properties could be adversely affected.
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We do not expect to register as an investment company under the Investment Company Act of 1940 and,
therefore, our unit holders will not be entitled to its benefits and protections; and our operating
in a manner to avoid registration may reduce cash available for distributions to unit holders.
We believe that we will not operate in a manner that requires us to register as an investment
company under the Investment Company Act of 1940, as amended, or the Investment Company Act.
Investment companies subject to the Investment Company Act are required to comply with a variety of
substantive requirements such as requirements relating to:
| limitations on the capital structure of the entity; |
| restrictions on certain investments; |
| prohibitions on transactions with affiliated entities; and |
| public reporting disclosures, record keeping, voting procedures, proxy disclosure and similar corporate governance rules and regulations. |
Many of these requirements are intended to provide benefits or protections to security holders
of investment companies. Because we do not expect to be subject to these requirements, our unit
holders will not be entitled to these benefits or protections.
In order to maintain our exemption from regulation under the Investment Company Act, we must
engage primarily in the business of buying real estate. In addition, in order to operate in a
manner to avoid being required to register as an investment company, we may be unable to sell
assets we would otherwise want to sell, and we may need to sell assets we would otherwise wish to
retain. This may possibly lower our unit holders returns.
If we are required to register as an investment company under the Investment Company Act, the
additional expenses and operational limitations associated with such registration may reduce our
unit holders investment return.
We do not expect that we will operate in a manner that requires us to register as an
investment company under the Investment Company Act. However, the analysis relating to whether a
company qualifies as an investment company can involve technical and complex rules and regulations.
If we own assets that qualify as investment securities, as such term is defined under this
Investment Company Act, and the value of such assets exceeds 40.0% of the value of our total
assets, we may be deemed to be an investment company. It is possible that many, if not all, of our
interests in real estate may be held through other entities and some or all of these interests in
other entities may be deemed to be investment securities.
If we held investment securities and the value of these securities exceeded 40.0% of the value
of our total assets we may be required to register as an investment company. Investment companies
are subject to a variety of substantial requirements that could significantly impact our
operations. The costs and expenses we would incur to register and operate as an investment company,
as well as the limitations placed on our operations, could have a material adverse impact on our
operations and our unit holders investment return.
If we were required to register as an investment company but failed to do so, we would be
prohibited from engaging in our business, criminal and civil actions could be brought against us,
our contracts would be unenforceable unless a court were to require enforcement and a court could
appoint a receiver to take control of us and liquidate our business.
Item 1B. | Unresolved Staff Comments. |
None.
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Item 2. | Properties. |
Real Estate Investments
As of December 31, 2010, we owned two consolidated office properties, with one property each
located in Missouri and North Carolina, with an aggregate gross leaseable area, or GLA, of
approximately 349,000 square feet. We also owned an 8.5% interest in one unconsolidated office
property located in California with an aggregate GLA of approximately 381,000 square feet.
The majority of the rental income from our properties consists of rent received under leases
that provide for the payment of fixed minimum rent paid monthly in advance, and for the payment by
tenants of a pro rata share of the real estate taxes, special assessments, insurance, utilities,
common area maintenance, management fees and certain building repairs. Under the majority of our
leases, we are not currently obligated to pay the tenants proportionate share of real estate
taxes, insurance and property operating expenses up to the amount incurred during the tenants
first year of occupancy, or base year, or a negotiated amount approximating the tenants pro rata
share of real estate taxes, insurance and property operating expenses, or expense stop. The tenant
pays their pro rata share of an increase in expenses above the base year or expense stop.
The following table presents certain additional information about our consolidated and
unconsolidated properties as of December 31, 2010:
Annual | ||||||||||||||||||||||||||||
Date | % | GLA | Annualized | Physical | Rent Per | |||||||||||||||||||||||
Location | Acquired | Owned | (Sq Ft) | Rent(1) | Occupancy | Sq Ft(2) | ||||||||||||||||||||||
Consolidated Properties: |
||||||||||||||||||||||||||||
Four Resource Square(3) |
Charlotte, NC | 3/7/2007 | 100.0 | % | 152,000 | $ | 2,461,000 | 81.7 | % | $ | 19.83 | |||||||||||||||||
Sevens Building |
St. Louis, MO | 10/25/2007 | 100.0 | % | 197,000 | 2,741,000 | 66.0 | % | $ | 21.05 | ||||||||||||||||||
Totals / Weighted Avg. |
349,000 | $ | 5,202,000 | 72.8 | % | $ | 20.45 | |||||||||||||||||||||
Unconsolidated Property: |
||||||||||||||||||||||||||||
Enterprise Technology
Center(4) |
Scotts Valley, CA | 5/7/2004 | 8.5 | % | 381,000 | $ | 817,000 | 12.5 | % | $ | 17.17 |
(1) | Annualized rent is based on contractual base rent from leases in effect as of December 31, 2010. | |
(2) | Annual rent per square foot is the average annual rent per occupied square foot as of December 31, 2010. | |
(3) | The Four Resource Square property was sold to an entity affiliated with the Four Resource Square lender on January 20, 2011. | |
(4) | Unaffiliated TICs own 88.4% of the Enterprise Technology Center property. Unaffiliated entities own the remaining 3.1%; however, their interests are held in an entity that is also managed by our manager. |
The following information applies to our consolidated properties and our investments in
unconsolidated properties:
| we believe all of our properties are adequately covered by insurance and are suitable for their intended purposes; |
| our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and |
| depreciation is provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging from 6 to 39 years and over the shorter of the lease term or useful lives of the tenant improvements. |
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Lease Expirations
The following table presents information about the annual base rent of expiring leases at our
consolidated properties as of December 31, 2010:
% of Leased | % of Total | |||||||||||||||||||
Area | Annual Rent | Annual Rent | ||||||||||||||||||
Number of | Total Sq. Ft. of | Represented by | Under | Represented by | ||||||||||||||||
Year Ending December 31 | Leases Expiring | Expiring Leases | Expiring Leases | Expiring Leases | Expiring Leases | |||||||||||||||
2011 (1) |
24 | 65,000 | 25.6 | % | $ | 1,389,000 | 26.7 | % | ||||||||||||
2012 |
9 | 103,000 | 40.5 | 2,135,000 | 41.0 | |||||||||||||||
2013 |
4 | 16,000 | 6.5 | 383,000 | 7.4 | |||||||||||||||
2014 |
10 | 39,000 | 15.5 | 819,000 | 15.8 | |||||||||||||||
2015 |
4 | 24,000 | 9.3 | 322,000 | 6.2 | |||||||||||||||
Thereafter |
2 | 7,000 | 2.6 | 154,000 | 2.9 | |||||||||||||||
Total |
53 | 254,000 | 100.0 | % | $ | 5,202,000 | 100.0 | % | ||||||||||||
(1) | Leases that have been extended on a month-to-month basis are included with the leases scheduled to expire during the year ended December 31, 2011. |
Geographic Diversification and Concentration
The following table lists the states in which our consolidated properties are located and
provides certain information regarding our portfolios geographic diversification/concentration as
of December 31, 2010:
Aggregate | Approximate | Current | Approximate | |||||||||||||||||
No. of | Rentable | % of Rentable | Annual Base | % of Aggregate | ||||||||||||||||
State | Properties | Square Feet | Square Feet | Rent | Annual Rent | |||||||||||||||
North Carolina |
1 | 152,000 | 43.6 | % | $ | 2,461,000 | 47.3 | % | ||||||||||||
Missouri |
1 | 197,000 | 56.4 | 2,741,000 | 52.7 | |||||||||||||||
Total |
2 | 349,000 | 100.0 | % | $ | 5,202,000 | 100.0 | % | ||||||||||||
Indebtedness
As of December 31, 2010, we had secured mortgage loans payable outstanding on both of our
consolidated properties, representing an aggregate principal amount of $43,471,000, consisting of
$21,000,000, or 48.3%, of fixed rate mortgage loans payable at a weighted-average interest rate of
10.95% per annum and $22,471,000, or 51.7%, of variable rate mortgage loans payable at a
weighted-average interest rate of 7.26% per annum. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations, Liquidity and Capital Resources, and Note 7,
Mortgage Loans Payable, to our Consolidated Financial Statements accompanying this Annual Report on
Form 10-K, for further information regarding our indebtedness.
Item 3. | Legal Proceedings. |
Neither we nor any of our properties are presently subject to any material litigation and, to
our knowledge, no material litigation is threatened against us or any of our properties that, if
determined unfavorably to us, would have a material adverse effect on our financial condition,
results of operations or cash flows.
Item 4. | [Removed and Reserved.] |
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PART II
Item 5. | Market for Registrants Common Equity, Related Unit Holder Matters and Issuer Purchases of Equity Securities. |
Market Information
There is no established public trading market for our units.
As of December 31, 2010, there were no outstanding options or warrants to purchase our units
or securities convertible into our units. In addition, there were no units that could be sold
pursuant to Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, or that
we have agreed to register under the Securities Act for sale by unit holders, and there were no
units that are being, or have been publicly proposed to be, publicly offered by us.
Unit Holders
As of March 18, 2011, there were 799 unit holders of record with 323, 248 and 266 holders of
Class A, Class B and Class C units, respectively. Certain of our unit holders own units in more
than one class of units.
Distributions
Effective November 1, 2008, we suspended regular, monthly cash distributions to all unit
holders. Instead, we will make periodic distributions to unit holders from available funds, if any.
The Operating Agreement provides that Class A unit holders receive a 10.0% priority return,
Class B unit holders receive a 9.0% priority return and Class C unit holders receive an 8.0%
priority return.
The distributions declared per Class A unit, Class B unit and Class C unit in each quarter
since January 1, 2008 were as follows:
Quarters Ended | 2010 | 2009 | 2008 | |||||||||
March 31 |
$ | 100 | $ | | $ | 88 | ||||||
June 30 |
$ | 100 | $ | | $ | 88 | ||||||
September 30 |
$ | 50 | $ | | $ | 87 | ||||||
December 31 |
$ | | $ | | $ | 29 |
Holders of Class A units, Class B units and Class C units have received identical per-unit
distributions; however, distributions may vary among the three classes in the future. To the extent
that prior distributions have been inconsistent with the distribution priorities specified in the
Operating Agreement, we intend to adjust future distributions in order to provide overall net
distributions consistent with the priority provisions of the Operating Agreement.
Distributions payable to our unit holders may include a return of capital. Distributions
exceeding taxable income will constitute a return of capital for federal income tax purposes to the
extent of a unit holders basis. Distributions in excess of tax basis will generally constitute
capital gain.
The declaration of distributions is determined by our manager. The amount of distributions
depends on our actual cash flow, financial condition, capital requirements and such other factors
our manager may deem relevant.
Equity Compensation Plan Information
We have no equity compensation plans as of December 31, 2010.
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Item 6. | Selected Financial Data. |
The following tables set forth our selected historical consolidated financial data as of and
for the years ended December 31, 2010, 2009, 2008, 2007 and 2006. The selected consolidated balance
sheet data as of December 31,
2010 and 2009 and the selected consolidated operating and cash flow data for the years ended
December 31, 2010, 2009 and 2008 have been derived from the audited consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K. The selected consolidated balance
sheet data as of December 31, 2008, 2007 and 2006 and the selected consolidated operating and cash
flow data for the years ended December 31, 2007 and 2006 has been derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K, as adjusted for
reclassifications required by the Property, Plant and Equipment Topic for discontinued operations.
Historical results are not necessarily indicative of the results that may be expected for any
future period. The selected consolidated financial data set forth below should be read in
conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements accompanying this Annual Report on Form 10-K.
December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Total assets |
$ | 32,687,000 | $ | 53,944,000 | $ | 72,215,000 | $ | 108,681,000 | $ | 77,056,000 | ||||||||||
Mortgage loans
payable, including
mortgage loans
secured by
properties held for
sale and properties
held for non-sale
disposition |
$ | 43,471,000 | $ | 60,164,000 | $ | 68,915,000 | $ | 71,682,000 | $ | 37,186,000 | ||||||||||
NNN 2003 Value
Fund, LLC unit
holders (deficit)
equity |
$ | (12,068,000 | ) | $ | (9,173,000 | ) | $ | (279,000 | ) | $ | 30,865,000 | $ | 34,772,000 |
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Rental revenues |
$ | 6,852,000 | $ | 6,950,000 | $ | 6,512,000 | $ | 2,981,000 | $ | | ||||||||||
Real estate related impairments |
$ | 5,300,000 | $ | 700,000 | $ | 12,100,000 | $ | | $ | | ||||||||||
Interest expense |
$ | 3,244,000 | $ | 3,179,000 | $ | 3,180,000 | $ | 1,717,000 | $ | | ||||||||||
Equity in earnings (losses) of unconsolidated
real estate |
$ | 619,000 | $ | (3,154,000 | ) | $ | (1,031,000 | ) | $ | (1,421,000 | ) | $ | (1,139,000 | ) | ||||||
Loss from continuing operations |
$ | (6,623,000 | ) | $ | (5,341,000 | ) | $ | (18,285,000 | ) | $ | (3,820,000 | ) | $ | (1,232,000 | ) | |||||
Income (loss) from discontinued operations |
$ | 6,130,000 | $ | (3,749,000 | ) | $ | (10,983,000 | ) | $ | 4,498,000 | $ | 1,595,000 | ||||||||
Net (loss) income attributable to NNN 2003
Value Fund, LLC |
$ | (395,000 | ) | $ | (8,894,000 | ) | $ | (28,882,000 | ) | $ | 829,000 | $ | 381,000 | |||||||
Other Data: |
||||||||||||||||||||
Cash flows provided by (used in) operating
activities |
$ | 64,000 | $ | (811,000 | ) | $ | (2,600,000 | ) | $ | (4,018,000 | ) | $ | (4,789,000 | ) | ||||||
Cash flows provided by (used in) investing
activities |
$ | 1,663,000 | $ | 10,922,000 | $ | 352,000 | $ | (17,530,000 | ) | $ | 15,867,000 | |||||||||
Cash flows (used in) provided by financing
activities |
$ | (2,420,000 | ) | $ | (8,846,000 | ) | $ | (4,501,000 | ) | $ | 29,112,000 | $ | (21,194,000 | ) | ||||||
Distributions paid |
$ | (2,500,000 | ) | $ | | $ | (2,908,000 | ) | $ | (4,090,000 | ) | $ | (5,997,000 | ) | ||||||
Number of consolidated properties at year end |
2 | 4 | 5 | 5 | 6 | |||||||||||||||
Rentable square feet of consolidated properties |
349,000 | 738,000 | 837,000 | 837,000 | 763,000 | |||||||||||||||
Occupancy of consolidated properties |
72.8 | % | 65.7 | % | 66.1 | % | 64.9 | % | 52.8 | % |
The financial data above includes the impact of several acquisitions and dispositions of
consolidated and unconsolidated properties during the periods presented. As a result, the
comparability of the financial data above is limited.
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our consolidated financial
statements and notes thereto accompanying this Annual Report on Form 10-K. Such consolidated
financial statements and information have been prepared to reflect our financial position as of
December 31, 2010 and 2009, together with our results of operations and cash flows for the years
ended December 31, 2010, 2009 and 2008.
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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 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
those 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 we are including
this statement for purposes of complying with those safe-harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans, strategies and
expectations of us, 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 future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on our operations and future prospects on a consolidated basis
include, but are not limited to: changes in economic conditions generally and the real estate
market specifically; sales prices, lease renewals and new leases; legislative/regulatory changes;
availability of capital; changes in interest rates; our ability to service our debt, competition in
the real estate industry; the supply and demand for operating properties in our current and
proposed market areas; changes in accounting principles generally accepted in the United States of
America, or GAAP, policies and guidelines applicable to us; our ongoing relationship with our
manager (as defined below); and litigation. These risks and uncertainties should be considered in
evaluating forward looking statements and undue reliance should not be placed on such statements.
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 Background
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell our ownership interests in a
number of unspecified properties believed to have higher than average potential for capital
appreciation, or value-added properties. As of December 31, 2010, we held interests in three
commercial office properties, comprised of two consolidated properties and one unconsolidated
property. Our consolidated properties consist of Sevens Building, located in St. Louis, Missouri,
or the Sevens Building property, and Four Resource Square, located in Charlotte, North Carolina, or
the Four Resource Square property. Our unconsolidated property interest consists of an 8.5%
ownership interest in Enterprise Technology Center, located in Scotts Valley, California, or the
Enterprise Technology Center property. We currently intend to dispose of all of our remaining
properties and pay distributions to our unit holders from available funds, if any. We do not
anticipate acquiring any additional real estate properties at this time.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities as they come due. During the year ended December 31, 2010, we had a loss from
continuing operations of $6,623,000 and certain of our mortgage loans went into default.
Accordingly, there is substantial doubt about our ability to continue as a going concern.
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and is currently in default due
to non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
include an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property is significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, we had been in discussions
with the Sevens Building lender regarding our options for transferring the Sevens Building property
to the Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form
of transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. A successor trustee has been
appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens
Building property, which is set to take place on March 25, 2011.
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In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our
unit holders to attempt to extend the maturity date due to the unfavorable terms of the
extension option, including additional cash outlays for an extension fee and partial principal
prepayment, which we did not expect would be recovered through property operations over the
subsequent 12 months. Further, the estimated value of the Four Resource Square property was
significantly less than the outstanding principal balance of the mortgage loan, and we did not
expect that the value of the property would exceed the principal balance by the end of the
potential extension term. As such, on January 20, 2011, we sold the Four Resource Square property
to an entity affiliated with the Four Resource Square lender for a sales price equal to the
outstanding principal balance of the mortgage loan of $21,977,000. We did not receive any cash
proceeds from the sale of the property.
The maturities of the mortgage loans on the Sevens Building and Four Resource Square
properties, the subsequent sale of the Four Resource Square property to an entity affiliated with
its lender for no cash proceeds and the expected foreclosure of the Sevens Building property, which
we also expect will result in no cash proceeds, combined with our loss from continuing operations,
raises substantial doubt about our ability to continue as a going concern.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. While we
have no employees, certain executive officers and employees of our manager provide services to us
pursuant to the Operating Agreement. Our manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide certain services to us. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our manager prior to the termination of the Operating
Agreement or our dissolution, except for cause. The Management Agreement terminates with respect to
each of our properties upon the earlier of the sale of each respective property or December 31,
2013. Realty may be terminated without cause prior to the termination of the Management Agreement
or our dissolution, subject to certain conditions, including the payment by us to Realty of a
termination fee as provided in the Management Agreement.
Business Strategy
Our primary business strategy was to acquire, own, operate and subsequently sell our ownership
interests in a number of unspecified properties believed to have higher than average potential for
capital appreciation, or value-added properties. As of December 31, 2010, we held interests in
three commercial office properties, including two consolidated properties and one unconsolidated
property. Our principal objectives initially were to: (i) have the potential within approximately
one to five years, subject to market conditions, to realize income on the sale of our properties;
(ii) realize income through the acquisition, operation, development and sale of our properties or
our interests in our properties; and (iii) make periodic distributions to our unit holders from
cash generated from operations and capital transactions. We currently intend to dispose of all of
our remaining properties and pay distributions to our unit holders from available funds, if any. We
do not anticipate acquiring any additional real estate properties at this time.
Acquisitions and Dispositions
Pursuant to our Operating Agreement and Management Agreement, our manager or its affiliate is
entitled to a property acquisition fee or property disposition fee in connection with our
acquisition or disposition, as applicable, of properties. Certain acquisition and disposition fees
paid to Realty were passed through to our manager pursuant to an agreement between our manager and
Realty, or the Realty Agreement.
Acquisitions in 2010
We did not acquire any consolidated properties during the year ended December 31, 2010.
Dispositions in 2010
On May 7, 2010, we sold Tiffany Square, located in Colorado Springs, Colorado, or the Tiffany
Square property, to Tiffany Square, LLC, an entity affiliated with the Tiffany Square lender, for a
sales price of $12,395,000, which was equal to the outstanding principal balance of the mortgage
loan. We did not receive any cash proceeds from the transfer of the Tiffany Square property, and we
did not pay our manager a disposition fee in connection with the transfer of the property. We
recorded a gain on extinguishment of debt related to the Tiffany Square property of
$4,144,000 during the year ended December 31, 2010, which is included in the line item
entitled Income (loss) from discontinued operations in our accompanying consolidated statement of
operations for the year ended December 31, 2010.
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On June 2, 2010, we completed a deed-in-lieu of foreclosure transaction whereby we transferred
our ownership interest in Executive Center I, located in Dallas, Texas, or the Executive Center I
property, to the Executive Center I lender in exchange for complete cancellation of the loan
agreements and release of all of our liabilities, obligations and other indebtedness arising from
the loan agreements. At the time of transfer, the loan had an outstanding principal balance of
$4,590,000. We did not receive any cash proceeds from the transfer of the Executive Center I
property, and we did not pay our manager a disposition fee in connection with the transfer of the
property. We recorded a gain on extinguishment of debt related to the Executive Center I property
of $2,514,000 during the year ended December 31, 2010, which is included in the line item entitled
Income (loss) from discontinued operations in our accompanying consolidated statement of
operations for the year ended December 31, 2010.
Acquisitions in 2009
We did not acquire any consolidated properties during the year ended December 31, 2009.
Dispositions in 2009
On July 17, 2009, we completed the sale of 901 Civic Center, located in Santa Ana, California,
or the 901 Civic Center property, to an unaffiliated third party for a sales price of $11,250,000.
Our net cash proceeds were $1,946,000 after payment of the related mortgage loan, closing costs and
other transaction expenses. Our manager waived the disposition fee it was entitled to receive in
connection with the sale of the property. We recorded a gain on sale of the 901 Civic Center
property of $758,000 during the year ended December 31, 2009, which is included in the line item
entitled Income (loss) from discontinued operations in our accompanying consolidated statement of
operations for the year ended December 31, 2009. We owned a 96.9% interest in the 901 Civic Center
property.
Acquisitions and Dispositions in 2008
We did not acquire or dispose of any consolidated properties during the year ended December
31, 2008.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates
and judgments that affect the reported amounts of assets, 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 such as those related to
revenue recognition, allowance for doubtful accounts, impairment of real estate and intangible
assets, purchase price allocation, deferred assets and properties held for sale. 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 differ
under different assumptions or conditions.
Revenue Recognition and Allowance for Doubtful Accounts
Base rental income is recognized on a straight-line basis over the terms of the respective
lease agreements in accordance with the Financial Accounting Standards Board, or FASB, Accounting
Standards Codification, or Codification, Topic 840, Leases. Differences between rental income
recognized and amounts contractually due under the lease agreements are credited or charged, as
applicable, to rent receivable. We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of tenants to make required payments under lease agreements. We also
maintain an allowance for deferred rent receivables arising from the straight-lining of rents. We
determine the adequacy of this allowance by continually evaluating individual tenant receivables
considering the tenants financial condition, security deposits, letters of credit, lease
guarantees, if applicable, and current economic conditions.
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Real Estate Related Impairments
We assess the impairment of a real estate asset when events or changes in circumstances
indicate that its carrying amount may not be recoverable. Indicators we consider important which
could trigger an impairment review include the following:
| a significant negative industry or economic trend; |
| a significant underperformance of a property relative to historical or projected future operating results; and |
| a significant change in the manner in which the asset is used. |
In the event that the carrying amount of a property exceeds the sum of the undiscounted cash
flows (excluding interest) that are expected to result from the use and eventual disposition of the
property, we would recognize an impairment loss to the extent the carrying amount exceeds the
estimated fair value of the property. The estimation of expected future net cash flows is
inherently uncertain and relies on subjective assumptions dependent upon future and current market
conditions and events that affect the ultimate value of the property. It requires us to make
assumptions related to future rental rates, tenant allowances, operating expenditures, property
taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future
sale of the property. The estimation of proceeds to be generated from the future sale of the
property requires us to also make estimates about capitalization rates and discount rates.
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, during the
years ended December 31, 2010, 2009 and 2008, we assessed the values of our consolidated
properties. These valuation assessments resulted in us recognizing charges for real estate related
impairments of $5,300,000, $4,000,000 and $20,700,000 against the carrying values of our
consolidated real estate investments during the years ended December 31, 2010, 2009 and 2008,
respectively.
Additionally, our unconsolidated properties were also assessed for impairment and impairment
charges of $18,000,000, $21,570,000 and $4,200,000 were recorded against their carrying values
during the years ended December 31, 2010, 2009 and 2008, respectively. Our share of these
impairments was approximately $374,000, $3,115,000 and $500,000 during the years ended December 31,
2010, 2009 and 2008, respectively. Our share of the impairments recorded during the year ended
December 31, 2010 was limited to the amount of our remaining investment in the unconsolidated
property.
Real estate related impairments are reflected in our consolidated statements of operations as
follows:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Real estate related impairments of operations held for
non-sale disposition |
$ | 5,300,000 | $ | 700,000 | $ | 12,100,000 | ||||||
Equity in income (losses) of unconsolidated real estate |
374,000 | 3,115,000 | 500,000 | |||||||||
Income (loss) from discontinued operations |
| 3,300,000 | 8,600,000 | |||||||||
$ | 5,674,000 | $ | 7,115,000 | $ | 21,200,000 | |||||||
The current economic conditions have affected property values and the availability of credit.
If we are unable to execute on our plans for the continued operation and/or disposition of our
properties, or if economic conditions affecting property values and the availability of credit
decline further, our investments in real estate assets may become further impaired.
Properties Held for Non-Sale Disposition
Our properties held for non-sale disposition are stated at historical cost less accumulated
depreciation, net of real estate related impairment charges. The cost of our properties held for
non-sale disposition includes the cost of land and completed buildings and related improvements.
Expenditures that increase the service life of the property are capitalized and the cost of
maintenance and repairs is charged to expense as incurred. The cost of buildings and improvements
are depreciated on a straight-line basis over the estimated useful lives of the buildings and
improvements, ranging from 6 to 39 years and the shorter of the lease term or useful life, ranging
from 1 to 6 years for tenant improvements. When depreciable property is retired or disposed of, the
related costs and accumulated depreciation are removed from the accounts and any gain or loss is
reflected in discontinued operations.
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During the year ended December 31, 2009, we elected to cease the subsidization of the
operations and debt service on the non-recourse promissory note for Executive Center I, located in
Dallas, Texas, or the Executive Center I property, which matured on October 1, 2009. The property
was reclassified as a property held for non-sale disposition at that time, as we determined that
the property would be transferred to the Executive Center I lender in the first half of 2010. In
the first quarter of 2010, Tiffany Square, located in Colorado Springs, Colorado, or the Tiffany
Square property, was also reclassified as a property held for non-sale disposition, as its related
mortgage loan matured on February 15, 2010 and we determined that the property would be transferred
to the Tiffany Square lender in the second quarter of 2010. Further, in the third quarter of 2010,
we determined that the Sevens Building and Four Resource Square properties would also be
transferred to their respective lenders, and have reclassified both of these properties as
properties held for non-sale disposition.
Factors Which May Influence Results of Operations
Rental Revenue
The amount of rental revenue generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space and to lease currently available space and
space available from unscheduled lease terminations at the existing rental rates. Negative trends
in one or more of these factors could adversely affect our rental income in future periods.
Scheduled Lease Expirations
As of December 31, 2010, our two consolidated properties were 72.8% leased to 58 tenants.
Leases representing approximately 25.6% of the total leased area expire during 2011. Our leasing
strategy focuses on negotiating renewals for leases scheduled to expire during the year. If we are
unable to negotiate such renewals, we will try to identify new tenants or collaborate with existing
tenants who are seeking additional space to occupy. If the aggregate lease non-renewal factor at a
property exceeds the factor we projected when we acquired the property, we evaluate any tenant
relationship intangible assets in connection with our assessment of real estate assets for
impairment.
Sarbanes-Oxley Act
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 compliance with corporate governance, reporting
and disclosure practices which are now required of us. These costs were unanticipated at the time
of our formation and may have a material impact on our results of operations. Furthermore, these
costs may increase in the future, and any increased costs may affect our liquidity or capital
resources and/or future distribution of funds, if any, to our unit holders. As part of our
compliance with the Sarbanes-Oxley Act, we provided managements assessment of our internal control
over our financial reporting as of December 31, 2010 and continue to comply with such regulations.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in case of non-compliance,
thereby increasing the risks of liability and potential sanctions against us. We expect that our
efforts to comply with these laws and regulations will continue to involve significant, and
potentially increasing costs and, our failure to comply, could result in fees, fines, penalties or
administrative remedies against us.
Results of Operations
Our operating results are primarily comprised of income derived from our portfolio of
properties, as described below. Because our primary business strategy was acquiring properties with
greater than average appreciation potential, enhancing value and realizing gains upon disposition
of these properties, our operations may reflect significant property acquisitions and dispositions
from period to period. As a result, the comparability of the financial data is limited and may vary
significantly from period to period.
We have made reclassifications of the operating results of all properties sold or abandoned as
of December 31, 2010 from Loss from continuing operations to Income (loss) from discontinued
operations for all periods
presented to conform with the current year financial statement presentation. In addition, we
have made reclassifications from Income (loss) from discontinued operations to Loss from
continuing operations for all periods presented for properties that no longer met the held for
sale classification criteria as of December 31, 2010.
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Comparison of the Years Ended December 31, 2010 and 2009
Years Ended December 31, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
Revenues: |
||||||||||||||||
Rental revenue of operations held for
non-sale disposition |
$ | 6,852,000 | $ | 6,950,000 | $ | (98,000 | ) | (1.4 | )% | |||||||
Expenses: |
||||||||||||||||
Operating expenses of operations held
for non-sale disposition |
5,235,000 | 4,612,000 | 623,000 | 13.5 | % | |||||||||||
General and administrative |
362,000 | 587,000 | (225,000 | ) | (38.3 | )% | ||||||||||
Real estate related impairments of
operations held for non-sale
disposition |
5,300,000 | 700,000 | 4,600,000 | 657.1 | % | |||||||||||
10,897,000 | 5,899,000 | 4,998,000 | 84.7 | % | ||||||||||||
(Loss) income before other income
(expense) and discontinued operations |
(4,045,000 | ) | 1,051,000 | (5,096,000 | ) | (484.9 | )% | |||||||||
Other income (expense): |
||||||||||||||||
Interest expense of operations held
for non-sale disposition |
(3,244,000 | ) | (3,179,000 | ) | (65,000 | ) | 2.0 | % | ||||||||
Interest and dividend income |
23,000 | 47,000 | (24,000 | ) | (51.1 | )% | ||||||||||
Investment related impairments |
| (126,000 | ) | 126,000 | (100.0 | )% | ||||||||||
Equity in income (losses) of
unconsolidated real estate |
619,000 | (3,154,000 | ) | 3,773,000 | 119.6 | % | ||||||||||
Other income |
24,000 | 20,000 | 4,000 | 20.0 | % | |||||||||||
Loss from continuing operations |
(6,623,000 | ) | (5,341,000 | ) | (1,282,000 | ) | (24.0 | )% | ||||||||
Income (loss) from discontinued operations |
6,130,000 | (3,749,000 | ) | 9,879,000 | 263.5 | % | ||||||||||
Consolidated net loss |
$ | (493,000 | ) | $ | (9,090,000 | ) | $ | 8,597,000 | (94.6 | )% | ||||||
Rental Revenue of Operations Held for Non-Sale Disposition
Rental revenue of operations held for non-sale disposition decreased $98,000, or 1.4%, to
$6,852,000 during the year ended December 31, 2010, compared to $6,950,000 for the year ended
December 31, 2009.
Operating Expenses of Operations Held for Non-Sale Disposition
Operating expenses of operations held for non-sale disposition increased $623,000, or 13.5%,
to $5,235,000 during the year ended December 31, 2010, compared to $4,612,000 for the year ended
December 31, 2009. The increase was primarily attributable to higher depreciation expense for the
Sevens Building property. The Sevens Building property was classified as held for sale for the
majority of 2009 and, accordingly, was not depreciated. In the fourth quarter of 2009, the property
was reclassified as held for investment, and depreciation of the building, improvements and
intangible assets resumed upon reclassification.
General and Administrative
General and administrative expense decreased $225,000, or 38.3%, to $362,000 during the year
ended December 31, 2010, compared to $587,000 for the year ended December 31, 2009. The decrease
was primarily due to lower external audit costs and other professional fees.
Real Estate Related Impairments of Operations Held for Non-Sale Disposition
Real estate related impairments of operations held for non-sale disposition were $5,300,000
during the year ended December 31, 2010, compared to real estate related impairments of $700,000
for the year ended December 31, 2009. The larger impairments recorded during the year ended
December 31, 2010 were due to impairments
recorded related to the Sevens Building property, which primarily resulted from the
identification of some repair and restoration work required on the propertys parking structure, as
well as a decrease in our lease renewal rate estimates.
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Interest Expense of Operations Held for Non-Sale Disposition
Interest expense of operations held for non-sale disposition increased $65,000, or 2.0%, to
$3,244,000 during the year ended December 31, 2010, compared to $3,179,000 for the year ended
December 31, 2009. The increase was primarily due to the higher default interest rate being
recorded on the Sevens Building mortgage loan, which has been in default since October 31, 2010 due
to non-payment of the principal balance upon maturity. This increase was partly offset by lower
amortization of deferred financing fees related to the Four Resource Square mortgage loan because
the fees became fully amortized upon the original maturity date of the mortgage loan on March 7,
2010.
Interest and Dividend Income
Interest and dividend income was $23,000 during the year ended December 31, 2010, compared to
$47,000 for the year ended December 31, 2009.
Equity in Income (Losses) of Unconsolidated Real Estate
Equity in income of unconsolidated real estate was $619,000 during the year ended December 31,
2010, compared to equity in losses of unconsolidated real estate of $3,154,000 for the year ended
December 31, 2009. The equity in income of unconsolidated real estate for the year ended December
31, 2010 was comprised of: (i) our share of the gain on sale and gains on the forgiveness of debt
and forgiveness of management fees payable to our manager, upon the sale of Executive Center II and
III, located in Dallas, Texas, or the Executive Center II and III property, (ii) the reversal of an
allowance against the notes and interest receivable from the Executive Center II and III property,
as the amounts were fully repaid upon the sale of the property, and (iii) our share of the
$18,000,000 real estate related impairment charge recorded by the Enterprise Technology Center
property, which was limited to the amount of our remaining investment in the property.
The equity in losses of unconsolidated real estate for the year ended December 31, 2009 was
primarily attributable to real estate related impairment charges of $21,570,000 that were recorded
at our unconsolidated real estate, of which our portion was approximately $3,115,000.
Other Income
Other income was $24,000 during the year ended December 31, 2010, compared to other income of
$20,000 for the year ended December 31, 2009.
Income (Loss) from Discontinued Operations
Income from discontinued operations was $6,130,000 during the year ended December 31, 2010,
compared to a loss from discontinued operations of $3,749,000 for the year ended December 31, 2009.
During the year ended December 31, 2010, the income from discontinued operations resulted primarily
from the gains recognized on the extinguishment of debt related to the Tiffany Square and Executive
Center I properties of $4,144,000 and $2,514,000, respectively. The loss from discontinued
operations during the year ended December 31, 2009 was primarily attributable to real estate
related impairment charges totaling $3,300,000 related to the Executive Center I and Tiffany Square
properties, as well as the operating losses of these properties incurred during the period, partly
offset by a gain of $758,000 recognized on the sale of the 901 Civic Center property.
Consolidated Net Loss
As a result of the above, consolidated net loss was $493,000 for the year ended December 31,
2010, compared to consolidated net loss of $9,090,000 for the year ended December 31, 2009.
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Comparison of the Years Ended December 31, 2009 and 2008
Years Ended December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Revenues: |
||||||||||||||||
Rental revenue of operations held for
non-sale disposition |
$ | 6,950,000 | $ | 6,512,000 | $ | 438,000 | 6.7 | % | ||||||||
Expenses: |
||||||||||||||||
Operating expenses of operations held
for non-sale disposition |
4,612,000 | 6,297,000 | (1,685,000 | ) | (26.8 | )% | ||||||||||
General and administrative |
587,000 | 723,000 | (136,000 | ) | (18.8 | )% | ||||||||||
Real estate related impairments of
operations held for non-sale
disposition |
700,000 | 12,100,000 | (11,400,000 | ) | (94.2 | )% | ||||||||||
5,899,000 | 19,120,000 | (13,221,000 | ) | (69.1 | )% | |||||||||||
Income (loss) before other income
(expense) and discontinued operations |
1,051,000 | (12,608,000 | ) | 13,659,000 | 108.3 | % | ||||||||||
Other income (expense): |
||||||||||||||||
Interest expense of operations held
for non-sale disposition |
(3,179,000 | ) | (3,180,000 | ) | 1,000 | (0.0 | )% | |||||||||
Interest and dividend income |
47,000 | 219,000 | (172,000 | ) | (78.5 | )% | ||||||||||
Loss on sales of marketable securities |
| (808,000 | ) | 808,000 | | % | ||||||||||
Investment related impairments |
(126,000 | ) | (900,000 | ) | 774,000 | (86.0 | )% | |||||||||
Equity in losses of unconsolidated
real estate |
(3,154,000 | ) | (1,031,000 | ) | (2,123,000 | ) | 205.9 | % | ||||||||
Other income |
20,000 | 23,000 | (3,000 | ) | (13.0 | )% | ||||||||||
Loss from continuing operations |
(5,341,000 | ) | (18,285,000 | ) | 12,944,000 | (70.8 | )% | |||||||||
Loss from discontinued operations |
(3,749,000 | ) | (10,983,000 | ) | 7,234,000 | (65.9 | )% | |||||||||
Consolidated net loss |
$ | (9,090,000 | ) | $ | (29,268,000 | ) | $ | 20,178,000 | (68.9 | )% | ||||||
Rental Revenue of Operations Held for Non-Sale Disposition
Rental revenue of operations held for non-sale disposition increased $438,000, or 6.7%, to
$6,950,000 during the year ended December 31, 2009, compared to $6,512,000 for the year ended
December 31, 2008. The increase was attributable to higher rental revenue at the Four Resource
Square and Sevens Building properties.
Operating Expenses of Operations Held for Non-Sale Disposition
Operating expenses of operations held for non-sale disposition decreased $1,685,000, or 26.8%,
to $4,612,000 during the year ended December 31, 2009, compared to $6,297,000 for the year ended
December 31, 2008. This decrease was primarily due to a $1,714,000 decrease in depreciation and
amortization expense at the Four Resource Square and Sevens Building properties. Depreciation
expense for the Four Resource Square property decreased due to the $5,900,000 impairment charge
recorded in 2008 and the resulting lower depreciable basis. Depreciation expense for the Sevens
Building property decreased because it was classified as held for sale for the majority of 2009 and
was not depreciated during that period.
General and Administrative
General and administrative expense decreased $136,000, or 18.8%, to $587,000 during the year
ended December 31, 2009, compared to $723,000 for the year ended December 31, 2008. The decrease
was due primarily to lower tax and audit fees.
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Real Estate Related Impairments of Operations held for non-sale disposition
During the year ended December 31, 2009, we reviewed our consolidated properties for
impairment in accordance with FASB Codification Topic 360, Property, Plant and Equipment, as
indicators of impairment were present. As a result of these impairment reviews, we recorded real
estate related impairments of $600,000 related to the Sevens Building property and $100,000 related
to the Four Resource Square property, for total real estate related impairments of $700,000 during
the year ended December 31, 2009.
During the year ended December 31, 2008, we reviewed our consolidated properties for
impairment in accordance with FASB Codification Topic 360, Property, Plant and Equipment, as
indicators of impairment were present. As a result of these impairment reviews, we recorded real
estate related impairments of $6,200,000 related to the Sevens Building property and $5,900,000
related to the Four Resource Square property, for total real estate related impairments of
$12,100,000 during the year ended December 31, 2008.
Interest Expense of Operations Held for Non-Sale Disposition
Interest expense decreased $1,000 to $3,179,000 during the year ended December 31, 2009,
compared to interest expense of $3,180,000 for the year ended December 31, 2008.
Interest and Dividend Income
Interest and dividend income decreased $172,000, or 78.5%, to $47,000 during the year ended
December 31, 2009, compared to interest and dividend income of $219,000 for the year ended December
31, 2008, primarily due to a decrease in interest income earned on our money market accounts and
our marketable securities, as all of the securities were sold during 2008.
Loss on Sales of Marketable Securities
We did not hold any investments in marketable securities during the year ended December 31,
2009. We recorded a loss on sales of marketable securities of $808,000 during the year ended
December 31, 2008. The loss was due to the sale of underperforming investments in marketable equity
securities in our investment account during 2008.
Investment Related Impairments
Investment related impairments were $126,000 during the year ended December 31, 2009, compared
to $900,000 during the year ended December 31, 2008. During 2009, we recorded an investment related
impairment of $126,000 on Chase Tower, located in Austin, Texas, or the Chase Tower property, to
adjust the investment balance to its estimated fair value as of December 31, 2009. During 2008, we
recorded investment related impairments of $200,000 on the Enterprise Technology Center property,
$300,000 on the Executive Center II & III property, and $400,000 on the Chase Tower property to
adjust the investment balances to their estimated fair values as of December 31, 2008.
Equity in Losses of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate increased $2,123,000, or 205.9%, to a loss of
$3,154,000 during the year ended December 31, 2009, compared to loss of $1,031,000 for the year
ended December 31, 2008. The increased loss was primarily attributable to real estate related
impairment charges of $21,570,000 recorded during the year ended December 31, 2009 at our
unconsolidated properties, of which our share was approximately $3,115,000, compared to real estate
related impairment charges of $4,200,000 recorded during the year ended December 31, 2008 at our
unconsolidated properties, of which our share was approximately $500,000. The larger impairment
charges recorded during the year ended December 31, 2009 were partly offset by decreases in
depreciation expense at all three unconsolidated properties, which was due to the impairment
charges and the resulting lower depreciable bases, as well as the fact these properties were
classified as held for sale for a portion of 2009 and were not depreciated during that period. The
impairment charges recorded during 2009 exceeded any catch-up depreciation expense that would have
otherwise been required upon reclassification to operating properties.
Other Income
Other income decreased $3,000 to $20,000 during the year ended December 31, 2009, compared to
$23,000 for the year ended December 31, 2008.
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Loss from Discontinued Operations
Loss from discontinued operations decreased $7,234,000 to $3,749,000 during the year ended
December 31, 2009, compared to $10,983,000 for the year ended December 31, 2008. The loss from
discontinued operations during the year ended December 31, 2009 was primarily attributable to real
estate related impairment charges totaling $3,300,000 related to the Executive Center I and Tiffany
Square properties, as well as the operating losses of these properties incurred during the period,
partly offset by a gain of $758,000 recognized on the sale of the 901 Civic Center property. The
loss from discontinued operations during the year ended December 31, 2008 was mainly due to real
estate related impairment charges totaling $8,600,000 related to the 901 Civic Center, Executive
Center I and Tiffany Square properties, in addition to the operating losses for these properties
incurred during the period.
Consolidated Net Loss
As a result of the above, our consolidated net loss was $9,090,000 for the year ended December
31, 2009, compared to $29,268,000 for the year ended December 31, 2008.
Liquidity and Capital Resources
Ability to Continue as a Going Concern
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities as they come due. During the year ended December 31, 2010, we had a loss from
continuing operations of $6,623,000 and certain of our mortgage loans went into default.
Accordingly, there is substantial doubt about our ability to continue as a going concern.
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and is currently in default due
to non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
include an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property is significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, we had been in discussions
with the Sevens Building lender regarding our options for transferring the Sevens Building property
to the Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form
of transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. A successor trustee has been
appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens
Building property, which is set to take place on March 25, 2011.
In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
The maturities of the mortgage loans on the Sevens Building and Four Resource Square
properties, the subsequent sale of the Four Resource Square property to an entity affiliated with
its lender for no cash proceeds and the expected foreclosure of the Sevens Building property, which
we also expect will result in no cash proceeds, combined with our loss from continuing operations,
raises substantial doubt about our ability to continue as a going concern.
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Sources of Capital and Liquidity
Our primary sources of capital historically have been derived from: (i) proceeds from the sale
of properties; (ii) our ability to obtain debt financing from third parties and related parties
including, without limitation, our manager and its affiliates; and (iii) our real estate
operations. Our sources of capital are currently extremely limited due to the fact that we do not
expect to receive any cash proceeds from the ultimate dispositions of our remaining consolidated
and unconsolidated properties. We derive substantially all of our revenues from tenants under
leases at our properties. Our operating cash flow, therefore, depends materially on the rents that
we are able to charge our tenants and the ability of these tenants to make their rental payments to
us. The terms of any debt financing received from our manager or its affiliates are not negotiated
on an arms length basis and, under the terms of the Operating Agreement, we may be required to pay
interest on our borrowings at a rate of up to 12.00% per annum. We may use the net proceeds from
such loans for any purpose, including, without limitation, operating requirements, capital and
tenant improvements, rate lock deposits and distributions.
Our primary uses of cash are: (i) the payment of principal and interest on outstanding
indebtedness; (ii) capital investments in our existing portfolio of properties; (iii)
administrative costs; and (iv) distributions to our unit holders. We may also regularly require
capital to invest in our existing portfolio of operating assets in connection with routine capital
improvements, deferred maintenance on our properties recently acquired and leasing activities,
including funding tenant improvements, allowances, leasing commissions, development of land and
capital improvements. 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.
There are currently no limits or restrictions on the use of proceeds from our manager and its
affiliates that would prohibit us from making the proceeds available for distribution. We may also
pay distributions from cash from capital transactions, including, without limitation, the sale of
one or more of our properties. Our distribution rate was at 7.0% per annum (excluding special
distributions) prior to the suspension of distributions effective November 1, 2008 and was the same
among all unit holders from inception through November 1, 2008. The suspension of distributions
allows us to conserve approximately $290,000 per month. These funds have been applied, and it is
anticipated that they will continue to be applied, towards future tenant lease up costs not covered
by lender reserves and to supplement the lender reserve funding and other operating costs as
necessary.
Debt Financing
One of our principal liquidity needs is related to the payment of principal and interest on
outstanding indebtedness. As of December 31, 2010, we had secured mortgage loans payable
outstanding on both of our consolidated properties, representing an aggregate principal amount of
$43,471,000, consisting of $21,000,000, or 48.3%, of fixed rate mortgage loans payable at a
weighted-average interest rate of 10.95% per annum and $22,471,000, or 51.7%, of variable rate
mortgage loans payable at a weighted-average interest rate of 7.26% per annum.
The composition of our aggregate mortgage loans payable on consolidated properties as of
December 31, 2010 was as follows:
Total Mortgage Loans Payable | Weighted-Average Interest Rate | |||||||||||||||
As of December 31, | As of December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Variable rate |
$ | 22,471,000 | $ | 34,574,000 | 7.26 | % | 7.47 | % | ||||||||
Fixed rate |
21,000,000 | 25,590,000 | 10.95 | % | 7.04 | % | ||||||||||
$ | 43,471,000 | $ | 60,164,000 | 9.04 | % | 7.28 | % | |||||||||
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Additional information regarding our mortgage loans payable as of December 31, 2010 was as
follows:
Weighted- | ||||||||||||||||
Average | Variable | |||||||||||||||
Principal | Interest | or Fixed | ||||||||||||||
Outstanding | Maturity Date | Rate | Interest Rate | |||||||||||||
Consolidated Properties: |
||||||||||||||||
Sevens Building(1) |
$ | 21,494,000 | 10/31/2010 | 10.87 | % | Fixed & Variable | ||||||||||
Four Resource Square(2) |
21,977,000 | 1/20/2011 | 7.25 | % | Variable | |||||||||||
$ | 43,471,000 | |||||||||||||||
Unconsolidated Property: |
||||||||||||||||
Enterprise Technology Center(3) |
$ | 32,562,000 | 05/11/2011 | 11.44 | % | Fixed | ||||||||||
(1) | The mortgage loan on the Sevens Building property is currently in default due to non-payment of principal upon maturity. On March 7, 2011, we received a letter from the Sevens Building lender indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to our default on the mortgage loan for the Sevens Building property. A successor trustee has been appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens Building property, which is set to take place on March 25, 2011. The mortgage loan on the Sevens Building property includes $21,000,000 with a fixed interest rate of 5.95% per annum and a default interest rate of 10.95% per annum, and $494,000 with a variable interest rate of 2.56% per annum and a default interest rate of 7.56% per annum as of December 31, 2010. | |
(2) | The Four Resource Square property was sold to an entity affiliated with the lender of the Four Resource Square property on January 20, 2011. | |
(3) | The mortgage loan on the Enterprise Technology Center property is in default due to non-payment of monthly interest and principal, and we are currently discussing our options regarding this property with the Enterprise Technology Center lender. The mortgage loan has a fixed interest rate of 6.44% per annum and a default interest rate of 11.44% per annum. |
Certain of our consolidated and unconsolidated properties financed by borrowings are required
by the terms of their applicable loan documents to meet certain financial covenants and other
requirements. We are currently in default on the mortgage loans on the Sevens Building and
Enterprise Technology Center properties, as discussed above.
Cash Flows
Comparison of the Years Ended December 31, 2010 and 2009
Cash provided by operating activities was $64,000 for the year ended December 31, 2010,
compared to cash used in operating activities of $811,000 for the year ended December 31, 2009. The
improvement in cash from operating activities was due, in part, to lower administrative costs and
the collection of interest related to the loan to the Executive Center II and III property.
Cash provided by investing activities was $1,663,000 for the year ended December 31, 2010,
compared to cash provided by investing activities of $10,922,000 for the year ended December 31,
2009. The cash flows from investing activities for the year ended December 31, 2010 were primarily
due to the sales of the Chase Tower and Executive Center II and III properties, which resulted in
distributions from unconsolidated real estate of $1,407,000, and the receipt of payment on the
$579,000 loan receivable from the Executive Center II and III property. The cash provided by
investing activities for the year ended December 31, 2009 was primarily due to the $11,250,000 of
proceeds received from the sale of the 901 Civic Center property, which was partially offset by
$329,000 of capital expenditures.
Cash used in financing activities was $2,420,000 for the year ended December 31, 2010,
compared to cash used in financing activities of $8,846,000 for the year ended December 31, 2009.
The cash used in financing activities during the year ended December 31, 2010 was primarily due to
$2,500,000 of distributions to our unit holders during the year. The cash used in financing
activities during the year ended December 31, 2009 was mainly due to the $8,943,000 principal
repayment on the mortgage loan on the 901 Civic Center property in connection with the sale of the
property.
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Comparison of the Years Ended December 31, 2009 and 2008
Net cash used in operating activities was $811,000 for year ended December 31, 2009, compared
to cash used in operating activities of $2,600,000 for the year ended December 31, 2008. This
decrease in cash used in operating activities was due primarily to changes in operating assets and
liabilities and improved cash operating results after non-cash reconciling items.
Cash provided by investing activities was $10,922,000 for the year ended December 31, 2009,
compared to cash provided by investing activities of $352,000 for the year ended December 31, 2008.
The improvement in cash flows from investing activities between the two periods was primarily due
to the sale of the 901 Civic Center property during 2009, which generated proceeds of $11,250,000.
Cash used in financing activities was $8,846,000 for the year ended December 31, 2009,
compared to cash used in financing activities of $4,501,000 for the year ended December 31, 2008.
The increase in cash used in financing activities between the two periods was primarily due to the
repayment of the loan on the 901 Civic Center property in connection with the sale of the property,
which was partially offset by suspension of distributions to the unit holders effective November 1,
2008.
As a result of the above, cash and cash equivalents increased $1,265,000 for the year ended
December 31, 2009 to $2,724,000, compared to a decrease in cash and cash equivalents of $6,749,000
to $1,459,000 for the year ended December 31, 2008.
Other Liquidity Needs
We have restricted cash balances of $646,000 as of December 31, 2010, which are primarily held
as reserves for property taxes and insurance in connection with our mortgage loans payable. In
addition, $217,000 of the restricted cash balance represents an escrow account that was funded from
the proceeds of the sale of Southwood Tower, located in Houston, Texas, or the Southwood Tower
property, to pay a rent guaranty to the buyer for a period of five years, which ended in December
2010. The buyer of the Southwood Tower property receives payments from this escrow account as the
vacant space is leased. We are currently finalizing the allocation of the remaining funds in the
escrow account, which we expect will be completed in the first half of 2011.
We estimate that our expenditures for capital improvements, tenant improvements and lease
commissions not funded through loan draws will be insignificant in 2011. We have no reserves for
these expenditures, and any such expenditures will be funded from net cash from operations, if any.
We cannot provide assurance, however, that our required expenditures for capital improvements,
tenant improvements and lease commissions will not exceed our estimates.
Contractual Obligations
The following table provides information with respect to the maturities and scheduled
principal repayments of our consolidated debt balance, excluding any available extension options,
as well as scheduled interest payments on our debt as of December 31, 2010:
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||||
(2011)(1) | (2012-2013) | (2014-2015) | (After 2015) | Total | ||||||||||||||||
Principal payments variable rate debt |
$ | 22,471,000 | $ | | $ | | $ | | $ | 22,471,000 | ||||||||||
Principal payments fixed rate debt |
21,000,000 | | | | 21,000,000 | |||||||||||||||
Interest payments variable rate debt
(based on rates in effect as of December
31, 2010) |
89,000 | | | | 89,000 | |||||||||||||||
Interest payments fixed rate debt |
| | | | | |||||||||||||||
$ | 43,560,000 | $ | | $ | | $ | | $ | 43,560,000 | |||||||||||
(1) | The mortgage loan on the Sevens Building property matured on October 31, 2010 and is currently in default due to non-payment of the outstanding principal balance upon maturity. On March 7, 2011, we received a letter from the Sevens Building lender indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to our default on the mortgage loan for the Sevens Building property. A successor trustee has been appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens Building property, which is set to take place on March 25, 2011. The principal balance of this mortgage loan is included in the table above in the column of loans maturing in less than 1 year; however, no interest payments have been included in the table. |
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Off-Balance Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet transactions nor do we currently have any
such arrangements or obligations.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the
primary source of our cash flows from operations. We expect that there will be provisions in the
majority of our tenant leases that will offer 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 basis. However, due to
the long-term nature of the leases, among other factors, the leases may not reset frequently enough
to cover inflation.
Subsequent Events
See Note 16, Subsequent Events, to our consolidated financial statements accompanying this
Annual Report on Form 10-K, for a discussion of subsequent events.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, we expect that the primary market risk to
which we will be exposed is interest rate risk.
We are exposed to interest rate changes primarily as a result of our long-term debt. Our
interest rate risk objectives are to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. To achieve these objectives, we borrow primarily at
fixed rates or variable rates with the lowest margins available and, in some cases, we may enter
into derivative financial instruments such as interest rate swaps, caps and treasury locks in order
to seek to mitigate our interest rate risk on a related financial instrument. We do not enter into
derivative or interest rate transactions for speculative purposes.
In addition to changes in interest rates, the value of our properties is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
The table below presents, as of December 31, 2010, the consolidated principal amounts and
weighted average interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes:
Expected Maturity Date | ||||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Fixed rate
mortgage loans
payable(1) |
$ | 21,000,000 | $ | | $ | | $ | | $ | | $ | | $ | 21,000,000 | $ | 15,632,000 | ||||||||||||||||
Weighted average
interest rate on
maturing fixed rate
debt |
10.95 | % | | % | | % | | % | | % | | % | 10.95 | % | ||||||||||||||||||
Variable rate mortgage
loans payable |
$ | 22,471,000 | $ | | $ | | $ | | $ | | $ | | $ | 22,471,000 | $ | 14,618,000 | ||||||||||||||||
Weighted average
interest rate on
maturing variable rate
debt (based on rates
in effect as of
December 31, 2010) |
7.26 | % | | % | | % | | % | | % | | % | 7.26 | % |
(1) | Our fixed rate debt, which consists only of a mortgage loan on the Sevens Building property, matured on October 31, 2010 and is currently in default. The table above assumes the mortgage loan has a maturity date of January 1, 2011. |
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As of December 31, 2010, we estimate the fair value of our mortgage loans payable to be
approximately $30,250,000. For non-recourse mortgage loans on properties with estimated fair values
of less than their respective loan balances, which is the case for both of our consolidated
properties, we estimate the fair value of the mortgage loans to be equal to the estimated fair
value of the properties.
As of December 31, 2010, we had fixed and variable rate mortgage loans with effective interest
rates ranging from 7.25% to 10.95% per annum and a weighted average effective interest rate of
9.04% per annum. As of December 31, 2010, a 0.50% increase in London Interbank Offered Rate, or
LIBOR, would have had an insignificant impact on our overall annual interest expense.
Item 8. | Financial Statements and Supplementary Data. |
See the index included in Item 15. Exhibits and Financial Statement Schedules.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Changes in Registrants Certifying Accountant
None.
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 managers executive vice
president, portfolio management, and chief accounting officer, 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 manager, including
our managers executive vice president, portfolio management, and chief accounting officer, 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 managers executive vice
president, portfolio management, and chief accounting officer concluded that our disclosure
controls and procedures, as of December 31, 2010, were effective.
(b) Managements Report on Internal Control over Financial Reporting. The management of our
manager is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the
supervision and with the participation of our managers executive vice president, portfolio
management, and chief accounting officer, 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 managers
executive vice president, portfolio management, and chief accounting officer 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 quarter 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. |
We are managed by Grubb & Ellis Realty Investors, LLC, or our manager, and the executive
officers and employees of our manager provide services to us pursuant to the terms of an operating
agreement, or the Operating Agreement.
Our manager shall remain our manager until: (i) we are dissolved; (ii) our manager is removed
for cause by a majority vote of our unit holders; or (iii) our manager, with the consent of our
unit holders and in accordance with the Operating Agreement, assigns its interest in us to a
substitute manager. For this purpose, removal of our manager for cause means removal due to the:
| gross negligence or fraud of our manager; |
| willful misconduct or willful breach of the Operating Agreement by our manager; or |
| bankruptcy, insolvency or inability of our manager to meet its obligations as they come due. |
The following table and biographical descriptions set forth information with respect to our
managers executive officers who serve as our principal executive officer and principal financial
officer as of March 18, 2011. We have no directors.
Name | Age | Position | Term of Office | |||||||||
Steven M. Shipp |
49 | Principal Executive Officer | Since December 2010 | |||||||||
Paul E. Henderson |
39 | Principal Financial Officer | Since April 2010 |
Steven M. Shipp serves as the executive vice president, portfolio management, of our Manager,
responsible for the day-to-day operations of our Managers asset management and structured finance
and refinance efforts, which is a position he has held since November 2010. In connection with his
capacity as executive vice president, portfolio management, of our Manager, Mr. Shipp has served as
our principal executive officer since December 2010. Mr. Shipp has also served as the principal
executive officer of NNN 2002 Value Fund, LLC, an entity also managed by our manager, since
February 2011. From November 2008 to November 2010, Mr. Shipp previously served as our Managers
managing director of structured finance. From October 1997 to June 2008, Mr. Shipp served as a
special consultant to several of the largest commercial real estate lenders in the nation,
including Nomura Securities North America, The Bank of New York Mellon and Prudential Asset
Management, which is a role that overlapped his career at PDG America, LLC. Between February 2000
and March 2001, Mr. Shipp served as senior vice president of finance for a regional commercial
retail development group, PDG America, LLC. Prior to PDG America, LLC, Mr. Shipp served as vice
president of Bank of Americas commercial mortgage-backed securities asset management and
securitized debt portfolio from June 1993 to June 1997. He also served as vice president and
regional manager of loan administration for Bank of America, N.A. from September 1990 to August
1993. Mr. Shipp began his career working for Far West Savings and Loan Association in the
construction loan management department. Mr. Shipp received his B.A. degree in Economics from the
University of California, Irvine.
Paul E. Henderson has served as the chief accounting officer of our Manager since October
2009. In connection with his capacity as chief accounting officer of our Manager, Mr. Henderson has
served as our principal financial officer since April 2010. Since April 2010, Mr. Henderson has
also served as principal financial officer for NNN 2002 Value Fund, LLC. From May 2007 to August
2009, Mr. Henderson served as senior controller at LNR Property Corporation, a diversified real
estate, investment, finance and management company. From January 2006 to April 2007, Mr. Henderson
served as assistant corporate controller of Conexant Systems, Inc., a NASDAQ-listed semiconductor
company. Between 2002 and 2005, Mr. Henderson served as director of accounting and reporting and
subsequently as European controller for Hyperion Solutions Corporation, a NASDAQ-listed business
performance management software company. Mr. Henderson began his career in public accounting as an
associate at Arthur Andersen LLP and, subsequently, as a manager in the Global Capital Markets
group of PricewaterhouseCoopers LLP. A certified public accountant, Mr. Henderson received his B.S.
degree in Business Administration, with dual concentrations in Financial Management and Accounting,
from California Polytechnic State University, San Luis Obispo.
41
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Fiduciary Relationship of our Manager to Us
Our manager is a fiduciary of us and has fiduciary duties to us and our unit holders pursuant
to the Operating Agreement and under applicable law. Our managers fiduciary duties include
responsibility for our control and management and exercising good faith and integrity in handling
our affairs. Our manager has a fiduciary responsibility for the safekeeping and use of all of our
funds and assets, whether or not in our 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 are not and will not be commingled with the funds of any other person or entity
except for operating revenue from our properties.
Our manager 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 manager. It is not clear under
current law the extent, if any, that such parties will have a fiduciary duty to us or our members.
Investors who have questions concerning the fiduciary duties of our manager should consult with
their own legal counsel.
Committees of our Board of Directors
We do not have our own board of directors or board committees. We rely upon our manager to
provide recommendations regarding acquisitions, compensation and financial disclosure.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and
persons who own 10.0% or more of our units, to report their beneficial ownership of our units (and
any related options) to the United States Securities and Exchange Commission, or the SEC. Their
initial reports must be filed using the SECs Form 3 and they must report subsequent unit
purchases, sales, option exercises and other changes using the SECs Form 4, which must be filed
within two business days of most transactions. In some cases, such as changes in ownership arising
from gifts and inheritances, the SEC allows delayed reporting at year-end on Form 5. Officers,
directors and unit holders owning more than 10.0% of our common stock are required by SEC
regulations to furnish us with copies of all of reports they file pursuant to Section 16(a).
Based solely on a review of the copies of such forms furnished to us during and with respect
to the fiscal year ended December 31, 2010 or written representations that no additional forms were
required, to the best of our knowledge, all required Section 16(a) filings were timely and
correctly made by reporting persons during 2010.
Code of Ethics
We do not have our own code of ethics. Grubb & Ellis has a Code of Business Conduct and Ethics
that is applicable to employees of our manager who provide services to us, a copy of which is
available at www.grubb-ellis.com and upon request and without charge by writing to NNN 2003 Value
Fund, LLC at 1551 N. Tustin Avenue, Suite 300, Santa Ana, California 92705.
Item 11. | Executive Compensation. |
Executive and Director Compensation
Since the resignation of our chief executive officer in December 2010, we do not have nor do
we intend to hire any employees, executive officers or directors to whom we will pay compensation.
Our principal executive officer and principal financial officer are employees of our manager and/or
its affiliates and are compensated by such entities for their services to us. Our day-to-day
management is performed by our manager and its affiliates. We pay these entities fees and reimburse
expenses pursuant to the Operating Agreement. We do not currently intend to pay any compensation
directly to our principal executive officer or principal financial officer. As a result, we do not
have a compensation policy or program and have not included a compensation discussion and analysis
in this Annual Report on Form 10-K.
42
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters. |
Principal Unit Holders
The following table shows, as of March 18, 2011, the number and percentage of units owned by:
| any person who is known to us to be the beneficial owner of more than 5.0% of our outstanding units; |
| our manager; |
| our principal executive officer; |
| our principal financial officer; and |
| all of our directors and executive officers as a group. |
Beneficially | Percentage of | |||||||
Owned | Outstanding | |||||||
Name of Beneficial Owners(1) | No. of Units | Units | ||||||
Our manager |
None | 0.0 | % | |||||
Steven M. Shipp |
None | 0.0 | % | |||||
Paul E. Henderson |
None | 0.0 | % | |||||
Kent W. Peters(2) |
None | 0.0 | % | |||||
All of our directors and executive officers as a group(3) |
None | 0.0 | % |
(1) | The address of each beneficial owner listed is 1551 N. Tustin Avenue, Suite 300, Santa Ana, California 92705. | |
(2) | Mr. Peters resigned as our Chief Executive Officer effective December 31, 2010. | |
(3) | We have no directors. |
We are not aware of any arrangements which may, at a subsequent date, result in a change in
control of us.
Equity Compensation Plan Information
We have no equity compensation plans as of December 31, 2010.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Our manager is primarily responsible for managing our day-to-day business affairs and assets.
Our manager is a Virginia limited liability company that was formed in April of 1998 to advise
syndicated limited partnerships, limited liability companies and other entities regarding the
acquisition, management and disposition of real estate assets.
The Management Agreement
Our manager manages us pursuant to the terms of the Operating Agreement and the Management
Agreement. While we have no employees, certain employees of our manager provide services in
connection with the Operating Agreement. In addition, Realty serves as our property manager
pursuant to the terms of the Operating Agreement and the Management Agreement.
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. Certain fees paid to Realty in the years ended
December 31, 2010, 2009 and 2008, were passed through to our manager or its affiliate pursuant to
an agreement between our manager and Realty, or the Realty Agreement.
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Property Management Fees
We pay Realty a monthly property management fee of up to 5.0% of the gross receipts revenue of
the properties. For the years ended December 31, 2010, 2009 and 2008, we incurred property
management fees to Realty of $390,000, $538,000 and $547,000, respectively.
Real Estate Acquisition Fees
We pay Realty or its affiliate a real estate acquisition fee of up to 3.0% of the gross
purchase price of a property. For the years ended December 31, 2010, 2009 and 2008, we did not
incur any real estate acquisition fees to Realty or its affiliate.
Real Estate Disposition Fees
We pay Realty or its affiliate a real estate disposition fee of up to 5.0% of the gross sales
price of a property. For the years ended December 31, 2010, 2009 and 2008, we did not incur any
real estate disposition fees to Realty or its affiliate.
Lease Commissions
We pay Realty a lease commission for its services in leasing any of our properties equal to
6.0% of the value of any lease entered into during the term of the Management Agreement and 3.0%
with respect to any renewals. For the years ended December 31, 2010, 2009 and 2008, we incurred
lease commissions to Realty of $227,000, $157,000 and $303,000, respectively.
Accounting Fees
We pay our manager accounting fees for record keeping services provided to us. For the years
ended December 31, 2009 and 2008, we incurred accounting fees to our manager of $59,000 and
$72,000, respectively. Beginning January 1, 2010, all accounting fees have been waived by our
manager and, as such, we did not incur any accounting fees for the year ended December 31, 2010.
Construction Management Fees
We pay Realty a construction management fee for its services in supervising construction and
repair projects in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any
amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in
any calendar year for construction or repair projects. For the years ended December 31, 2009 and
2008, we incurred construction management fees to Realty of $4,000 and $76,000, respectively. We
did not incur any construction management fees for the year ended December 31, 2010.
Loan Fees
We pay Realty or its affiliate a loan fee equal to 1.0% of the principal amount of the loan
for its services in obtaining loans for our properties during the term of the Management Agreement.
For the years ended December 31, 2010, 2009 and 2008, we did not incur any loan fees to Realty or
its affiliate.
Related Party Payables
Related party accounts payable consist primarily of amounts due related to the Management
Agreement, as discussed above, and for operating expenses incurred by us and paid by our manager or
its affiliates. As of December 31, 2010 and 2009, the amount payable by us was $32,000 and
$118,000, respectively, and is included in the accompanying consolidated balance sheets in the line
item entitled Accounts and loans payable due to related parties.
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Related Party Receivables
On December 1, 2005, we advanced $579,000 to NNN Executive Center, LLC, an 11.5% owner of the
Executive Center II and III property, an unconsolidated property, as evidenced by an unsecured
note. The unsecured note provided for interest at a fixed rate of 8.00% per annum and all principal
and accrued interest was originally due in full on December 1, 2008. Pursuant to the terms of the
note, upon extension of the maturity dates of the mortgage loans payable on the Executive Center II
and III property on December 28, 2008, the maturity date of the unsecured note was automatically
extended to December 28, 2009. On March 2, 2010, the maturity date of this note was further
extended to January 15, 2011. At the time of the sale of the Executive Center II and III property
on May 24, 2010, the $579,000 note receivable, as well as $208,000 of accrued interest, was repaid
in full.
As of December 31, 2009, the amount due to us related to the unsecured note described above,
net of allowances, and for management fees due from an affiliated entity was $475,000, which is
included in the accompanying consolidated balance sheet in the line item entitled Accounts and
loans receivable due from related parties, net. There were no amounts due to us as of December 31,
2010.
Item 14. | Principal Accounting Fees and Services. |
Ernst & Young LLP, or E&Y, has served as our independent auditor since October 9, 2008 and has
audited our consolidated financial statements for the years ended December 31, 2010, 2009 and 2008.
The following table lists the fees for services rendered by E&Y in 2010 and 2009:
Services | 2010 | 2009 | ||||||
Audit fees |
$ | 210,000 | $ | 321,000 | ||||
Audit-related fees |
| | ||||||
Total |
$ | 210,000 | $ | 321,000 | ||||
Deloitte & Touche LLP, or D&T, served as our independent auditor from January 12, 2005 to
October 9, 2008. The following table lists the fees for services rendered by D&T in 2010 and 2009:
Services | 2010 | 2009 | ||||||
Audit fees (1) |
$ | 13,000 | $ | 20,000 | ||||
Audit-related fees |
| | ||||||
Total |
$ | 13,000 | $ | 20,000 | ||||
(1) | Audit fees billed in 2010 were related to the reissuance of D&Ts audit opinion for 2007, which was included in our Annual Report on Form 10-K for the year ended December 31, 2009. Audit fees billed in 2009 were related to the reissuance of D&Ts audit opinions for 2007 and 2006, which were included in our Annual Report on Form 10-K for the year ended December 31, 2008. |
Our manager pre-approves all auditing services and permitted non-audit services (including the
fees and terms thereof) to be performed for us by our independent auditor, subject to the de
minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act and
the rules and regulations of the SEC.
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PART IV
Item 15. | Exhibits, Financial Statement Schedules. |
(a)(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
47 | ||||
48 | ||||
49 | ||||
50 | ||||
51 | ||||
52 |
(a)(2) Financial Statement Schedules:
The following financial statement schedules for the year ended December 31, 2010 are submitted
herewith:
Page | ||||
70 | ||||
71 |
All schedules other than the ones listed above have been omitted as the required information
is inapplicable or the information is presented in the 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:
See Item 15(a) (2) above.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Manager and Unit Holders of
NNN 2003 Value Fund, LLC
NNN 2003 Value Fund, LLC
We have audited the
accompanying consolidated balance sheets of NNN 2003 Value Fund, LLC (the
Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations
and comprehensive (loss) income, (deficit) equity, and cash flows for each of
the three years in
the period ended December 31, 2010. Our audits also included the consolidated financial statement schedules
listed in the Index at Item 15(a). These financial statements and schedules are the
responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company at December 31, 2010 and 2009, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2010 in conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As described in Note 1 to the financial statements, the Company has
incurred recurring losses and has a working capital deficiency. In addition, the Company has not
complied with certain covenants of loan agreements and does not have sufficient cash flow to repay
mortgage loans that are past due and in default. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans in regard to these matters are
also described in Note 1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Ernst & Young LLP | ||||
Irvine, California
March 18, 2011
March 18, 2011
47
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NNN 2003 VALUE FUND, LLC
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Real estate investments: |
||||||||
Properties held for non-sale disposition, net |
$ | 27,218,000 | $ | 41,540,000 | ||||
Investments in unconsolidated real estate |
24,000 | 1,101,000 | ||||||
27,242,000 | 42,641,000 | |||||||
Cash and cash equivalents |
2,031,000 | 2,724,000 | ||||||
Accounts receivable, net |
79,000 | 354,000 | ||||||
Accounts and loans receivable due from related parties, net |
| 475,000 | ||||||
Restricted cash |
646,000 | 1,351,000 | ||||||
Intangible assets related to properties held for non-sale disposition, net |
1,951,000 | 4,233,000 | ||||||
Other assets related to properties held for non-sale disposition, net |
738,000 | 2,166,000 | ||||||
Total assets |
$ | 32,687,000 | $ | 53,944,000 | ||||
LIABILITIES AND (DEFICIT) EQUITY |
||||||||
Mortgage loans payable secured by properties held for non-sale disposition |
$ | 43,471,000 | $ | 60,164,000 | ||||
Accounts payable and accrued liabilities |
613,000 | 1,842,000 | ||||||
Accounts and loans payable due to related parties |
32,000 | 118,000 | ||||||
Other liabilities related to properties held for non-sale disposition |
422,000 | 678,000 | ||||||
Other liabilities |
217,000 | 217,000 | ||||||
Total liabilities |
44,755,000 | 63,019,000 | ||||||
Commitments and contingencies (Note 13) |
||||||||
(Deficit) equity: |
||||||||
NNN 2003 Value Fund, LLC unit holders deficit |
(12,068,000 | ) | (9,173,000 | ) | ||||
Noncontrolling interest equity |
| 98,000 | ||||||
Total (deficit) equity |
(12,068,000 | ) | (9,075,000 | ) | ||||
Total liabilities and (deficit) equity |
$ | 32,687,000 | $ | 53,944,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
NNN 2003 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues: |
||||||||||||
Rental revenue of operations held for non-sale disposition |
$ | 6,852,000 | $ | 6,950,000 | $ | 6,512,000 | ||||||
Expenses: |
||||||||||||
Operating expenses of operations held for non-sale disposition |
5,235,000 | 4,612,000 | 6,297,000 | |||||||||
General and administrative |
362,000 | 587,000 | 723,000 | |||||||||
Real estate related impairments of operations held for
non-sale disposition |
5,300,000 | 700,000 | 12,100,000 | |||||||||
Total expenses |
10,897,000 | 5,899,000 | 19,120,000 | |||||||||
(Loss) income before other income (expense) and discontinued
operations |
(4,045,000 | ) | 1,051,000 | (12,608,000 | ) | |||||||
Other income (expense): |
||||||||||||
Interest expense of operations held for non-sale disposition |
(3,244,000 | ) | (3,179,000 | ) | (3,180,000 | ) | ||||||
Interest and dividend income |
23,000 | 47,000 | 219,000 | |||||||||
Loss on sales of marketable securities |
| | (808,000 | ) | ||||||||
Investment related impairments |
| (126,000 | ) | (900,000 | ) | |||||||
Equity in income (losses) of unconsolidated real estate |
619,000 | (3,154,000 | ) | (1,031,000 | ) | |||||||
Other income |
24,000 | 20,000 | 23,000 | |||||||||
Loss from continuing operations |
(6,623,000 | ) | (5,341,000 | ) | (18,285,000 | ) | ||||||
Income (loss) from discontinued operations |
6,130,000 | (3,749,000 | ) | (10,983,000 | ) | |||||||
Consolidated net loss |
(493,000 | ) | (9,090,000 | ) | (29,268,000 | ) | ||||||
Loss attributable to noncontrolling interests |
(98,000 | ) | (196,000 | ) | (386,000 | ) | ||||||
Net loss attributable to NNN 2003 Value Fund, LLC |
$ | (395,000 | ) | $ | (8,894,000 | ) | $ | (28,882,000 | ) | |||
Comprehensive (loss) income: |
||||||||||||
Consolidated net loss |
$ | (493,000 | ) | $ | (9,090,000 | ) | $ | (29,268,000 | ) | |||
Recognition of previously unrealized loss on marketable
equity securities |
| | 646,000 | |||||||||
Comprehensive loss |
(493,000 | ) | (9,090,000 | ) | (28,622,000 | ) | ||||||
Comprehensive loss attributable to noncontrolling interests |
(98,000 | ) | (196,000 | ) | (386,000 | ) | ||||||
Comprehensive loss attributable to NNN 2003 Value Fund, LLC |
$ | (395,000 | ) | $ | (8,894,000 | ) | $ | (28,236,000 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
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NNN 2003 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
NNN 2003 | ||||||||||||||||
Number of | Total Equity | Value Fund, LLC | Noncontrolling | |||||||||||||
Units | (Deficit) | Equity (Deficit) | Interests | |||||||||||||
Equity Balance January 1, 2008 |
9,970 | $ | 31,547,000 | $ | 30,865,000 | $ | 682,000 | |||||||||
Distributions |
| (2,910,000 | ) | (2,908,000 | ) | (2,000 | ) | |||||||||
Net loss |
| (29,268,000 | ) | (28,882,000 | ) | (386,000 | ) | |||||||||
Recognition of previously
unrealized loss on marketable
equity securities |
| 646,000 | 646,000 | | ||||||||||||
Equity (Deficit) Balance
December 31, 2008 |
9,970 | 15,000 | (279,000 | ) | 294,000 | |||||||||||
Net loss |
| (9,090,000 | ) | (8,894,000 | ) | (196,000 | ) | |||||||||
Equity (Deficit) Balance
December 31, 2009 |
9,970 | (9,075,000 | ) | (9,173,000 | ) | 98,000 | ||||||||||
Distributions |
| (2,500,000 | ) | (2,500,000 | ) | | ||||||||||
Net loss |
| (493,000 | ) | (395,000 | ) | (98,000 | ) | |||||||||
Deficit Balance December 31, 2010 |
9,970 | $ | (12,068,000 | ) | $ | (12,068,000 | ) | $ | | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NNN 2003 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Consolidated net loss |
$ | (493,000 | ) | $ | (9,090,000 | ) | $ | (29,268,000 | ) | |||
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
||||||||||||
Real estate related impairments on consolidated properties |
5,300,000 | 4,000,000 | 20,700,000 | |||||||||
Investment related impairments |
| 126,000 | 900,000 | |||||||||
Gain on sales of real estate |
| (758,000 | ) | | ||||||||
Gain on extinguishment of debt |
(6,658,000 | ) | | | ||||||||
Loss on sales of marketable equity securities |
| | 808,000 | |||||||||
Depreciation and amortization (including deferred
financing costs, deferred rent, lease inducements and
above/below market leases) |
2,186,000 | 2,090,000 | 4,828,000 | |||||||||
Equity in (earnings) losses of unconsolidated real estate |
(619,000 | ) | 3,154,000 | 1,031,000 | ||||||||
Allowance for doubtful accounts |
241,000 | 15,000 | (228,000 | ) | ||||||||
Change in operating assets and liabilities: |
||||||||||||
Accounts receivable, including accounts receivable
from related parties |
249,000 | (59,000 | ) | 123,000 | ||||||||
Other assets |
(399,000 | ) | (584,000 | ) | (168,000 | ) | ||||||
Restricted cash |
128,000 | 528,000 | 63,000 | |||||||||
Accounts payable and accrued liabilities, including
accounts payable to related parties |
146,000 | (201,000 | ) | (1,212,000 | ) | |||||||
Security deposits, prepaid rent and other liabilities |
(17,000 | ) | (32,000 | ) | (177,000 | ) | ||||||
Net cash provided by (used in) operating activities |
64,000 | (811,000 | ) | (2,600,000 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Distributions from (investments in) unconsolidated real
estate |
1,407,000 | 1,000 | (224,000 | ) | ||||||||
Proceeds from sales of real estate |
| 11,250,000 | | |||||||||
Capital expenditures |
(323,000 | ) | (329,000 | ) | (1,045,000 | ) | ||||||
Proceeds from sales of marketable equity securities |
| | 893,000 | |||||||||
Proceeds from repayment of loans to related parties |
579,000 | | | |||||||||
Restricted cash |
| | 728,000 | |||||||||
Net cash provided by investing activities |
1,663,000 | 10,922,000 | 352,000 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Borrowings on mortgage loans payable |
292,000 | 192,000 | 1,119,000 | |||||||||
Principal repayments on mortgage loans payable |
| (8,943,000 | ) | (3,886,000 | ) | |||||||
Borrowings from related parties |
| | 199,000 | |||||||||
Principal repayments on related parties borrowings |
| | (199,000 | ) | ||||||||
Cash transfer to lender in connection with transfer of
property |
(213,000 | ) | | | ||||||||
Restricted cash |
1,000 | (91,000 | ) | 1,406,000 | ||||||||
Payment of deferred financing costs |
(4,000 | ) | (230,000 | ) | ||||||||
Distributions to noncontrolling interests |
| | (2,000 | ) | ||||||||
Distributions to unit holders |
(2,500,000 | ) | | (2,908,000 | ) | |||||||
Net cash used in financing activities |
(2,420,000 | ) | (8,846,000 | ) | (4,501,000 | ) | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(693,000 | ) | 1,265,000 | (6,749,000 | ) | |||||||
CASH AND CASH EQUIVALENTS beginning of year |
2,724,000 | 1,459,000 | 8,208,000 | |||||||||
CASH AND CASH EQUIVALENTS end of year |
$ | 2,031,000 | $ | 2,724,000 | $ | 1,459,000 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||||
Cash paid for interest |
$ | 3,011,000 | $ | 4,701,000 | $ | 5,130,000 | ||||||
Cash paid for income taxes |
$ | 20,000 | $ | 24,000 | $ | 72,000 | ||||||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||||||
Accrual for tenant improvements and capital expenditures |
$ | | $ | 217,000 | $ | 712,000 | ||||||
Transfer of real estate and other assets in connection with
debt extinguishment |
$ | 10,758,000 | $ | | $ | | ||||||
Cancellation of debt and accrued interest in connection with
transfer of real estate and other assets and liabilities |
$ | 17,629,000 | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
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NNN 2003 VALUE FUND, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and our
subsidiaries, except where the context otherwise requires.
1. Organization and Description of Business
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell our ownership interests in a
number of unspecified properties believed to have higher than average potential for capital
appreciation, or value-added properties. As of December 31, 2010, we held interests in three
commercial office properties, comprised of two consolidated properties and one unconsolidated
property. We currently intend to dispose of all of our remaining properties and pay distributions
to our unit holders from available funds, if any. We do not anticipate acquiring any additional
real estate properties at this time.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities as they come due. During the year ended December 31, 2010, we had a loss from
continuing operations of $6,623,000 and certain of our mortgage loans went into default.
Accordingly, there is substantial doubt about our ability to continue as a going concern.
The mortgage loan for Sevens Building, located in St. Louis, Missouri, or the Sevens Building
property, which had an outstanding principal balance of $21,494,000 as of December 31, 2010,
matured on October 31, 2010 and is currently in default due to non-payment of the outstanding
principal balance upon maturity. The mortgage loan documents include an option to extend the
maturity date for an additional 12 months beyond October 31, 2010; however, we determined that it
was not in the best interest of our unit holders to attempt to extend the maturity date due to the
unfavorable terms of the extension option, including additional cash outlays for an extension fee
and partial principal prepayment, which we did not expect would be recovered through property
operations over the subsequent 12 months. Further, the estimated value of the Sevens Building
property is significantly less than the outstanding principal balance of the mortgage loan, and we
did not expect that the value of the property would exceed the principal balance by the end of the
potential extension term. As such, we had been in discussions with the Sevens Building lender
regarding our options for transferring the Sevens Building property to the Sevens Building lender,
including foreclosure, deed-in-lieu of foreclosure, or another form of transfer. However, on March
7, 2011, we received a letter from the Sevens Building lender indicating that it had initiated a
foreclosure action on the Sevens Building property pursuant to our default on the mortgage loan for
the Sevens Building property. A successor trustee has been appointed by the Sevens Building lender
to conduct a public auction for the sale of the Sevens Building property, which is set to take
place on March 25, 2011.
In addition, the mortgage loan for Four Resource Square, located in Charlotte, North Carolina,
or the Four Resource Square property, which had an outstanding principal balance of $21,977,000 as
of December 31, 2010, had an original maturity date of November 30, 2010 but was extended to
January 20, 2011. The mortgage loan documents included an option to extend the maturity date for an
additional 12 months beyond November 30, 2010; however, we determined that it was not in the best
interest of our unit holders to attempt to extend the maturity date due to the unfavorable terms of
the extension option, including additional cash outlays for an extension fee and partial principal
prepayment, which we did not expect would be recovered through property operations over the
subsequent 12 months. Further, the estimated value of the Four Resource Square property was
significantly less than the outstanding principal balance of the mortgage loan, and we did not
expect that the value of the property would exceed the principal balance by the end of the
potential extension term. As such, on January 20, 2011, we sold the Four Resource Square property
to an entity affiliated with the Four Resource Square lender for a sales price equal to the
outstanding principal balance of the mortgage loan of $21,977,000. We did not receive any cash
proceeds from the sale of the property.
The maturities of the mortgage loans on the Sevens Building and Four Resource Square
properties, the subsequent sale of the Four Resource Square property to an entity affiliated with
its lender for no cash proceeds and the expected foreclosure of the Sevens Building property, which
we also expect will result in no cash proceeds,
combined with our loss from continuing operations, raises substantial doubt about our ability
to continue as a going concern.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. While we
have no employees, certain executive officers and employees of our manager provide services to us
pursuant to the Operating Agreement. Our manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide certain services to us. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our manager prior to the termination of the Operating
Agreement or our dissolution, except for cause. The Management Agreement terminates with respect to
each of our properties upon the earlier of the sale of each respective property or December 31,
2013. Realty may be terminated without cause prior to the termination of the Management Agreement
or our dissolution, subject to certain conditions, including the payment by us to Realty of a
termination fee as provided in the Management Agreement.
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 consolidated financial statements and the
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 our accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include our accounts and those of our
wholly owned subsidiaries, any majority-owned subsidiaries and any variable interest entities, or
VIEs, that we have concluded should be consolidated in accordance with the Financial Accounting
Standards Board, or FASB, Accounting Standards Codification, or Codification, Topic 810,
Consolidation. All material intercompany transactions and account balances have been eliminated in
consolidation. We account for all other unconsolidated real estate investments using the equity
method of accounting. Accordingly, our share of the earnings (losses) of these real estate
investments is included in consolidated net income (loss).
Our consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or to the amounts and
classifications of liabilities that may be necessary if we are unable to continue as a going
concern.
We have evaluated subsequent events through the date of issuance of these financial
statements.
Use of Estimates
The preparation of our financial statements in accordance with GAAP requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities as of December
31, 2010 and 2009 and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses for the years ended
December 31, 2010, 2009 and 2008. Actual results could vary from those estimates, perhaps in
material adverse ways, and those estimates could differ under different assumptions or conditions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with a maturity of three
months or less when purchased. Short-term investments with remaining maturities of three months or
less when acquired are considered cash equivalents.
Restricted Cash
Restricted cash is comprised of impound reserve accounts for property taxes, insurance,
capital improvements and tenant improvements, as well as an escrow account that was funded from the
proceeds of the sale of our Southwood property to pay a rent guarantee to the buyer.
Allowance for Doubtful Accounts
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances
for doubtful current tenant receivables and unbilled deferred rent. An allowance is maintained for
estimated losses resulting from the inability of certain tenants to meet the contractual
obligations under their lease agreements. Our determination of the adequacy of these allowances is
based primarily upon evaluations of historical loss experience, individual tenant receivables
considering the tenants financial condition, security deposits, letters of credit, lease
guaranties, current economic conditions and other relevant factors. We have established allowances
for doubtful accounts of $218,000 and $15,000 as of December 31, 2010 and 2009, respectively, to
reduce receivables to our estimate of the amount recoverable.
Marketable Securities
Marketable securities are carried at fair value and consist primarily of investments in
marketable equity securities. We classify our marketable equity securities portfolio as
available-for-sale. If we believe that a decline in the value of an equity security is temporary,
we record the decline in other comprehensive (loss) income in unit holders (deficit) equity. If a
decline is believed to be other than temporary, the equity security is written down to the fair
value and an other-than-temporary impairment is recorded in our statement of operations. Our
evaluation of other-than-temporary impairment includes, but is not limited to the following: the
amount of the unrealized loss; the length of time in which the unrealized loss has existed; the
financial condition of the issuer; rating agency changes on the issuer; our intent and ability to
hold the security for a period of time sufficient to allow for any anticipated recovery in fair
value; and all other available evidence to evaluate the realizable value of our investments. If
facts and circumstances change in subsequent periods, we may ultimately record a realized loss
after having initially concluded that the decline in value was temporary.
As of December 31, 2010 and 2009, we held no investments in marketable securities. During the
year ended December 31, 2008, we sold all of our remaining investments in marketable securities and
recorded a total loss on sale of $808,000.
Real Estate Related Impairments
We assess the impairment of a real estate asset when events or changes in circumstances
indicate that its carrying amount may not be recoverable. Indicators we consider important which
could trigger an impairment review include the following:
| a significant negative industry or economic trend; |
| a significant underperformance of a property relative to historical or projected future operating results; and |
| a significant change in the manner in which the asset is used. |
In the event that the carrying amount of a property exceeds the sum of the undiscounted cash
flows (excluding interest) that are expected to result from the use and eventual disposition of the
property, we would recognize an impairment loss to the extent the carrying amount exceeds the
estimated fair value of the property. The estimation of expected future net cash flows is
inherently uncertain and relies on subjective assumptions dependent upon future and current market
conditions and events that affect the ultimate value of the property. It requires us to make
assumptions related to future rental rates, tenant allowances, operating expenditures,
property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from
the future sale of the property. The estimation of proceeds to be generated from the future sale of
the property requires us to also make estimates about capitalization rates and discount rates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, during the
years ended December 31, 2010, 2009 and 2008, we assessed the values of our consolidated
properties. These valuation assessments resulted in us recognizing charges for real estate related
impairments of $5,300,000, $4,000,000 and $20,700,000 against the carrying values of our
consolidated real estate investments during the years ended December 31, 2010, 2009 and 2008,
respectively.
Additionally, our unconsolidated properties were also assessed for impairment, and impairment
charges of $18,000,000, $21,570,000 and $4,200,000 were recorded against their carrying values
during the years ended December 31, 2010, 2009 and 2008, respectively. Our share of these
impairments was approximately $374,000, $3,115,000 and $500,000 during the years ended December 31,
2010, 2009 and 2008, respectively. Our share of the impairment recorded during the year ended
December 31, 2010 was limited to the amount of our remaining investment in the unconsolidated
property.
Real estate related impairments are reflected in our consolidated statements of operations as
follows:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Real estate related impairments of operations held for
non-sale disposition |
$ | 5,300,000 | $ | 700,000 | $ | 12,100,000 | ||||||
Equity in income (losses) of unconsolidated real estate |
374,000 | 3,115,000 | 500,000 | |||||||||
Income (loss) from discontinued operations |
| 3,300,000 | 8,600,000 | |||||||||
$ | 5,674,000 | $ | 7,115,000 | $ | 21,200,000 | |||||||
The current economic conditions have affected property values and the availability of credit.
If we are unable to execute on our plans for the continued operation and/or disposition of our
properties, or if economic conditions affecting property values and the availability of credit
decline further, our investments in real estate assets may become further impaired.
Properties Held for Non-Sale Disposition
Our properties held for non-sale disposition are stated at historical cost less accumulated
depreciation, net of real estate related impairment charges. The cost of our properties held for
non-sale disposition includes the cost of land and completed buildings and related improvements.
Expenditures that increase the service life of the property are capitalized and the cost of
maintenance and repairs is charged to expense as incurred. The cost of buildings and improvements
are depreciated on a straight-line basis over the estimated useful lives of the buildings and
improvements, ranging from six to 39 years and the shorter of the lease term or useful life,
ranging from one to six years for tenant improvements. When depreciable property is retired or
disposed of, the related costs and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in discontinued operations.
During the year ended December 31, 2009, we elected to cease the subsidization of the
operations and debt service on the non-recourse promissory note for Executive Center I, located in
Dallas, Texas, or the Executive Center I property, which matured on October 1, 2009. The property
was reclassified as a property held for non-sale disposition at that time, as we determined that
the property would be transferred to the Executive Center I lender in the first half of 2010. In
the first quarter of 2010, Tiffany Square, located in Colorado Springs, Colorado, or the Tiffany
Square property, was also reclassified as a property held for non-sale disposition, as its related
mortgage loan matured on February 15, 2010 and we determined that the property would be transferred
to the Tiffany Square lender in the second quarter of 2010. Further, in the third quarter of 2010,
we determined that the Sevens Building and Four Resource Square properties would also be
transferred to their respective lenders, and have reclassified both of these properties as
properties held for non-sale disposition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Other Assets
Other assets consist primarily of deferred rent receivables, leasing commissions, deferred
financing costs, prepaid expenses and deposits. Costs incurred for property leasing are capitalized
as deferred assets. Deferred financing costs include amounts paid to lenders and others to obtain
financing. Such costs are amortized using the straight-line method over the term of the related
loan, which approximates the effective interest rate method. Amortization of deferred financing
costs is included in interest expense in the consolidated statements of operations. Deferred
leasing costs include leasing commissions that are amortized using the straight-line method over
the term of the related lease.
Fair Value Measurements
FASB Codification Topic 820, Fair Value Measurements, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair value
instruments. It establishes a three-tiered fair value hierarchy that prioritizes inputs to
valuation techniques used in fair value calculations. Level 1 inputs are the highest priority and
are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect
other than quoted prices included in Level 1 that are either observable directly or through
corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or
no market activity for the asset or liability, such as internally developed valuation models. If
quoted market prices or inputs are not available, fair value measurements are based upon valuation
models that utilize current market or independently sourced market inputs, such as interest rates,
option volatilities, credit spreads and market capitalization rates. Items valued using such
internally generated valuation techniques are classified according to the lowest level input that
is significant to the fair value measurement. As a result, the asset or liability could be
classified in either Level 2 or 3 even though there may be some significant inputs that are readily
observable.
We generally use a discounted cash flow model to estimate the fair value of our consolidated
real estate investments, unless better market comparable data is available. Management uses its
best estimate in determining the key assumptions, including the expected holding period, future
occupancy levels, capitalization rates, discount rates, rental rates, lease-up periods and capital
expenditure requirements. In our 2010 valuation analyses, we used terminal capitalization rates
ranging between 8.0% and 9.5%. Generally, if a property is under contract, the contract price,
adjusted for selling expenses, is used to estimate the fair value of the property.
The following table presents the nonfinancial assets that were measured at fair value on a
nonrecurring basis during the year ended December 31, 2010:
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | Total | |||||||||||||||||
Assets | Inputs | Inputs | Impairment | |||||||||||||||||
Assets | Carrying Value | Level 1 | Level 2 | Level 3 | Losses | |||||||||||||||
Properties
held for non-sale
disposition |
$ | 27,218,000 | $ | | $ | | $ | 27,218,000 | $ | (5,300,000 | ) | |||||||||
Investments in
unconsolidated real
estate |
$ | 24,000 | $ | | $ | | $ | 24,000 | $ | |
The following table presents nonfinancial assets that were measured at fair value on a
nonrecurring basis during the year ended December 31, 2009:
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | Total | |||||||||||||||||
Assets | Inputs | Inputs | Impairment | |||||||||||||||||
Assets | Carrying Value | Level 1 | Level 2 | Level 3 | Losses | |||||||||||||||
Properties
held for non-sale
disposition |
$ | 41,540,000 | $ | | $ | | $ | 41,540,000 | $ | (4,000,000 | ) | |||||||||
Investments in
unconsolidated real
estate |
$ | 1,101,000 | $ | | $ | | $ | 1,101,000 | $ | (126,000 | ) |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Revenue Recognition
Base rental income is recognized on a straight-line basis over the terms of the respective
lease agreements in accordance with FASB Codification Topic 840, Leases. Differences between rental
income recognized and amounts contractually due under the lease agreements are credited or charged,
as applicable, to rent receivable.
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 cash accounts
in excess of FDIC insured limits. We believe this risk is not significant. Concentration of credit
risk with respect to accounts receivable from tenants is limited. We perform credit evaluations of
prospective tenants and security deposits are obtained upon lease execution.
We have geographic concentration of risk subject to fluctuations in each states economy where
we operate our consolidated properties. As of December 31, 2010, we held interests in two
consolidated properties with one property each located in: (i) Missouri, which accounted for 52.7%
of our aggregate annual rent; and (ii) North Carolina, which accounted for 47.3% of our aggregate
annual rent.
As of December 31, 2010, tenants at our consolidated properties representing 10.0% or more of
aggregate annual rental revenue, based on contractual base rent from leases in effect as of
December 31, 2010, were as follows:
Percentage of | ||||||||||||||||
2010 | 2010 | Lease | ||||||||||||||
Annualized | Annualized | Expiration | ||||||||||||||
Tenant | Base Rent | Base Rent | Property | Date | ||||||||||||
McKesson Information Solutions, Inc. |
$ | 1,203,000 | 23.1 | % | Four Resource Square | 06/30/12 |
As of December 31, 2009, tenants at our consolidated properties representing 10.0% or
more of aggregate annual rental revenue, based on contractual base rent from leases in effect as of
December 31, 2009, were as follows:
Percentage of | ||||||||||||||||
2009 | 2009 | Lease | ||||||||||||||
Annualized | Annualized | Expiration | ||||||||||||||
Tenant | Base Rent | Base Rent | Property | Date | ||||||||||||
McKesson Information Solutions, Inc. |
$ | 1,168,000 | 14.4 | % | Four Resource Square | 06/30/12 | ||||||||||
PRC, LLC |
$ | 839,000 | 10.4 | % | Tiffany Square | 05/31/12 | ||||||||||
Westwood College of Technology |
$ | 806,000 | 10.0 | % | Executive Center I | 01/31/13 |
As of December 31, 2008, tenants at our consolidated properties representing 10.0% or
more of aggregate annual rental revenue, based on contractual base rent from leases in effect as of
December 31, 2010, were as follows:
Percentage of | ||||||||||||||||
2008 | 2008 | Lease | ||||||||||||||
Annualized | Annualized | Expiration | ||||||||||||||
Tenant | Base Rent | Base Rent | Property | Date | ||||||||||||
GSA-FBI |
$ | 1,234,000 | 12.1 | % | 901 Civic Center | 05/03/12 | ||||||||||
McKesson Information Solutions, Inc. |
$ | 1,134,000 | 11.1 | % | Four Resource Square | 06/30/12 |
Fair Value of Financial Instruments
FASB Codification Topic 825, Financial Instruments, requires disclosure of the fair value of
financial instruments, whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. Fair value is defined as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted market prices are
not available, fair values are estimated using presently available market information and judgments
about the financial instrument, such as estimates of timing and amount of expected future cash
flows. Such estimates do not reflect any premium or discount that could result from offering for
sale at one time our entire holdings of a particular financial instrument, nor do they consider the
tax impact of the realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Financial instruments on our condensed consolidated balance sheets consist of cash and cash
equivalents, accounts and loans receivable, accounts payable and accrued expenses, and mortgage
loans payable. We consider the carrying values of cash and cash equivalents, accounts receivable
and accounts payable and accrued expenses to approximate fair value for those financial instruments
because of the short period of time between origination of the instruments and their expected
realization. The fair value of amounts due to and from related parties is not determinable due to
their related party nature. As of December 31, 2010 and 2009, we estimate the fair value of our
consolidated mortgage loans payable to be approximately $30,250,000 and $47,993,000, respectively,
compared to their carrying values of $43,471,000 and $60,164,000, respectively. The fair value of
the mortgage loans payable are estimated using borrowing rates for debt instruments with similar
terms and maturities. For non-recourse mortgage loans payable secured by properties with estimated
fair values of less than their respective loan balances, we estimate the fair value of the mortgage
loans to be equal to the estimated fair value of the properties.
Income Taxes
We are a pass-through entity for income tax purposes and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying consolidated statements of operations except for insignificant amounts
related to state franchise and income taxes.
We follow FASB Codification Topic 740, Income Taxes, to recognize, measure, present and
disclose in our condensed consolidated financial statements uncertain tax positions that we have
taken or expect to take on a tax return. As of December 31, 2010 and 2009, we did not have any
liabilities for uncertain tax positions that we believe should be recognized in our condensed
consolidated financial statements.
Comprehensive Income
We report comprehensive income (loss) in accordance with FASB Codification Topic 220,
Comprehensive Income. This statement defines comprehensive income (loss) as the changes in equity
of an enterprise except those resulting from unit holders transactions. Accordingly, comprehensive
income (loss) includes certain changes in equity that are excluded from net income (loss). Our only
comprehensive income (loss) items were net income (loss) and the unrealized change in fair value of
marketable securities.
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 office buildings and value-add
commercial office properties. Our management evaluates operating performance on an individual
property level. However, as each of our properties has similar economic characteristics, tenants,
and products and services, our properties have been aggregated into one reportable segment for the
years ended December 31, 2010, 2009 and 2008.
Noncontrolling Interests
A noncontrolling interest relates to the interest in the consolidated entities that are not
wholly owned by us.
3. Real Estate Investments Properties Held for Non-Sale Disposition
Our investments in properties held for non-sale disposition consisted of the following as of
December 31, 2010 and 2009:
December 31, | ||||||||
2010 | 2009 | |||||||
Buildings and improvements |
$ | 26,813,000 | $ | 39,074,000 | ||||
Land |
4,137,000 | 7,122,000 | ||||||
30,950,000 | 46,196,000 | |||||||
Less: accumulated depreciation |
(3,732,000 | ) | (4,656,000 | ) | ||||
$ | 27,218,000 | $ | 41,540,000 | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Depreciation expense for the properties held for non-sale disposition was $1,111,000, $708,000
and $1,557,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Real estate
related impairment charges of $4,721,000, $618,000 and $10,904,000 were recorded against land,
buildings and improvements of our properties held for non-sale disposition during the years ended
December 31, 2010, 2009 and 2008, respectively. In addition, real estate related impairment charges
of $579,000, $82,000 and $1,196,000 were recorded against identified intangible and other assets of
our properties held for non-sale disposition during the years ended December 31, 2010, 2009 and
2008, respectively.
4. Real Estate Investments Unconsolidated Real Estate
Our investments in unconsolidated real estate consisted of the following as of December 31,
2010 and 2009:
Ownership | December 31, | |||||||||||||||
Property | Location | Percentage | 2010 | 2009 | ||||||||||||
Chase Tower |
Austin, TX | 14.8 | % | $ | 6,000 | $ | 727,000 | |||||||||
Enterprise Technology Center |
Scotts Valley, CA | 8.5 | % | | 374,000 | |||||||||||
Executive Center II and III |
Dallas, TX | 41.1 | % | 18,000 | | |||||||||||
$ | 24,000 | $ | 1,101,000 | |||||||||||||
Summarized Financial Information
Summarized unaudited condensed combined financial information about our unconsolidated real
estate as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 is
as follows:
December 31, | ||||||||
2010 | 2009 | |||||||
Assets (primarily real estate, net of impairments) |
$ | 18,591,000 | $ | 140,954,000 | ||||
Mortgage loans and other debt payable |
$ | 32,562,000 | $ | 117,582,000 | ||||
Other liabilities |
5,258,000 | 15,987,000 | ||||||
(Deficit) equity |
(19,229,000 | ) | 7,385,000 | |||||
Total liabilities and equity |
$ | 18,591,000 | $ | 140,954,000 | ||||
Our share of equity |
$ | 24,000 | $ | 1,101,000 | ||||
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 2,831,000 | $ | 6,361,000 | $ | 6,684,000 | ||||||
Rental and other expenses |
25,398,000 | 16,357,000 | 12,718,000 | |||||||||
Loss from continuing operations |
(22,567,000 | ) | (9,996,000 | ) | (6,034,000 | ) | ||||||
Income (loss) from discontinued operations |
2,774,000 | (9,556,000 | ) | (2,254,000 | ) | |||||||
Net loss |
$ | (19,793,000 | ) | $ | (19,552,000 | ) | $ | (8,288,000 | ) | |||
Our equity in income (losses) of unconsolidated real estate |
$ | 271,000 | $ | (2,806,000 | ) | $ | (1,031,000 | ) | ||||
Total real estate related impairment charges of $18,000,000, $21,570,000
and $4,200,000 were recorded against land, buildings, capital improvements and intangible
assets of our unconsolidated properties during the years ended December 31, 2010, 2009 and 2008,
respectively. Our share of these real estate related impairment charges was approximately $374,000,
$3,115,000 and $500,000 during the years ended December 31, 2010, 2009 and 2008, respectively, and
is included in the consolidated statements of operations in the line item entitled Equity in income
(losses) of unconsolidated real estate. Since we have no commitment to fund deficit capital accounts,
the amount of losses from unconsolidated real estate that we record is limited to the amount of our
remaining investment in each respective unconsolidated property. During the year ended December 31,
2010, our share of the $18,000,000 real estate related impairment charge recorded by one of our
unconsolidated properties was limited to our remaining investment in that property.
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In addition, during the year ended December 31, 2009, we recorded a $348,000
allowance against the carrying value of our note receivable of $579,000 from
the Executive Center II and III property pursuant to FASB Codification Topic 323,
Investments Equity Method and Joint Ventures, as our share of losses incurred by
the Executive Center II and III property exceeded the amount of our equity
investment. This allowance was reversed during the year ended December 31, 2010,
as the note receivable was paid in full upon the sale of the property on May 24, 2010.
The allowance, as well as the subsequent reversal of the allowance, are included in the
line item entitled Equity in income (losses) of unconsolidated real estate in the
accompanying consolidated statements of operations.
We also impaired our investments in unconsolidated real estate by $126,000 and $900,000 during
the years ended December 31, 2009 and 2008, respectively. These charges are included in our
consolidated statements of operations in the line item entitled Investment related impairments.
There were no investment related impairment charges recorded for our unconsolidated properties
during the year ended December 31, 2010.
Mortgage Loans
Total mortgage loans and other debt payable of our unconsolidated properties consisted of the
following as of December 31, 2010 and 2009:
Ownership | December 31, | |||||||||||
Property | Percentage | 2010 | 2009 | |||||||||
Chase Tower |
14.8 | % | $ | | $ | 67,781,000 | ||||||
Enterprise Technology Center |
8.5 | % | 32,562,000 | 32,771,000 | ||||||||
Executive Center II and III |
41.1 | % | | 17,030,000 | ||||||||
$ | 32,562,000 | $ | 117,582,000 | |||||||||
Chase Tower
On January 25, 2010, we, along with NNN Chase Tower REO, LP, an entity managed by our manager,
NNN OF 8 Chase Tower REO, LP, an entity also managed by our manager, and CBD Chase Tower, LP (f/k/a
ERG Chase Tower, LP), an unaffiliated third party, sold Chase Tower, located in Austin, Texas, or
the Chase Tower property, to 221 West Sixth Street, LLC, an unaffiliated third party, for an
aggregate sales price of $73,850,000. We owned a 14.8% interest in the Chase Tower property. Our
portion of the net cash proceeds was $526,000 after payment of the related mortgage loan, closing
costs and other transaction expenses. Our manager waived the disposition fee it was entitled to
receive in connection with the sale of the Chase Tower property; therefore, a disposition fee was
not paid to our manager. We also received distributions of excess cash from the Chase Tower
property totaling $260,000 during the year ended December 31, 2010.
Enterprise Technology Center
On April 11, 2010, Enterprise Technology Center, located in Scotts Valley, California, or the
Enterprise Technology Center property, was unable to pay in full the monthly interest and principal
payment due on its non-recourse mortgage loan on that date or within five days of that date,
thereby triggering an event of default under the mortgage loan documents.
The property is continuing to be marketed for sale and several possible options in connection
with the property are currently being discussed with the Enterprise Technology Center lender,
including: (a) a sale of the property or (b) a deed-in-lieu of foreclosure of the property. We can
give no assurances that the property will be sold. Therefore, the Enterprise Technology Center
lender may elect to foreclose on the property or a deed-in-lieu of foreclosure of the property may
be provided to the lender. However, under the terms of the loan agreement, this event of default
could allow the Enterprise Technology Center lender to immediately: (i) increase the interest rate
of the loan from 6.44% per annum to the default interest rate of 11.44% per annum; (ii) impose a
late charge equal to the lesser of
5.0% of the amount of any payment not timely paid, or the maximum amount which may be charged
under applicable law; and/or (iii) foreclose on the Enterprise Technology Center property.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Executive Center II and III
On May 24, 2010, we, through NNN Executive Center II and III 2003, LP, our indirect
subsidiary, along with NNN Executive Center, LLC, an entity also managed by our manager, and
sixteen unaffiliated third party entities sold Executive Center II and III, located in Dallas,
Texas, or the Executive Center II and III property, to Boxer F2, L.P., an unaffiliated third party,
for an aggregate sales price of $17,000,000. We owned a 41.1% interest in the Executive Center II
and III property. Our portion of the net cash proceeds was $541,000 after payment of the related
mortgage loan, closing costs and other transaction expenses. In connection with the sale of the
Executive II and III property, we also received approximately $787,000 as full repayment of a note
receivable and accrued interest due to us from the property. Our manager waived the disposition fee
it was entitled to receive in connection with the sale of the Executive Center II and III property,
therefore, a disposition fee was not paid to our manager. We also received distributions of excess
cash from the Executive Center II and III property totaling $80,000 during the year ended December
31, 2010.
Loan Covenants
Our unconsolidated properties that are financed by borrowings may be required by the terms of
the applicable loan documents to meet certain financial covenants such as minimum loan to value,
debt service coverage, performance covenants, as well as other requirements. As discussed above,
the mortgage loan on the Enterprise Technology Center property is in default.
Unconsolidated Debt Due to Related Parties
Our properties may obtain financing through one or more related parties, including our manager
and/or its affiliates. The Executive Center II and III property had outstanding unsecured notes due
to our manager as of December 31, 2009 totaling $1,445,000. These notes bore interest at 8.00% per
annum and had original maturity dates of January 1, 2009. Pursuant to the terms of the unsecured
notes, upon extension of the maturity dates of the mortgage loans payable on the Executive Center
II and III property on December 28, 2008, the maturity dates of the unsecured notes were
automatically extended to January 1, 2010 and, on February 23, 2010, the maturity dates were
further extended to January 15, 2011. Upon sale of the Executive Center II and III property on May
24, 2010, a payment of $500,000 was made toward the principal balance of these notes, and the
remaining principal balance of $945,000, as well as accrued interest of $555,000, was forgiven by
our manager.
In addition, on November 5, 2008, the Executive Center II and III property obtained a 90-day
unsecured loan in the amount of $304,000 from NNN Realty Advisors. The unsecured note bore interest
at 8.67% per annum and all principal and all accrued interest was paid in full on January 20, 2009.
5. Intangible Assets Related to Properties Held for Non-Sale Disposition
Identified intangible assets related to our properties held for non-sale disposition consisted
of the following as of December 31, 2010 and 2009:
December 31, | ||||||||
2010 | 2009 | |||||||
In-place leases and tenant relationships, net
of accumulated amortization of $1,881,000 and
$3,224,000 as of December 31, 2010 and 2009,
respectively |
$ | 1,951,000 | $ | 4,233,000 | ||||
Amortization expense recorded on the identified intangible assets related to properties held
for non-sale disposition was $587,000, $431,000 and $1,296,000 for the years ended December 31,
2010, 2009 and 2008, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Estimated amortization expense of the identified intangible assets as of December 31, 2010 for
each of the five succeeding fiscal years and thereafter is as follows:
Year | Amount | |||
2011 |
$ | 555,000 | ||
2012 |
394,000 | |||
2013 |
340,000 | |||
2014 |
272,000 | |||
2015 |
187,000 | |||
Thereafter |
203,000 | |||
$ | 1,951,000 | |||
6. Other Assets Related to Properties Held for Non-Sale Disposition
Other assets related to our properties held for non-sale disposition consisted of the
following as of December 31, 2010 and 2009:
December 31, | ||||||||
2010 | 2009 | |||||||
Deferred rent receivable |
$ | 277,000 | $ | 764,000 | ||||
Lease commissions, net of accumulated
amortization of $286,000 and $479,000
as of December 31, 2010 and 2009,
respectively |
321,000 | 744,000 | ||||||
Deferred financing costs, net of
accumulated amortization of $0 and
$925,000 as of December 31, 2010 and
2009, respectively |
| 164,000 | ||||||
Prepaid expenses, deposits and other |
140,000 | 494,000 | ||||||
$ | 738,000 | $ | 2,166,000 | |||||
7. Mortgage Loans Payable
We have fixed and variable rate mortgage loans payable secured by our consolidated properties
held for non-sale disposition of $43,471,000 and $60,164,000 as of December 31, 2010 and 2009,
respectively. As of December 31, 2010 and 2009, the effective interest rates on mortgage loans
payable ranged from 7.25% to 10.95% per annum and 2.50% to 12.00% per annum, respectively, and the
weighted-average effective interest rates were 9.04% and 7.28% per annum, respectively.
The composition of our consolidated mortgage loans payable as of December 31, 2010 and 2009
was as follows:
Total Mortgage | Weighted Average | |||||||||||||||
Loans Payable | Interest Rate | |||||||||||||||
December 31, 2009 | December 31, 2009 | December 31, 2010 | December 31, 2009 | |||||||||||||
Variable rate |
$ | 22,471,000 | $ | 34,574,000 | 7.26 | % | 7.47 | % | ||||||||
Fixed rate |
21,000,000 | 25,590,000 | 10.95 | % | 7.04 | % | ||||||||||
$ | 43,471,000 | $ | 60,164,000 | 9.04 | % | 7.28 | % | |||||||||
Certain of our consolidated properties financed by borrowings are required by the terms
of their applicable loan documents to meet certain financial covenants such as minimum loan to
value, debt service coverage and performance covenants, as well as other requirements on a combined
and individual basis. As of December 31, 2010, we were in default on the Sevens Building mortgage
loan, as discussed below.
The maturity dates and outstanding principal balances of our consolidated mortgage loans
payable as of December 31, 2010 is as follows:
Maturity | Outstanding Principal | |||||||||||
Property | Date | December 31, 2009 | December 31, 2009 | |||||||||
Sevens Building |
10/31/2010 | $ | 21,494,000 | $ | 21,382,000 | |||||||
Four Resource Square |
1/20/2011 | 21,977,000 | 21,797,000 | |||||||||
Tiffany Square |
N/A | | 12,395,000 | |||||||||
Executive Center I |
N/A | | 4,590,000 | |||||||||
$ | 43,471,000 | $ | 60,164,000 | |||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Sevens Building Loan Default
On October 31, 2010, the mortgage loan for the Sevens Building property became due and is now
in default due to non-payment of the outstanding principal balance upon maturity. The mortgage loan
documents include an option to extend the maturity date for an additional 12 months; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Sevens Building property is currently less than the outstanding principal balance of the
mortgage loan, and we do not expect that the value of the property will exceed the principal
balance by the end of the potential extension term. As such, we had been in discussions with the
Sevens Building lender regarding our options for transferring the Sevens Building property to the
Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form of
transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. A successor trustee has been
appointed by the Sevens Building lender to conduct a public auction for the sale of the Sevens
Building property, which is set to take place on March 25, 2011.
Four Resource Square Loan Default, Extension and Cancellation
On March 7, 2010, the mortgage loan for the Four Resource Square property matured and was in
default due to non-payment of the outstanding principal balance upon maturity. On April 20, 2010,
we entered into an amendment to the loan and security agreement with the Four Resource Square
lender, with an effective date of March 7, 2010, to extend the maturity date of the mortgage loan
to the earlier of November 30, 2010 or the date on which the mortgage loan becomes due and payable,
whether by acceleration or otherwise. On November 16, 2010, we entered into a second amendment with
the Four Resource Square lender to extend the maturity date of the mortgage loan to the earlier of
January 20, 2011 or the date on which the mortgage loan comes due and payable, by acceleration or
otherwise.
On January 10, 2011, we entered into a purchase and sale agreement with Four Resource Square,
LLC, an entity affiliated with the Four Resource Square lender, for the sale of the Four Resource
Square property for a sales price equal to the outstanding principal balance of the mortgage loan,
plus accrued interest and any other amounts due under the mortgage loan documents as of the closing
date. On January 20, 2011, we sold the Four Resource Square property to Four Resource Square, LLC,
an entity affiliated with the Four Resource Square lender, for a sales price of $21,977,000, which
was equal to the outstanding principal balance of the mortgage loan. This mortgage loan was fully
repaid and cancelled upon the transfer of the property.
Tiffany Square Loan Extension, Default and Cancellation
On February 15, 2009, we exercised an extension option on our mortgage loan for the Tiffany
Square property, extending the maturity date to February 15, 2010. On February 15, 2010, our
mortgage loan on the Tiffany Square property became due and was in default due to non-payment of
the outstanding principal balance upon maturity.
On April 8, 2010, we entered into a purchase and sale agreement with Tiffany Square, LLC, an
entity affiliated with the Tiffany Square lender, for the sale of the Tiffany Square property for a
sales price equal to the outstanding principal balance of the mortgage loan, plus accrued interest
and any other amounts due under the mortgage loan documents as of the closing date. On May 7, 2010,
we sold the Tiffany Square property to Tiffany Square, LLC, an entity affiliated with the Tiffany
Square lender, for a sales price of $12,395,000, which was equal to the outstanding principal
balance of the mortgage loan. This loan was fully repaid and cancelled upon the transfer of the
property.
Executive Center I Loan Extension, Default and Cancellation
On September 23, 2008, we exercised a third extension option on our mortgage loan for the
Executive Center I property, which extended the maturity date to October 1, 2009. In the third
quarter of 2009, we elected to cease the subsidization of the operations and debt service on the
non-recourse promissory note for the Executive Center I property, and the mortgage loan was not
repaid on October 1, 2009.
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On June 2, 2010, we completed a deed-in-lieu of foreclosure transaction whereby we transferred
our ownership interest in the Executive Center I property to the Executive Center I lender in
exchange for complete cancellation of the mortgage loan agreements and release of all of our
liabilities, obligations and other indebtedness arising from the mortgage loan agreements. At the
time of transfer, the mortgage loan had an outstanding principal balance of $4,590,000.
8. Derivative Financial Instruments
Derivatives are recognized as either assets or liabilities in our consolidated balance sheet
and are measured at fair value in accordance with FASB Codification Topic 815, Derivatives and
Hedging. Since our derivative instruments are not designated as hedge instruments, they do not
qualify for hedge accounting and, accordingly, changes in fair value are included as a component of
interest expense in our consolidated statements of operations and comprehensive income (loss) in
the period of change. We utilize derivative instruments to mitigate interest rate fluctuations on
specific transactions and cash flows. We do not utilize derivative instruments for speculative or
trading purposes.
The primary risks associated with derivative instruments are market and credit risk. Market
risk is defined as the potential for loss in value of the derivative instruments due to adverse
changes in market prices (interest rates). Utilizing derivative instruments allows us to
effectively manage the risk of increasing interest rates with respect to the potential effects
these fluctuations could have on future operations and cash flows. Credit risk is the risk that one
of the parties to a derivative contract fails to perform or meet their financial obligation. We do
not obtain collateral associated with derivative instruments, but monitor the credit standing of
our counterparties on a regular basis. Should a counterparty fail to perform, we would incur a
financial loss to the extent that the associated derivative contract was in an asset position.
In connection with the variable interest rate mortgage loans on our 901 Civic Center property,
which was sold on July 17, 2009, we entered into an interest rate swap agreement in order to limit
the impact of interest rate changes on our results of operations and cash flows. The terms of the
swap included: (i) a notional amount of $9,837,000; (ii) a trade date and effective date of June
18, 2008; (iii) a termination date of May 12, 2009; and (iv) a fixed rate payer payment date of the
first of each month, commencing on July 1, 2008 and ending on the termination date.
We paid $112,000 to reduce the swap liability during the year ended December 31, 2009. We
recorded $79,000 as an addition to interest expense related to the change in the swap fair value
for the years ended December 31, 2008. This interest rate swap agreement expired on May 12, 2009,
and we did not renew it.
9. Noncontrolling Interests
Noncontrolling interests relate to interests in the following consolidated limited liability
companies and property with tenant- in-common, or TIC, ownership interests that are not
wholly-owned by us as of December 31, 2010 and 2009:
Entity | Date Acquired | Noncontrolling Interests | ||||||
NNN Enterprise Way, LLC |
05/07/2004 | 26.7 | % | |||||
NNN 901 Civic Center, LLC |
04/24/2006 | 3.1 | % |
NNN 901 Civic Center, LLC sold the 901 Civic Center property on July 17, 2009; however, the
legal entity still exists as of December 31, 2010 in order to settle outstanding receivables and
payables remaining from the operation of the property.
10. NNN 2003 Value Fund, LLC Unit Holders Deficit
Pursuant to our Private Placement Memorandum, we offered for sale to the public a minimum of
1,000 and a maximum of 10,000 units at a price of $5,000 per unit. We relied on the exemptions from
registration provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act.
There are three classes of membership interests, or units, each having different rights with
respect to distributions. As of December 31, 2010 and December 31, 2009, there were 4,000 Class A
units, 3,170 Class B units
and 2,800 Class C units issued and outstanding. The rights and obligations of all unit holders
are governed by the Operating Agreement.
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NNN 2003 VALUE FUND, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the event that any distribution of Cash from Operations
is not sufficient to pay the return described above, all unit holders receive identical pro rata
distributions, except that Class C unit holders do not receive more than an 8.0% return on their
Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B
units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per
outstanding unit basis and further distributed to the unit holders and our manager based on
predetermined ratios providing our manager with a share of 15.0%, 20.0% and 25.0% of the
distributions available to Class A units, Class B units and Class C units, respectively, of such
excess Cash from Operations.
Cash from Capital Transactions, as defined in the Operating Agreement, is first used to
satisfy our debt and liability obligations; then distributed pro rata to all unit holders in
accordance with their membership interests until all capital contributions are reduced to zero; and
lastly, in accordance with the distributions as outlined above in the Cash from Operations.
Effective November 1, 2008, we suspended regular, monthly cash distributions to all unit
holders. Instead, we make periodic distributions to unit holders from available funds, if any. To
date, Class A units, Class B units and Class C units have received identical per-unit
distributions; however, distributions may vary among the three classes of units in the future.
During the years ended December 31, 2010, 2009 and 2008, we distributed $2,500,000, $0, and
$2,908,000, respectively, of available funds to our unit holders. In addition, we distributed
$500,000 of available funds to our unit holders on March 15, 2011.
11. Future Minimum Rental Revenue
We have operating leases with tenants that expire at various dates through 2017 and, in some
cases, are subject to scheduled fixed increases or adjustments based on the consumer price index.
Generally, the leases grant tenants renewal options. Leases also provide for additional rents based
on certain operating expenses. Future minimum rent contractually due under operating leases,
excluding tenant reimbursements of certain costs, as of December 31, 2010, are summarized as
follows:
Year Ending | Amount | |||
2011 |
$ | 4,187,000 | ||
2012 |
2,429,000 | |||
2013 |
1,416,000 | |||
2014 |
794,000 | |||
2015 |
220,000 | |||
Thereafter |
189,000 | |||
$ | 9,235,000 | |||
A certain amount of our rental revenue is derived from tenants with leases which are subject
to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic
revenues in excess of specified levels. For the years ended December 31, 2010, 2009 and 2008, the
amount of contingent rent earned by us was not significant.
12. Related Party Transactions
The Management Agreement
Our manager manages us pursuant to the terms of the Operating Agreement and the Management
Agreement. While we have no employees, certain employees of our manager provide services in
connection with the Operating Agreement. In addition, Realty serves as our property manager
pursuant to the terms of the Operating Agreement and the Management Agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. Certain fees paid to Realty in the years ended
December 31, 2010, 2009 and 2008, were passed through to our manager or its affiliate pursuant to
an agreement between our manager and Realty, or the Realty Agreement.
Property Management Fees
We pay Realty a monthly property management fee of up to 5.0% of the gross receipts revenue of
the properties. For the years ended December 31, 2010, 2009 and 2008, we incurred property
management fees to Realty of $390,000, $538,000 and $547,000, respectively.
Real Estate Acquisition Fees
We pay Realty or its affiliate a real estate acquisition fee of up to 3.0% of the gross
purchase price of a property. For the years ended December 31, 2010, 2009 and 2008, we did not
incur any real estate acquisition fees to Realty or its affiliate.
Real Estate Disposition Fees
We pay Realty or its affiliate a real estate disposition fee of up to 5.0% of the gross sales
price of a property. For the years ended December 31, 2010, 2009 and 2008, we did not incur any
real estate disposition fees to Realty or its affiliate.
Lease Commissions
We pay Realty a lease commission for its services in leasing any of our properties equal to
6.0% of the value of any lease entered into during the term of the Management Agreement and 3.0%
with respect to any renewals. For the years ended December 31, 2010, 2009 and 2008, we incurred
lease commissions to Realty of $227,000, $157,000 and $303,000, respectively.
Accounting Fees
We pay our manager accounting fees for record keeping services provided to us. For the years
ended December 31, 2009 and 2008, we incurred accounting fees to our manager of $59,000 and
$72,000, respectively. Beginning January 1, 2010, all accounting fees have been waived by our
manager and, as such, we did not incur any accounting fees for the year ended December 31, 2010.
Construction Management Fees
We pay Realty a construction management fee for its services in supervising construction and
repair projects in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any
amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in
any calendar year for construction or repair projects. For the years ended December 31, 2009 and
2008, we incurred construction management fees to Realty of $4,000 and $76,000, respectively. We
did not incur any construction management fees for the year ended December 31, 2010.
Loan Fees
We pay Realty or its affiliate a loan fee equal to 1.0% of the principal amount of the loan
for its services in obtaining loans for our properties during the term of the Management Agreement.
For the years ended December 31, 2010, 2009 and 2008, we did not incur any loan fees to Realty or
its affiliate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Related Party Payables
Related party accounts payable consist primarily of amounts due related to the Management
Agreement, as discussed above, and for operating expenses incurred by us and paid by our manager or
its affiliates. As of December 31, 2010 and 2009, the amount payable by us was $32,000 and
$118,000, respectively, and is included in the accompanying consolidated balance sheets in the line
item entitled Accounts and loans payable due to related parties.
Related Party Receivables
On December 1, 2005, we advanced $579,000 to NNN Executive Center, LLC, an 11.5% owner of the
Executive Center II and III property, an unconsolidated property, as evidenced by an unsecured
note. The unsecured note provided for interest at a fixed rate of 8.00% per annum and all principal
and accrued interest was originally due in full on December 1, 2008. Pursuant to the terms of the
note, upon extension of the maturity dates of the mortgage loans payable on the Executive Center II
and III property on December 28, 2008, the maturity date of the unsecured note was automatically
extended to December 28, 2009. On March 2, 2010, the maturity date of this note was further
extended to January 15, 2011. At the time of the sale of the Executive Center II and III property
on May 24, 2010, the $579,000 note receivable, as well as $208,000 of accrued interest, was repaid
in full.
As of December 31, 2009, the amount due to us related to the unsecured note described above,
net of allowances, and for management fees due from an affiliated entity was $475,000, which is
included in the accompanying consolidated balance sheet in the line item entitled Accounts and
loans receivable due from related parties, net. There were no amounts due to us as of December 31,
2010.
Other Related Party Financing
On August 29, 2008, we entered into a 365-day unsecured loan in the amount of $111,000 with
NNN Realty Advisors, the parent company of our manager. The unsecured note provided for interest at
6.96% per annum, and all principal and accrued interest was paid in full on December 10, 2008.
On November 18, 2008, we entered into a 365-day unsecured loan in the amount of $88,000 from
NNN Realty Advisors. The unsecured note provided for interest at 8.67% per annum, and all principal
and accrued interest was paid in full on December 10, 2008.
13. Commitments and Contingencies
Litigation
Neither we nor any of our properties are presently subject to any material litigation and, to
our knowledge, no material litigation is threatened against us or any of our properties that, if
determined unfavorably to us, would have a material adverse effect on our financial condition,
results of operations or cash flows.
Environmental Matters
We follow the policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist,
we are not currently aware of any environmental liability with respect to the properties that would
have a material adverse effect on our financial condition, results of operations or cash flows.
Further, we are not aware of any environmental liabilities or any unasserted claim or assessment
with respect to environmental liabilities that we believe would require additional disclosure or
the recording of a loss contingency.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
14. Discontinued Operations
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, the net income
(loss) from consolidated properties sold, as well as those classified as held for sale, are
reflected in our consolidated statements of operations as discontinued operations for all periods
presented. For the years ended December 31, 2010, 2009 and 2008, discontinued operations included
the net income (loss) of the following properties:
Property | Date Acquired | Date Designated Held for Sale | Date Sold | |||||||||
901 Civic Center |
April 24, 2006 | September 26, 2008 | July 17, 2009 | |||||||||
Tiffany Square |
November 15, 2006 | N/A | May 7, 2010 | |||||||||
Executive Center I |
December 30, 2003 | N/A | June 2, 2010 |
The following table summarizes the revenue and expense components that comprised income (loss)
from discontinued operations for the years ended December 31, 2010, 2009 and 2008:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Rental revenue |
$ | 935,000 | $ | 3,461,000 | $ | 4,695,000 | ||||||
Rental expenses (including general,
administrative, depreciation and
amortization) |
(842,000 | ) | (2,554,000 | ) | (4,482,000 | ) | ||||||
Real estate related impairments |
| (3,300,000 | ) | (8,600,000 | ) | |||||||
Income (loss) before other income (expense) |
93,000 | (2,393,000 | ) | (8,387,000 | ) | |||||||
Interest expense |
(622,000 | ) | (2,110,000 | ) | (2,628,000 | ) | ||||||
Other income (expense) |
1,000 | (4,000 | ) | 32,000 | ||||||||
Gain on extinguishment of debt |
6,658,000 | | | |||||||||
Gain on sale |
| 758,000 | | |||||||||
Income (loss) from discontinued operations |
6,130,000 | (3,749,000 | ) | (10,983,000 | ) | |||||||
Income (loss) from discontinued operations
attributable to noncontrolling interests |
| 57,000 | (140,000 | ) | ||||||||
Income (loss) from discontinued operations
attributable to NNN 2003 Value Fund, LLC |
$ | 6,130,000 | $ | (3,806,000 | ) | $ | (10,843,000 | ) | ||||
15. Selected Quarterly Financial Data
(unaudited)
Set forth below is the unaudited selected quarterly financial data. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly, and in accordance with generally accepted accounting
principles, the unaudited selected quarterly financial data when read in conjunction with the
consolidated financial statements. Previously reported amounts have been reclassified to reflect
current discontinued operations in accordance with FASB Codification Topic 360, Property, Plant and
Equipment.
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Rental revenues |
$ | 1,632,000 | $ | 1,790,000 | $ | 1,710,000 | $ | 1,720,000 | ||||||||
Rental expenses (including
general, administrative,
depreciation and amortization) |
1,338,000 | 1,303,000 | 1,481,000 | 1,475,000 | ||||||||||||
Real estate related impairments |
| | 5,300,000 | | ||||||||||||
Income (loss) before other
income (expense) and
discontinued operations |
294,000 | 487,000 | (5,071,000 | ) | 245,000 | |||||||||||
Equity in income (losses) of
unconsolidated real estate |
4,000 | 6,000 | 1,016,000 | (407,000 | ) | |||||||||||
Loss from continuing operations |
(637,000 | ) | (269,000 | ) | (4,727,000 | ) | (990,000 | ) | ||||||||
Consolidated net (loss) income |
(638,000 | ) | (275,000 | ) | 1,864,000 | (1,444,000 | ) | |||||||||
Net (loss) income attributable
to NNN 2003 Value Fund, LLC |
(638,000 | ) | (275,000 | ) | 1,864,000 | (1,346,000 | ) |
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NNN 2003 VALUE FUND, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
Rental revenues |
$ | 1,738,000 | $ | 1,664,000 | $ | 1,764,000 | $ | 1,784,000 | ||||||||
Rental expenses (including general,
administrative, depreciation and
amortization) |
1,257,000 | 1,281,000 | 1,215,000 | 1,446,000 | ||||||||||||
Real estate related impairments |
| 100,000 | 600,000 | | ||||||||||||
Income (loss) before other income (expense)
and discontinued operations |
481,000 | 283,000 | (51,000 | ) | 338,000 | |||||||||||
Equity in losses of unconsolidated real estate |
(395,000 | ) | (194,000 | ) | (1,525,000 | ) | (1,040,000 | ) | ||||||||
Loss from continuing operations |
(623,000 | ) | (706,000 | ) | (2,537,000 | ) | (1,475,000 | ) | ||||||||
Consolidated net loss |
(807,000 | ) | (895,000 | ) | (4,952,000 | ) | (2,436,000 | ) | ||||||||
Net loss attributable to NNN 2003 Value Fund,
LLC |
(809,000 | ) | (949,000 | ) | (5,010,000 | ) | (2,126,000 | ) |
16. Subsequent Events
Sale of Four Resource Square
On January 20, 2011, we sold the Four Resource Square property to Four Resource Square, LLC,
an entity affiliated with the Four Resource Square lender, for a sales price of $21,977,000, which
was equal to the outstanding principal balance of the loan. This loan was fully repaid and
cancelled upon the transfer of the property.
Pending Foreclosure Action of Sevens Building
On March 7, 2011, we received a letter from the Sevens Building lender indicating that it had
initiated a foreclosure action on the Sevens Building property pursuant to our default on the
mortgage loan for the Sevens Building property, which occurred as a result of our non-payment of
the principal balance of the mortgage loan on the maturity date of October 31, 2010. A successor
trustee has been appointed by the Sevens Building lender to conduct a public auction for the sale
of the Sevens Building property, which is set to take place on March 25, 2011.
Distribution to Unit Holders
On March 15, 2011, we distributed $500,000 of available funds to our unit holders.
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NNN 2003 VALUE FUND, LLC
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Deductions | ||||||||||||||||
Balance at | Charged to | (Write-off of | Balance at | |||||||||||||
Beginning of | Costs and | uncollectible | End of | |||||||||||||
Period | Expenses | account) | Period | |||||||||||||
Year ended December 31, 2010 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 15,000 | $ | 241,000 | $ | (38,000 | ) | $ | 218,000 | |||||||
Straight line rent reserve |
$ | 176,000 | $ | 40,000 | $ | | $ | 216,000 | ||||||||
Year ended December 31, 2009 |
||||||||||||||||
Allowance for doubtful accounts |
$ | | $ | 15,000 | $ | | $ | 15,000 | ||||||||
Straight line rent reserve |
$ | | $ | 176,000 | $ | | $ | 176,000 | ||||||||
Year ended December 31, 2008 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 228,000 | $ | (228,000 | ) | $ | | $ | | |||||||
Straight line rent reserve |
$ | | $ | | $ | | $ | |
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NNN 2003 VALUE FUND, LLC
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
Maximum Life | ||||||||||||||||||||||||||||||||||||||||
on Which | ||||||||||||||||||||||||||||||||||||||||
Gross Amount at Which Carried | Depreciation in | |||||||||||||||||||||||||||||||||||||||
Initial Costs to Company | at Close of Period | Latest Income | ||||||||||||||||||||||||||||||||||||||
Buildings and | Buildings and | Accumulated | Date | Date | Statement is | |||||||||||||||||||||||||||||||||||
Encumbrance | Land | Improvements | Land | Improvements | Total(a)(b) | Depreciation(c) | Constructed | Acquired | Computed | |||||||||||||||||||||||||||||||
Four Resource
Square (Office),
Charlotte, NC |
$ | 21,531,000 | $ | 1,668,000 | $ | 19,357,000 | $ | 1,183,000 | $ | 14,149,000 | $ | 15,332,000 | $ | (2,516,000 | ) | 2000 | 3/7/2007 | 39 years | ||||||||||||||||||||||
Sevens Building
(Office), St.
Louis, MO |
21,000,000 | 5,119,000 | 20,487,000 | 2,954,000 | 12,664,000 | 15,618,000 | (1,216,000 | ) | 1971 | 10/25/2007 | 39 years | |||||||||||||||||||||||||||||
Total |
$ | 42,531,000 | $ | 6,787,000 | $ | 39,844,000 | $ | 4,137,000 | $ | 26,813,000 | $ | 30,950,000 | $ | (3,732,000 | ) | |||||||||||||||||||||||||
(a) | For federal income tax purposes, the aggregate cost of our four consolidated operating properties, including a property that is held for non-sale disposition, as of December 31, 2010 is $47,193,000. | |
(b) | A summary of activity for real estate for the years ended December 31, 2010, 2009 and 2008 is as follows: |
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Real Estate: |
||||||||||||
Balances at beginning of year |
$ | 46,196,000 | $ | 22,132,000 | $ | 77,337,000 | ||||||
Acquisitions of real estate properties |
| | | |||||||||
Additions to (retirements of) building and improvements |
(143,000 | ) | (173,000 | ) | 22,000 | |||||||
Dispositions of real estate properties |
(10,382,000 | ) | | | ||||||||
Real estate related impairments |
(4,721,000 | ) | (3,461,000 | ) | (6,046,000 | ) | ||||||
Balances associated with changes in reporting presentation(d) |
| 27,698,000 | (49,181,000 | ) | ||||||||
Balances at end of year |
$ | 30,950,000 | $ | 46,196,000 | $ | 22,132,000 | ||||||
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(c) | A summary of activity for accumulated depreciation for the years ended December 31, 2010, 2009 and 2008 is as follows: |
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Accumulated Depreciation: |
||||||||||||
Balances at beginning of year |
$ | 4,656,000 | $ | 2,894,000 | $ | 2,740,000 | ||||||
Depreciation expense |
1,111,000 | 788,000 | 1,223,000 | |||||||||
Retirements |
(223,000 | ) | (329,000 | ) | | |||||||
Dispositions of real estate properties |
(1,812,000 | ) | | | ||||||||
Balances associated with changes in reporting presentation(d) |
| 1,303,000 | (1,069,000 | ) | ||||||||
Balances at end of year |
$ | 3,732,000 | $ | 4,656,000 | $ | 2,894,000 | ||||||
(d) | The balances associated with changes in reporting presentation represent real estate and accumulated depreciation related to (i) properties designated as held for sale and placed into discontinued operations or (ii) properties that no longer meet the criteria for classification as held for sale that have been reclassified as operating properties. |
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SIGNATURES
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.
NNN 2003 Value Fund, LLC (Registrant) |
||||
By:
|
/s/ Steven M. Shipp | Executive Vice President, Portfolio Management | ||
Steven M. Shipp | Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2003 Value Fund, LLC |
Date: March 18, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/ Steven M. Shipp
|
Executive Vice President, Portfolio Management
Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2003 Value Fund, LLC (principal executive officer) |
||
Date: March 18, 2011 | ||||
By:
|
/s/ Paul E. Henderson
|
Chief Accounting Officer Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2003 Value Fund, LLC (principal financial officer) |
Date: March 18, 2011
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Table of Contents
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 this Annual Report on
Form 10-K for the fiscal year 2010 (and are numbered in accordance with Item 601 of Regulation
S-K).
Exhibit | ||||
Number | Exhibit | |||
3.1 | Articles of Organization of NNN 2003 Value Fund, LLC, dated
March 19, 2003 (included in Exhibit 3.1 to our Form 10 filed on
May 2, 2005 and incorporated herein by reference) |
|||
10.1 | Operating Agreement of NNN 2003 Value Fund, LLC, by and between
Triple Net Properties, LLC, as the Manager, and Anthony W.
Thompson, as the Initial Member (included as Exhibit 10.1 to
our Form 10 filed on May 2, 2005 and incorporated herein by
reference) |
|||
10.2 | Management Agreement between NNN 2003 Value Fund, LLC and
Triple Net Properties Realty, Inc. (included as Exhibit 10.2 to
our Form 10 filed on May 2, 2005 and incorporated herein by
reference) |
|||
10.3 | First Amendment to Operating Agreement of NNN 2003 Value Fund,
LLC, by and between Triple Net Properties, LLC, as the Manager,
dated January 20, 2005 (included as Exhibit 10.3 to our Form
10-K filed on April 2, 2007 and incorporated herein by
reference) |
|||
10.4 | First Amendment to Management Agreement between NNN 2003 Value
Fund, LLC and Triple Net Properties Realty, Inc., dated May 1,
2005 (included as Exhibit 10.4 to our Form 10-K filed on April
2, 2007 and incorporated herein by reference) |
|||
10.5 | Second Amendment to Operating Agreement of NNN 2003 Value Fund,
LLC, by and between Triple Net Properties, LLC, as the Manager,
dated February 2, 2007 (included as Exhibit 10.7 to our Form
10-K filed on April 2, 2007 and incorporated herein by
reference) |
|||
10.6 | Agreement for Purchase and Sale of Real Property and Escrow
Instructions by and among NNN VF 901 Civic, LLC, NNN 901 Civic,
LLC and Robert Ko, dated April 21, 2009 (included as Exhibit
10.6 to our Form 10-Q filed on May 18, 2009 and incorporated
herein by reference) |
|||
10.7 | First Amendment to Agreement for Purchase and Sale by and among
NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko, dated
May 6, 2009 (included as Exhibit 10.7 to our Form 10-Q filed on
May 18, 2009 and incorporated herein by reference) |
|||
10.8 | Second Amendment to Agreement for Purchase and Sale by and
among NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko,
dated May 12, 2009 (included as Exhibit 10.8 to our Form 10-Q
filed on May 18, 2009 and incorporated herein by reference) |
|||
10.9 | Third Amendment to Agreement for Purchase and Sale by and among
NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko, dated
May 12, 2009 (included as Exhibit 10.1 to our Current Report on
Form 8-K filed on May 20, 2009 and incorporated herein by
reference) |
|||
10.10 | Modification of Deed of Trust and Other Loan Documents dated
May 15, 2009, effective as of May 12, 2009, by and among NNN VF
901 Civic, LLC, NNN 901 Civic, LLC, NNN 2003 Value Fund, LLC
and Bank of America, N.A. (Senior Loan Modification) (included
as Exhibit 10.2 to our Current Report on form 8-K filed on May
20, 2009 and incorporated herein by reference) |
|||
10.11 | Modification of Deed of Trust and Other Loan Documents dated
May 15, 2009, effective as of May 12, 2009, by and among NNN VF
901 Civic, LLC, NNN 901 Civic, LLC, NNN 2003 Value Fund, LLC
and Bank of America, N.A. (Mezzanine Loan Modification)
(included as Exhibit 10.3 to our Current Report on form 8-K
filed on May 20, 2009 and incorporated herein by reference) |
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Table of Contents
Exhibit | ||||
Number | Exhibit | |||
10.12 | Fourth Amendment to Agreement for Purchase and Sale by and
among NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko,
dated May 22, 2009 (included as Exhibit 10.1 to our Current
Report on Form 8-K filed on May 27, 2009 and incorporated
herein by reference) |
|||
10.13 | Fifth Amendment to Agreement for Purchase and Sale by and among
NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko, dated
May 29, 2009 (included as Exhibit 10.1 to our Current Report on
Form 8-K filed on June 4, 2009 and incorporated herein by
reference) |
|||
10.14 | Sixth Amendment to Agreement for Purchase and Sale by and among
NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko, dated
June 17, 2009 (included as Exhibit 10.1 to our Current Report
on Form 8-K filed on June 23, 2009 and incorporated herein by
reference) |
|||
10.15 | Temporary Extension Agreement by and among NNN VF Chase Tower,
LLC et al. (Senior Borrowers) and PSP/MRC DEBT PORTFOLIO S-1,
L.P., successor-in-interest to MMA Realty Capital, LLC the
(Senior Lender) and also NNN VF Chase Tower, LLC et al.
(Mezzanine Borrowers) and Transwestern Mezzanine Realty
Partners II, LLC, (Mezzanine Lender) dated June 30, 2009
(included as Exhibit 10.1 to our Current Report on Form 8-K
filed on July 6, 2009 and incorporated herein by reference) |
|||
10.16 | Letter Amendment to the Temporary Extension Agreement by and
among NNN Chase Tower REO, LP, NNN OF 8 Chase Tower REO, LP,
ERG Chase Tower, LP and NNN VF Chase Tower RE, LP and PSP/MRC
Debt Portfolio S-1, LP, by and among NNN Chase Tower, LLC, NNN
Chase Tower Member, LLC, NNN OF 8 Chase Tower, LLC, NNN Of 8
Chase Tower Member, LLC, NNN-ERG Chase Tower GP I, LLC, ERG
Chase Tower Limited I, LP, NNN VF Chase Tower, LLC NNN VF Chase
Tower Member, LLC, Grubb & Ellis Realty Investors, LLC, NNN
Opportunity Fund VIII, LLC, NNN 2003 Value Fund, LLC and
Transwestern Mezzanine Realty Partners II, LLC, dated July 10,
2009 (included as Exhibit 10.1 to our Current Report on Form
8-K filed on July 14, 2009 and incorporated herein by
reference) |
|||
10.17 | Seventh Amendment to Agreement for Purchase and Sale by and
among NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko,
effective July 15, 2009 (included as Exhibit 10.1 to our
Current Report on Form 8-K filed on July 21, 2009 and
incorporated herein by reference) |
|||
10.18 | Loan Modification Agreement by and among NNN Chase Tower REO,
LP, NNN OF 8 Chase Tower REO, LP, ERG Chase Tower, LP and NNN
VF Chase Tower RE, LP and PSP/MRC Debt Portfolio S-1, LP, dated
July 17, 2009 (included as Exhibit 10.1 to our Current Report
on Form 8-K filed on July 23, 2009 and incorporated herein by
reference) |
|||
10.19 | Forbearance and Modification Agreement by and among NNN Chase
Tower, LLC, NNN Chase Tower Member, LLC, NNN OF 8 Chase Tower,
LLC, NNN Of 8 Chase Tower Member, LLC, NNN-ERG Chase Tower GP
I, LLC, ERG Chase Tower Limited I, LP, NNN VF Chase Tower, LLC
NNN VF Chase Tower Member, LLC, Grubb & Ellis Realty Investors,
LLC, NNN Opportunity Fund VIII, LLC, Andrew Pastor, Jeffrey S.
Newberg, Kirk A. Rudy, Christopher T. Ellis, David L. Roche,
and Arnold B. Miller, NNN 2003 Value Fund, LLC and Transwestern
Mezzanine Realty Partners II, LLC, dated July 17, 2009
(included as Exhibit 10.2 to our Current Report on Form 8-K
filed on July 23, 2009 and incorporated herein by reference) |
|||
10.20 | Agreement for Purchase and Sale of Real Property and Escrow
Instructions between NNN VF Chase Tower REO, LP, NNN Chase
Tower REO, LP, NNN OF 8 Chase Tower REO, LP and CBD Chase
Tower, LP (f/k/a ERG Chase Tower, LP), and 221 West Sixth
Street, LLC, effective November 19, 2009 (included as Exhibit
10.1 to our Current Report on Form 8-K filed on November 24,
2009 and incorporated herein by reference) |
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Table of Contents
Exhibit | ||||
Number | Exhibit | |||
10.21 | Second Amendment to Loan Documents between sixteen entities
sequentially named NNN Executive Center 1, LLC through NNN
Executive Center 16, LLC, NNN Executive Center, LLC, NNN
Executive Center II and III 2003, LP, Grubb & Ellis Realty
Investors, LLC, NNN Realty Advisors, Inc., NNN Executive
Center, LLC, and Bank of America, N.A., dated as of January 31,
2010 (included as Exhibit 10.1 to our Current Report on
Form 8-K filed on February 11, 2010 and incorporated herein by
reference) |
|||
10.22 | Amended and Restated Promissory Note by and between NNN
Executive Center, LLC, and sixteen entities sequentially named
NNN Executive Center 1, LLC through NNN Executive Center 16,
LLC, and NNN Executive Center II and III 2003, LP, payable to
Bank of America, N.A., dated as of January 31, 2010 (included
as Exhibit 10.2 to our Current Report on Form 8-K filed on
February 11, 2010 and incorporated herein by reference) |
|||
10.23 | Third Modification to Deed of Trust, Security Agreement and
Fixture Filing by and between NNN Executive Center, LLC, and
sixteen entities sequentially named NNN Executive Center 1, LLC
through NNN Executive Center 16, LLC, and NNN Executive Center
II and III 2003, LP, for the benefit of Bank of America, N.A.,
dated as of January 31, 2010 (included as Exhibit 10.3 to our
Current Report on Form 8-K filed on February 11, 2010 and
incorporated herein by reference) |
|||
10.24 | Purchase and Sale Agreement between NNN VF Tiffany Square, LLC
and Tiffany Square, LLC, dated April 8, 2010 (included as
Exhibit 10.1 to our Current Report on Form 8-K filed on April
14, 2010 and incorporated herein by reference) |
|||
10.25 | First Amendment to Loan and Security Agreement between NNN VF
Four Resource Square, LLC, NNN 2003 Value Fund, LLC and RAIT
Partnership, L.P., dated April 20, 2010 (included as Exhibit
10.1 to our Current Report on Form 8-K filed on April 26, 2010
and incorporated herein by reference) |
|||
10.26 | Settlement Agreement between NNN Executive Center 2003, LP and
Ivan Halaj and Vilma Halaj Inter Vivos Trust, dated May 28,
2010 (included as Exhibit 10.1 to our Current Report on
Form 8-K filed on June 4, 2010 and incorporated herein by
reference) |
|||
10.27 | Amendment to Settlement Agreement between NNN Executive Center
2003, LP and Ivan Halaj and Vilma Halaj Inter Vivos Trust,
dated June 2, 2010 (included as Exhibit 10.2 to our Current
Report on Form 8-K filed on June 4, 2010 and incorporated
herein by reference) |
|||
10.28 | Second Amendment to Loan and Security Agreement between NNN VF
Four Resource Square, LLC, NNN 2003 Value Fund, LLC and RAIT
Partnership, L.P., dated November 16, 2010 (included as
Exhibit 10.1 to our Current Report on Form 8-K filed on
November 22, 2010 and incorporated herein by reference) |
|||
21.1 | * | Subsidiaries of NNN 2003 Value Fund, LLC |
||
31.1 | * | Certification of Principal Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Principal Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | ** | Certification of Principal Executive Officer, pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002 |
||
32.2 | ** | Certification of Principal Financial Officer, pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
76