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EX-21.1 - SUBSIDIARIES OF REGISTRANT - CNL LIFESTYLE PROPERTIES INCdex211.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - CNL LIFESTYLE PROPERTIES INCdex312.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - CNL LIFESTYLE PROPERTIES INCdex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - CNL LIFESTYLE PROPERTIES INCdex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - CNL LIFESTYLE PROPERTIES INCdex311.htm
EX-10.1.1 - ADVISORY AGREEMENT - CNL LIFESTYLE PROPERTIES INCdex1011.htm
EX-10.19 - SCHEDULE OF OMITTED AGREEMENTS - CNL LIFESTYLE PROPERTIES INCdex1019.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x 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

 

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

For the transition period from                      to                     

Commission file number 000-51288

 

 

CNL LIFESTYLE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   20-0183627

(State of other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

450 South Orange Avenue

Orlando, Florida

  32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (407) 650-1000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

None

  Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(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  ¨    No  x

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   ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.05 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s 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.  ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨

  Accelerated filer   ¨

Non-accelerated filer   x

  Smaller reporting company   ¨

(Do not check if a smaller reporting company)

 

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

While there is no established market for the registrant’s shares of common stock, the registrant has an ongoing primary offering of its shares of common stock pursuant to a registration statement on Form S-11. In each of its primary offerings, the registrant sold shares of its common stock for $10.00 per share, with discounts available for certain categories of purchasers. The number of shares held by non-affiliates as of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately 262,971,959.

As of March 10, 2011, there were 293,530,034 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant incorporates by reference portions of the CNL Lifestyle Properties, Inc. Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders (Items 10, 11, 12, 13 and 14 of Part III) to be filed no later than April 30, 2011.

 

 

 


Table of Contents

Contents

 

          Page  

Part I

     
   Statement Regarding Forward Looking Information      1   

Item 1.

   Business      1-10   

Item 1A.

   Risk Factors      11-23   

Item 1B.

   Unresolved Staff Comments      23   

Item 2.

   Properties      24-33   

Item 3.

   Legal Proceedings      33   

Part II.

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     34-39   

Item 6.

   Selected Financial Data      40-42   

Item 7.

  

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

     43-69   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      70-71   

Item 8.

   Financial Statements and Supplementary Data      72-110   

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     111   

Item 9A.

   Controls and Procedures      111   

Item 9B.

   Other Information      112   

Part III.

     

Item 10.

   Directors, Executive Officers and Corporate Governance      113   

Item 11.

   Executive Compensation      113   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     113   

Item 13.

   Certain Relationships and Related Transactions and Director Independence      113   

Item 14.

   Principal Accountant Fees and Services      113   

Part IV.

     

Item 15.

   Exhibits, Financial Statement Schedules      114-131   

Signatures

     132-133   

Schedule II—Valuation and Qualifying Accounts

     134   

Schedule III—Real Estate and Accumulated Depreciation

     135-144   

Schedule IV—Mortgage Loans on Real Estate

     145-146   


Table of Contents

PART I

STATEMENT REGARDING FORWARD LOOKING INFORMATION

The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as “may,” “will,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: continued or worsening economic environment, the lack of available debt for us and our tenants, including our inability to refinance existing debt, the general decline in value of real estate, conditions affecting the CNL brand name, increased direct competition, changes in government regulations or accounting rules, changes in local and national real estate conditions, our ability to obtain additional lines of credit or long-term financing on satisfactory terms, changes in interest rates, availability of proceeds from our offering of shares, availability of capital to expand and enhance our properties, our tenants’ inability to increase revenues or manage rising costs, our ability to identify suitable investments, our ability to close on identified investments, our ability to locate suitable tenants and operators for our properties and borrowers for our loans, tenant or borrower defaults under their respective leases or loans, tenant or borrower bankruptcies and inaccuracies of our accounting estimates. Given these uncertainties, we caution you not to place undue reliance on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

 

Item 1. Business

GENERAL

CNL Lifestyle Properties, Inc. is a Maryland corporation organized on August 11, 2003. We operate as a real estate investment trust, or REIT. The terms “us,” “we,” “our,” “our company” and “CNL Lifestyle Properties” include CNL Lifestyle Properties, Inc. and each of our subsidiaries. We have retained CNL Lifestyle Company, LLC, (the “Advisor”), as our Advisor to provide management, acquisition, disposition, advisory and administrative services. Our offices are located at 450 South Orange Avenue within the CNL Center at City Commons in Orlando, Florida 32801.

Our principal investment objectives include investing in a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We primarily invest in lifestyle properties in the United States that we believe have the potential for long-term growth and income generation. Our investment thesis is supported by demographic trends which we believe affect consumer demand for the various lifestyle asset classes that are the focus of our investment strategy. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. We primarily lease our properties on a long-term, triple-net or gross basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be significant industry leaders. To a lesser extent, we also make and acquire loans (including mortgage, mezzanine and other loans), enter into joint ventures related to interests in real estate and engage third-party operators to manage certain properties on our behalf as permitted under applicable tax regulations.

Following our investment policies of acquiring carefully selected and well-located lifestyle and other income producing properties, we believe we have built a unique portfolio of assets with established long-term operating histories, and have created balanced diversification within the portfolio by region, operator and asset class. We will continue to focus on select acquisitions of income producing properties that we believe will enhance the portfolio and provide long-term value to our stockholders, while also concentrating on the management and oversight of our existing portfolio. We have also maintained a strong balance sheet and cash position with a low leverage ratio.

 

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While we have primarily acquired wholly owned properties subject to long-term triple-net leases, we also make investments in properties through joint ventures, and to a lesser extent, engaged third-party operators to manage certain properties on our behalf. The following represents our types of property investments by number of total properties as of March 10, 2011:

LOGO

Asset classes and portfolio diversification. As of March 10, 2011, we had a portfolio of 150 lifestyle properties which when aggregated by initial purchase price was diversified as follows: approximately 23% in ski and mountain lifestyle, 21% in golf facilities, 14% in senior living, 16% in attractions, 7% in marinas and 19% in additional lifestyle properties. These assets consist of 22 ski and mountain lifestyle properties, 53 golf facilities, 29 senior living facilities, 21 attractions, 17 marinas and eight additional lifestyle properties. Thirty-seven of these 150 properties are owned through unconsolidated entities. Many of our properties feature characteristics that are common to more than one asset class, such as a ski resort with a golf facility. Our asset classifications are based on the primary property usage. The pie chart below shows our asset class diversification as of March 10, 2011, by initial purchase price.

LOGO

 

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Our real estate investment portfolio is geographically diversified with properties in 32 states and two Canadian provinces. The map below shows our current property allocations across geographic regions as of March 10, 2011.

LOGO

Our tenants and operators. We generally attempt to lease our properties to tenants and operators that we consider to be significant industry leaders. However, we do not believe the success of our properties is based solely on the performance or abilities of our tenant operators. In some cases, we consider the assets we have acquired to be unique, iconic or nonreplicable which by their nature have an intrinsic value. In addition, in the event a tenant is in default and vacates a property, under special provisions in the tax laws we are able to engage a third-party manager to operate the property on our behalf for a period of time until we re-lease it to a new tenant. During this period, the property remains open and we receive any net earnings from the property’s operations, although these amounts may be less than the rents that were contractually due under the prior leases. Any taxable income from these properties will be subject to income tax until we re-lease these properties to new tenants.

Our leases and ventures. As part of our net lease investment strategy, we either acquire properties directly or purchase interests in entities that own the properties. Once we acquire the properties, we either lease them back to the original seller or to a third-party operator. These leases are usually structured as triple-net leases which means our tenants are generally responsible for repairs, maintenance, property taxes, ground lease or permit expenses (where applicable), utilities and insurance for the properties that they lease. The weighted-average lease rate of our consolidated properties subject to long-term triple-net leases as of December 31, 2010 was approximately 8.8%. This rate is based on the weighted-average annualized straight-lined base rent due under our leases.

Our leases are generally long-term in nature (generally five to 20 years with multiple renewal options). We have no near-term lease expirations (other than at our one multi-family residential property, which generally

 

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enters into one-year leases with its tenants) with the first long-term lease expiring in December 2021, excluding available renewal periods. As of March 10, 2011, the average lease expiration of our portfolio (excluding our multi-family residential property and our unconsolidated properties) was approximately 17 years with the following breakdown:

LOGO

We typically structure our leases to provide for the payment of a minimum annual base rent with periodic increases in base rent over the lease term. In addition, our leases provide for the payment of percentage rent normally based on a percentage of gross revenues generated at the property over certain thresholds. Within the provisions of our leases, we also generally require the payment of capital improvement reserve rent. Capital improvement reserves are paid by the tenant and are generally based on a percentage of gross revenue of the property and are set aside by us for capital improvements, replacements and other capital expenditures at the property. These amounts are and will remain our property during and after the term of the lease and help maintain the integrity of our assets.

To a lesser extent, when beneficial to our investment structure, certain properties may be leased to wholly-owned tenants that are taxable REIT subsidiaries or that are owned through taxable REIT subsidiaries (referred to as “TRS” entities). Under this structure, we engage third-party managers to conduct day-to-day operations. Under the TRS leasing structure, our results of operations will include the operating results of the underlying properties as opposed to rental income from operating leases that is recorded for properties leased to third-party tenants.

We have entered into joint ventures in which our partners subordinate their returns to our minimum return. This structure provides us with some protection against the risk of downturns in performance but may allow our partners to obtain a higher rate of return on their investment than we receive if the underlying performance of the properties exceeds certain thresholds. As of March 10, 2011, we had a total of 37 properties owned through three unconsolidated joint ventures.

Our managed properties. In certain circumstances, and subject to applicable tax regulations, we may engage third-party operators to manage properties on our behalf. For example, when beneficial to our investment structure, we may engage third-party operators to manage hotels and senior living properties under the TRS leasing structure. In addition, in the case of a tenant default and lease termination, we may engage a third-party manager to operate the property on our behalf for a period of time until we can re-lease the property. This allows us time to stabilize the property, if necessary, and enter into a new lease when market conditions are potentially more favorable. During this managed period, we recognize all the underlying property operating revenues and expenses in our consolidated financial statements and may be subject to more direct operating risk. As of March 10, 2011, we had 23 managed properties including four hotels, two golf courses, 16 attractions and one multi-family residential property.

 

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Our loans. As part of our overall investment and lending strategy, we have made and may continue to make or acquire loans (including mortgage, mezzanine or other loans) with respect to any of the asset classes in which we invest. We generally make loans to the owners of properties to enable them to acquire land, buildings, or both, or to develop property or as part of a larger acquisition. In exchange, the owner generally grants us a first lien or collateralized interest in a participating mortgage collateralized by the property or by interests in the entity that owns the property. Our loans generally require fixed interest payments. We expect that the interest rate and terms for long-term mortgage loans (generally, 10 to 20 years) will be similar to the rate of return on our long-term net leases. Mezzanine loans and other financings for which we have a secondary-lien or collateralized interest will generally have shorter terms (one to two years) and higher interest rates than our net leases and long-term mortgage loans. With respect to the loans that we make, we generally seek loans with collateral values resulting in a loan-to-value ratio of not more than 85%.

Our common stock offerings. As of December 31, 2010, we had raised approximately $3.0 billion (301.2 million shares) through our public offerings. During the period January 1, 2011 through March 10, 2011, we raised an additional $88.3 million (8.8 million shares). We have and will continue to use the net proceeds from our offerings to make select investments. We do not intend to commence another public offering of our shares following the completion of our current public offering on April 9, 2011. However, we intend to continue offering shares through our reinvestment plan. In making this decision, the board of directors considered a number of factors, including the Company’s size and diversification of our portfolio, our relatively low leverage and strong cash position, as well as the current stage of our lifecycle.

Seasonality. Many of the asset classes in which we invest are seasonal in nature and experience seasonal fluctuations in their business due to geographic location, climate and weather patterns. As a result, the businesses experience seasonal variations in revenues that may require our operators to supplement operating cash from their properties in order to be able to make scheduled rent payments to us. We have structured the leases for certain tenants such that rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenant’s seasonally busy operating period.

As part of our diversification strategy, we have considered the varying and complimentary seasonality of our asset classes and portfolio mix. For example, the peak operating season of our ski and mountain lifestyle assets is staggered against the peak seasons in our attractions and golf portfolios to balance and mitigate the risks associated with seasonality. Generally seasonality does not significantly affect our recognition of rental income from operating leases due to straight-line revenue recognition in accordance with Generally Accepted Accounting Principles (“GAAP”). However, seasonality does impact the timing of when base rent payments are made by our tenants, which impacts our operating cash flows and the amount of rental revenue we recognize in connection with capital improvement reserve revenue and percentage rents paid by our tenants, which is recognized in the period in which it is earned and is generally based on a percentage of tenant revenues. In addition, seasonality directly impacts properties where we engage third-party operators to manage on our behalf and where we record property operating revenues and expenses rather than straight-line rents from operating leases. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating season. Our consolidated operating results and cash flows will fluctuate quarter to quarter depending on the number and types of properties being managed by third-party operators and the seasonal results of those properties.

Competition. As a REIT, we have historically experienced competition from other REITs (both traded and non-traded), real estate partnerships, mutual funds, institutional investors, specialty finance companies, opportunity funds, healthcare providers, and other investors, including, but not limited to, banks and insurance companies, many of which generally have had greater financial resources than we do for the purposes of leasing and financing properties within our targeted asset classes. These competitors often also have a lower cost of capital and are subject to less regulation. The level of competition impacts both our ability to raise capital, find real estate investments and locate suitable tenants. We may also face competition from other funds in which affiliates of our Advisor participate or advise.

 

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In general, we perceive there to be a lower level of competition for the types of assets that we have acquired and intend to acquire in comparison to assets in core real estate sectors based on the number of willing buyers and the volume of transactions in their respective markets. Accordingly, we believe that being focused in specialty or lifestyle asset classes allows us to take advantage of unique opportunities. Some of our key competitive advantages are as follows:

 

   

We acquire assets in niche sectors which historically trade at higher cap rates than other core commercial real estate sectors such as Apartment, Industrial, Office and Retail.

 

   

Some of our targeted assets classes, such as golf and ski, have experienced a net reduction in new supply, which has better equalized supply and demand.

 

   

Certain of our lifestyle properties have inherently high barriers to entry. For example, the process of obtaining permits to create a new ski resort or marina is highly regulated and significantly more difficult than obtaining permits for the construction of new office or retail space. Additionally, general geographic constraints, such as the availability of suitable waterfront property or mountain terrain, are an inherent barrier to entry in several of our asset classes. There are also high costs associated with building a new ski resort or regional gated attractions that may be prohibitive to potential market participants.

 

   

Our leasing arrangements generally require the payment of capital improvement reserve rent which is paid by the tenants and set aside by us to be reinvested into the properties. This arrangement allows us to maintain the integrity of our properties and mitigates deferred maintenance issues.

 

   

Unlike our competitors in many other commercial real estate sectors that generally receive no income in the event a tenant defaults or vacates a property, applicable tax laws allow us to engage a third-party manager to operate a property on our behalf for a period of time until we can re-lease it to a new tenant. During that period, we receive any net earnings from the underlying business operations, which may be less than rents collected under the previous leasing arrangement. However, our ability to continue to operate the property under such an arrangement helps to off-set taxes, insurance and other operating costs that would otherwise have to be absorbed by a landlord and allows the property some time to stabilize, if necessary, before entering into a new lease.

Significant tenants and borrowers. As of December 31, 2010 and 2009 and for the three years ended through December 31, 2010, we had the following tenants that individually accounted for 10% or more of our aggregate total revenues or assets.

 

Tenant

 

Number & Type of Leased
Properties

   Percentage
of Total
Revenues
    Percentage
of Total
Assets
 
         2010     2009     2008     2010     2009  

PARC Management, LLC (“PARC”)(1)

  —  (1)      11.0 %(1)      18.3     21.0     —   (1)      14.3

Boyne USA, Inc. (“Boyne”)

  7 Ski & Mountain      12.6     15.3     19.4     8.8     9.2
  Lifestyle Properties           

Evergreen Alliance Golf Limited, L.P. (“EAGLE”)

  43 Golf Facilities      12.1     14.3     20.6     14.6     15.4

Booth Creek Ski Holding, Inc.(2) (“Booth”)

  1 Ski & Mountain      1.8     8.3     12.2     1.2     6.3
  Lifestyle Property           

 

FOOTNOTES:

 

(1) As of December 31, 2010, we were in the process of transitioning all of our properties previously leased to PARC to new third-party managers. This process was completed in February 2011 and PARC is no longer a tenant of the Company.

 

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(2) On October 25, 2010, Vail Resorts Inc. acquired 100% of the equity interest in the companies that operate Northstar-at-Tahoe Resort and The Village at Northstar from Booth Creek Resort Properties LLC and became our tenant under the existing leases on the properties.

The significance of any given tenant or operator, and the related concentration of risk generally decrease as additional properties and operators are added to the portfolio. As shown above, there were only two tenants that individually accounted for 10% or more of our total revenues or assets as of December 31, 2010.

Tax status. We currently operate and have elected to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2004. As a REIT, we generally will not be subject to federal income tax at the corporate level to the extent we distribute annually at least 90% of our taxable income to our stockholders and meet other compliance requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is lost.

Recent tax legislation. On October 18, 2010, the IRS published final regulations that require us to report the cost basis and gain or loss to a stockholder upon the sale or liquidation of “covered shares.” For purposes of the final regulations, all shares acquired by non-tax exempt stockholders on or after January 1, 2011 will be considered “covered shares” and will be subject to the new reporting requirement. In addition, beginning on January 1, 2012, all shares acquired by non-tax exempt stockholders through our Distribution Reinvestment Plan (DRP) will also be considered “covered shares.”

Upon the sale or liquidation of “covered shares,” a broker must report both the cost basis of the shares and the gain or loss recognized on the sale of those shares to the stockholder and to the IRS on Form 1099-B. In addition, effective January 1, 2011, S-corporations will no longer be exempt from Form 1099-B reporting and shares purchased by an S-corporation on or after January 1, 2012 will be “covered shares” under the final regulations. If we take an organizational action such as a stock split, merger, acquisition or return of capital distribution that affects the cost basis of “covered shares,” we will report to each stockholder and to the IRS a description of any such action and the quantitative effect of that action on the cost basis on an information return.

We have elected the first in, first out (FIFO) method as the default for calculating the cost basis and gain or loss upon the sale or liquidation of “covered shares”. A non-tax exempt stockholder may elect a different method of computation until the settlement date of the sold or liquidated shares. The election must be made in writing. Stockholders should consult with their tax advisors to determine the appropriate method of accounting for their investment.

Recently enacted legislation will require, after December 31, 2012, withholding at a rate of 30% on dividends in respect of, and gross proceeds from the sale of, shares of our stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information with respect to shares in the institution held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which shares of stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale of, shares of our stock held by an investor that is a non-financial non-U.S. entity will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which we will in turn provide to the Secretary of the Treasury. We will not pay any additional amounts to any stockholders in respect of any amounts withheld. Foreign persons are encouraged to consult with their tax advisors regarding the possible implications of the legislation on their investment in shares of our stock.

On March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders who meet certain requirements and are individuals, estates or certain

 

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trusts to pay an additional tax on, among other things, dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of shares of our stock.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Our current business consists of investing in, owning and leasing lifestyle properties primarily in the United States. We evaluate all of our lifestyle properties as a single industry segment and review performance on a property-by-property basis. Accordingly, we do not report segment information.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

We have one consolidated property located in British Columbia, Canada, Cypress Mountain, that generated total rental income of approximately $6.3 million for both of the years ended December 31, 2010 and 2009 and $6.7 million for the year ended December 31, 2008. We also own interests in two properties located in Canada through unconsolidated entities that generated a combined equity in earnings of approximately $0.1 million during the year ended December 31, 2010 and a combined equity in losses of approximately $0.3 million and $0.2 million during the years ended December 31, 2009 and 2008, respectively. The remainder of our rental income was generated from properties or investments located in the United States.

ADVISORY SERVICES

We have engaged CNL Lifestyle Company, LLC as our Advisor. Under the terms of the advisory agreement, our Advisor is responsible for our day-to-day operations, administers our bookkeeping and accounting functions, serves as our consultant in connection with policy decisions to be made by our board of directors, manages our properties, loans, and other permitted investments and renders other services as the board of directors deems appropriate. In exchange for these services, our Advisor is entitled to receive certain fees from us. First, for supervision and day-to-day management of the properties and the mortgage loans, our Advisor receives an asset management fee, which is payable monthly, in an amount equal to 0.08334% per month based on the total real estate asset value of a property as defined in the advisory agreement (exclusive of acquisition fees and acquisition expenses), the outstanding principal amounts of any loans made by us and the amount invested in any other permitted investments as of the end of the preceding month. Second, for the selection, purchase, financing, development, construction or renovation of real properties and services related to the incurrence of debt, our Advisor receives an acquisition fee equal to 3% of the gross proceeds from our common stock offerings and loan proceeds from debt, lines of credit and other permanent financing that we use to acquire properties or to make or acquire loans and other permitted investments.

In addition, we reimburse our Advisor for all of the costs it incurs in connection with the administrative services it provides to us. However, in accordance with the advisory agreement, our Advisor is required to reimburse us for the amount by which the total operating expenses (as described in the advisory agreement) incurred by us in any four consecutive fiscal quarters (the “Expense Year”) exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”). For the Expense Years ended December 31, 2010, 2009 and 2008, operating expenses did not exceed the Expense Cap.

The current advisory agreement continues until March 22, 2011, and was extended by unanimous consent of our board of directors through April 9, 2011, at which time we will engage CNL Lifestyle Advisor Corporation (the “New Advisor”) as our advisor and enter into an advisory agreement with substantially similar terms and services as those provided under our current advisory agreement. The current directors and officers of the Advisor will be elected and appointed as the directors and officers of the New Advisor and will have similar responsibilities and roles with the New Advisor as they currently hold with the Advisor except as otherwise noted in Item 9B. of this filing. In addition, the New Advisor will continue to engage and contract with other affiliates of our current advisor to cause those affiliates to provide services and personnel to perform duties on behalf of the Company.

 

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LEGAL AND REGULATORY CONSIDERATIONS

General. Our properties are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties as of December 31, 2010 has the necessary permits and approvals to operate its business.

Americans with Disabilities Act. Our U.S. properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

Environmental, Health, and Safety Matters. We are subject to many federal, state, and local environmental, health, and safety laws. The applicability of specific environmental, health, and, safety laws to each of our individual properties is dependent upon a number of property-specific factors, including: the current and former uses of the property; any impacts to the property from other properties; the type and amount of any emissions or discharges from or releases at the property; the building materials used at the property, including any asbestos-containing materials; and, among other factors, the type and amount of any hazardous substances or wastes used, stored, or generated at the property.

Under various laws relating to protection of the environment, current and former owners and operators of real property may be liable for any contamination resulting from the presence or release of hazardous or toxic substances at the property. Current and former owners and operators may also be held liable to the government or to third parties for property damage and for investigation and remediation costs related to contamination, regardless of whether the owners and operators were responsible for or even knew of the contamination, and the liability may be joint and several. The government may be entitled to a lien on a contaminated property. Certain environmental laws, as well as the common law, may subject us to liability for damages or injuries suffered by third parties as a result of environmental contamination or releases originating at our properties, including releases of asbestos, and the liabilities associated with our properties could exceed the values of the respective properties. Some of our properties were previously used for industrial purposes, and those properties may contain some degree of contamination. Environmental impacts or contamination at our properties may prevent us from selling or leasing the properties or using them as collateral. Environmental laws may regulate the use of our properties or the types of operations which can be conducted at our properties, and these regulations may necessitate corrective or other expenditures.

Some of our properties may contain asbestos-containing building materials. Asbestos-containing building materials are subject to management and maintenance requirements under environmental laws, and owners and operators may be subject to penalty for noncompliance. Environmental laws may allow suits by third parties for recovery from owners and operators for personal injury related to exposure to asbestos-containing building materials.

Prior to the purchase of our properties, we generally engaged independent environmental consultants to perform Phase I environmental assessments, which normally do not involve soil, groundwater or other invasive sampling. When Phase I environmental assessment results indicated the need to do so, we conducted Phase II assessments, which do involve invasive sampling. These assessments have not revealed any materially adverse environmental conditions which impact or have impacted our properties other than conditions which have been remediated or are currently undergoing remediation. There can be no assurance, however, that new environmental liabilities have not developed since the assessments were performed, that the assessment failed to reveal material adverse environmental conditions, liabilities, or compliance concerns, or that future developments, including changes in laws or regulations, will not impose environmental costs or liabilities upon

 

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us. If we become subject to material environmental liabilities, these liabilities could adversely effect us, our business and assets, the results of our operations, and our ability to meet our obligations.

Insurance. We maintain, or cause operators to maintain, insurance including, but not limited to, liability, fire, wind, earthquake, and business income coverage on all of our properties that are not being leased on a triple-net basis under various policies. We select policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our company’s management, our properties that are not being leased on a triple-net basis are currently adequately insured. We do not carry insurance for generally uninsured losses such as loss from war or nuclear reaction. Certain of our properties are located in areas known to be seismically active. See “Risk Factors—Risks Related to Our Business and Operations—Potential losses may not be covered by insurance.”

EMPLOYEES

Reference is made to Item 10. “Directors, Executive Officers and Corporate Governance” in our Definitive Proxy Statement for a listing of our executive officers. We have no employees. Our executive officers are compensated through our advisor and/or its affiliates.

AVAILABLE INFORMATION

We make available free of charge on our Internet website, www.cnllifestylereit.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the “Commission”). The public may read and copy any materials that we file with the Commission at the Commission’s Public Reference Room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549 and may obtain information on the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an internet site that contains reports, proxy and information statements, and other information that we file electronically with the Commission (http://www.sec.gov).

 

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Item 1A. Risk Factors

Real Estate and Other Investment Risks

The economic environment and general market conditions in recent years have affected certain of the lifestyle properties in which we invest. A continuation of such conditions could adversely affect our financial condition and results of operations. The recent economic and market conditions have affected the value and operating performance of certain of our properties which resulted in tenant defaults, losses on lease terminations, loan loss provisions and impairments charges. Continued or worsening global economic conditions including unemployment rates, the effects of unrest in the Middle East and rising oil prices, inflationary risks and rising costs, and a lack of consumer confidence with decreased consumer spending could result in additional losses to us and have a negative impact on our results of operations and our ability to pay distributions to our stockholders.

The economic environment has affected certain of our tenants’ ability to make rental payments to us in accordance with their lease agreement. Some of our tenants have experienced difficulties or have been unable to obtain working capital lines of credit or renew their existing lines of credit due to current state of economy and the capital markets which impacted their ability to pay the full amount of rent due under their leases. As a result, we restructured the leases for certain tenants such that the rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenants’ seasonally busy period. In other cases, we restructured the lease terms to allow for rent deferrals or reductions for a period of time to provide temporary relief that then become payable in later periods of the lease term. In addition, we have refunded security deposits which must be replaced up to specified amounts and have provided lease allowances. The rent deferrals granted, the security deposits refunded and lease allowances paid directly reduced our cash flows from operating activities. Other restructures, such as the reductions in lease rates and the future amortization of lease allowances against rental income have reduced and will continue to reduce our net operating results and cash flows in current and future periods.

Our operating results will experience seasonal fluctuations on properties in which we have engaged third-party managers to operate the properties on our behalf. In certain circumstances, we have engaged third-party managers to operate the properties on our behalf as a result of tenant defaults or utilizing the TRS leasing structure. In these situations, we recognize the properties’ operating revenues and expenses in our consolidated financial statements and may be subject to more direct operating risk. In addition, certain of our managed properties are seasonal in nature due to geographic location, climate and weather patterns. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating season. Our consolidated operating results will fluctuate quarter to quarter depending on the number and types of properties being managed by third-party operators and the seasonal results of those properties.

We will be exposed to various operational risks, liabilities and claims with respect to the properties that we engage third-party managers to operate on our behalf which may adversely affect our operating results. With respect to the properties that are managed by third-party operators, we are exposed to various operational risk, liabilities and claims in addition to those generally applicable to ownership of real property. These risks include the operator’s inability to manage the properties and fulfill its obligations, increases in labor costs and services, cost of energy, insurance, operating supplies and litigation costs relating to accidents or injuries at the properties. Although we maintain reasonable levels of insurance, we cannot be certain the insurance will adequately cover all litigation costs relating to accidents or inquires. Any one or a combination of these factors, together with other market and conditions beyond our control, could result in operating deficiencies at our managed properties which could have a material effect on our operating results.

Because our revenues are highly dependent on lease payments from our properties and interest payments from loans that we make, defaults by our tenants or borrowers would reduce our cash available for the repayment of our outstanding debt and for distributions. Our ability to repay any outstanding debt and make distributions to stockholders will depend upon the ability of our tenants and borrowers to make payments to us,

 

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and their ability to make these payments will depend primarily on their ability to generate sufficient revenues in excess of operating expenses from businesses conducted on our properties. For example, the ability of our tenants to make their scheduled payments to us will depend upon their ability to generate sufficient operating income at the property they operate. A tenant’s failure or delay in making scheduled rent payments to us or a borrower’s failure to make debt service payments to us may result from the tenant or borrower realizing reduced revenues at the properties it operates.

Discretionary consumer spending may affect the profitability of certain properties we acquire. The financial performance of certain properties in which we have invested and may invest in the future depends in part on a number of factors relating to or affecting discretionary consumer spending for the types of services provided by businesses operated on these properties. Unfavorable local, regional, or national economic developments or uncertainties regarding future economic prospects have reduced consumer spending in the markets where we own properties and, when combined with the lack of available debt, have adversely affected certain of our tenants’ businesses. As a result, certain of our tenants have experienced declines in operating results, and a number of our tenants have modified the terms of certain of their leases with us. Any continuation of such events that leads to lower spending on lifestyle activities could impact our tenants’ ability to pay rent and thereby have a negative impact on our results of operations.

The inability to increase or maintain lease rates at our properties might affect the level of distributions to stockholders. Given the nature of certain properties we have acquired or may acquire, the relative stagnation of base lease rates in certain sectors might not allow for substantial increases in rental revenue to us that could allow us to maintain or increase levels of distributions to stockholders.

Seasonal revenue variations in certain asset classes will require the operators of those asset classes to manage cash flow properly over time so as to meet their non-seasonal scheduled rent payments to us. Certain of the properties in which we invest or may invest are generally seasonal in nature due to geographic location, climate and weather patterns. For example, revenue and profits at ski resorts and their related properties are substantially lower and historically result in losses during the summer months due to the closure of ski operations, while many attractions properties are closed during the winter months and produce the majority of their revenues and profits during summer months. As a result of the seasonal nature of certain business operations that may be conducted on properties we acquire, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us or require us to, in certain cases, adjust their lease payments so that we collect more rent during their seasonally busy time.

Our real estate assets may be subject to impairment charges. We periodically evaluate the recoverability of the carrying value of our real estate assets for impairment indicators. Factors considered in evaluating impairment of our existing real estate assets held for investment include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions. Generally, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Investments in unconsolidated entities are not considered impaired if the estimated fair value of the investment exceeds the carrying value of the investment and the decline is considered to be other than temporary. Management makes assumptions and estimates when considering impairments and actual results could vary materially from these assumptions and estimates.

We do not have control over market and business conditions that may affect our success. The following external factors, as well as other factors beyond our control, may reduce the value of properties that we acquire, the ability of tenants to pay rent on a timely basis, or at all, the amount of the rent to be paid and the ability of borrowers to make loan payments on time, or at all:

 

   

changes in general or local economic or market conditions;

 

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the pricing and availability of debt, operating lines of credit or working capital;

 

   

increased costs of energy, insurance or products;

 

   

increased costs and shortages of labor;

 

   

increased competition;

 

   

quality of management;

 

   

failure by a tenant to meet its obligations under a lease;

 

   

bankruptcy of a tenant or borrower;

 

   

the ability of an operator to fulfill its obligations;

 

   

limited alternative uses for properties;

 

   

changing consumer habits;

 

   

condemnation or uninsured losses;

 

   

changing demographics; and

 

   

changing government regulations.

Further, the results of operations for a property in any one period may not be indicative of results in future periods, and the long-term performance of such property generally may not be comparable to, and cash flows may not be as predictable as, other properties owned by third parties in the same or similar industry. If tenants are unable to make lease payments or borrowers are unable to make loan payments as a result of any of these factors, cash available for distributions to our stockholders may be reduced.

Our exposure to typical real estate investment risks could reduce our income. Our properties, loans and other permitted investments will be subject to the risks typically associated with investments in real estate. Such risks include the possibility that our properties will generate rent and capital appreciation, if any, at rates lower than we anticipated or will yield returns lower than those available through other investments or that the value of our properties will decline. Further, there are other risks by virtue of the fact that our ability to vary our portfolio in response to changes in economic and other conditions will be limited because of the general illiquidity of real estate investments. Income from our properties may be adversely affected by many factors including, but not limited to, an increase in the local supply of properties similar to our properties, a decrease in the number of people interested in participating in activities related to the businesses conducted on the properties that we acquire, adverse weather conditions, changes in government regulation, international, national or local economic deterioration, increases in energy costs and other expenses affecting travel, factors which may affect travel patterns and reduce the number of travelers and tourists, increases in operating costs due to inflation and other factors that may not be offset by increased revenue, and changes in consumer tastes.

If one or more of our tenants file for bankruptcy protection, we may be precluded from collecting all sums due. If one or more of our tenants, or the guarantor of a tenant’s lease, commences, or has commenced against it, any proceeding under any provision of the U.S. federal bankruptcy code, as amended, or any other legal or equitable proceeding under any bankruptcy, insolvency, rehabilitation, receivership or debtor’s relief statute or law (“Bankruptcy Proceeding”), we may be unable to collect sums due under our lease(s) with that tenant. Any or all of the tenants, or a guarantor of a tenant’s lease obligations, could be subject to a Bankruptcy Proceeding. A Bankruptcy Proceeding may bar our efforts to collect pre-bankruptcy debts from those entities or their properties unless we are able to obtain an enabling order from the bankruptcy court. If a lease is rejected by a tenant in bankruptcy, we would only have a general unsecured claim against the tenant, and may not be entitled to any further payments under the lease. We believe that our security deposits in the form of letters of credit would be protected from bankruptcy in most jurisdictions. However, a tenant’s or lease guarantor’s Bankruptcy Proceeding could hinder or delay efforts to collect past due balances under relevant leases or guarantees and

 

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could ultimately preclude collection of these sums. Such an event could cause a decrease or cessation of rental payments which would reduce our cash flow and the amount available for distribution to our stockholders. In the event of a Bankruptcy Proceeding, we cannot assure you that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distribution to our stockholders may be adversely affected.

Multiple property leases or loans with individual tenants or borrowers increase our risks in the event that such tenants or borrowers become financially impaired. The value of our properties will depend principally upon the value of the leases entered into for properties that we acquire. Defaults by a tenant or borrower may continue for some time before we determine that it is in our best interest to terminate the lease or foreclose on the property of the borrower. Tenants may lease more than one property, and borrowers may enter into more than one loan. As a result, a default by, or the financial failure of, a tenant or borrower could cause more than one property to become vacant or be in default or more than one lease or loan to become non-performing. Defaults or vacancies can reduce and have reduced our cash receipts and funds available for distribution and could decrease the resale value of affected properties until they can be re-leased.

It may be difficult for us to exit a joint venture after an impasse. In our joint ventures, there will be a potential risk of impasse in some business decisions because our approval and the approval of each co-venturer may be required for some decisions. In any joint venture, we may have the right to buy the other co-venturer’s interest or to sell our own interest on specified terms and conditions in the event of an impasse regarding a sale. In the event of an impasse, it is possible that neither party will have the funds necessary to complete a buy-out. In addition, we may experience difficulty in locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for the interest. As a result, it is possible that we may not be able to exit the relationship if an impasse develops.

The current U.S. housing market may adversely affect our operators’ and tenants’ ability to increase or maintain occupancy levels at, and rental income from, our senior living facilities which may impact the amount of distributions and earnings we received from our unconsolidated venture that owns senior living facilities. Our tenants and operators in our senior living facilities may experience relatively flat or declining occupancy levels in the near-term due to falling home prices, declining incomes, stagnant home sales and other economic factors. Seniors may choose to postpone their plans to move into senior living facilities rather than sell their homes at a loss, or for a profit below their expectations. Moreover, tightening lending standards have made it more difficult for potential buyers to obtain mortgage financing, all of which have contributed to the declining home sales. Any future rise in interest rates may compound or prolong this problem. In addition, the senior living segment may continue to experience a decline in occupancy associated with private pay residents choosing to move out of the facilities to be cared for at home by relatives due to the weak economy. A material decline in occupancy levels and revenues may make it more difficult for them to meet scheduled rent payments to us, which could adversely affect our financial condition.

Events which adversely affect the ability of seniors to afford our daily resident fees could cause the occupancy rates, resident fee revenues and results of operations of our senior living facilities to decline. Costs to seniors associated with certain types of the senior living properties generally are not reimbursable under government reimbursement programs such as Medicaid and Medicare. Substantially all of the resident fee revenues generated by our facilities will be derived from private payment sources consisting of income or assets of residents or their family members. Only seniors with income or assets meeting or exceeding certain standards can typically afford to pay our daily resident and service fees and, in some cases, entrance fees. Economic downturns such as the one recently experienced in the United States, reductions or declining growth of government entitlement programs, such as social security benefits, or stock market volatility could adversely affect the ability of seniors to afford the fees for our senior living facilities. If our tenants or managers are unable to attract and retain seniors with sufficient income, assets or other resources required to pay the fees associated with assisted and independent living services, the occupancy rates, resident fee revenues and results of operations for these facilities could decline, which, in turn, could have a material adverse effect on our business.

 

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We may be unable to identify and complete acquisitions on favorable terms or at all. We continually evaluate the market of available properties and may acquire additional lifestyle properties when opportunities exist. Our ability to acquire properties on favorable terms may be subject to the following significant risks:

 

   

we may be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded REITs and institutional investment funds;

 

   

even if we are able to acquire a desired property, competition from other potential acquirors may significantly increase the purchase price or result in other less favorable terms;

 

   

even if we enter into agreements for the acquisition of desired lifestyle properties, these agreements are typically subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;

 

   

we may be unable to finance acquisitions on favorable terms or at all; and

 

   

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot complete property acquisitions on favorable terms, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

The real estate industry is capital intensive and we are subject to risks associated with ongoing needs for renovation and capital improvements to our properties as well as financing for such expenditures. In order for us to remain competitive, our properties will have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:

 

   

construction cost overruns and delays;

 

   

a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on satisfactory terms; and

 

   

disruptions in the operation of the properties while capital improvements are underway.

We will not control the management of our properties. In order to maintain our status as a REIT for federal income tax purposes, we may not operate certain types of properties we acquire or participate in the decisions affecting their daily operations. Our success, therefore, will depend on our ability to select qualified and creditworthy tenants and managers who can effectively manage and operate the properties. Our tenants will be responsible for maintenance and other day-to-day management of the properties and, because our revenues will largely be derived from rents, our financial condition will be dependent on the ability of third-party tenants and/or operators to operate the properties successfully. We will attempt to enter into leasing agreements with tenants having substantial prior experience in the operation of the type of property being rented, however, there can be no assurance that we will be able to make such arrangements. Additionally, if we elect to treat property we acquire as a result of a borrower’s default on a loan or a tenant’s default on a lease as “foreclosure property” for federal income tax purposes, we will be required to operate that property through an independent contractor over whom we will not have control. If our tenants or third-party operators are unable to operate the properties successfully or if we select unqualified managers, then such tenants and operators might not be able to pay our rent, or generate sufficient property-level operating income for us, which could adversely affect our financial condition.

Joint venture partners may have different interests than we have, which may negatively impact our control over our ventures. Investments in joint ventures involve the risk that our co-venturer may have economic or

 

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business interests or goals which, at a particular time, are inconsistent with our interests or goals, that the co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, or that the co-venturer may experience financial difficulties and be unable to fund its share of required capital contributions. Among other things, actions by a co-venturer might subject assets owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement or to other adverse consequences. This risk is also present when we make investments in securities of other entities. If we do not have full control over a joint venture, the value of our investment will be affected to some extent by a third party that may have different goals and capabilities than ours. As a result, joint ownership of investments and investments in other entities may adversely affect our returns on investments and, therefore, cash available for distributions to our stockholders may be reduced.

Adverse weather conditions may damage certain properties we acquire and/or reduce our operators’ ability to make scheduled rent payments to us. Weather conditions may influence revenues at certain types of properties we acquire. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or reduced rainfall levels), excessive rain, avalanches, mudslides and floods. Adverse weather could reduce the number of people participating in activities at properties we acquire and have acquired. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which may cause damage (including, but not limited to property damage and loss of revenue) that is not generally insurable at commercially reasonable rates. Further, the physical condition of properties we acquire must be satisfactory to attract visitation. In addition to severe or generally inclement weather, other factors, including, but not limited to plant disease and insect infestation, as well as the quality and quantity of water, could adversely affect the conditions at properties we own and acquire or develop. Most properties have some insurance coverage that will offset such losses and fund needed repairs.

Potential losses may not be covered by insurance. We maintain, or cause our operators to maintain, insurance including, but not limited to, liability, fire, wind, earthquake and business income coverage on all of our properties that are not being leased on a triple-net basis under various insurance policies. We select policy specifications and insured limits which we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsured losses such as loss from riots, terrorist threats, war or nuclear reaction. Most of our policies, like those covering losses due to floods, are insured subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. While we carry earthquake insurance on our properties that are not being leased on a triple-net basis, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes. In addition, we may discontinue earthquake or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the risk of loss.

Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks. We may invest in properties upon which we will develop and construct improvements. We will be subject to risks relating to uncertainties associated with re-zoning for development and environmental concerns of governmental entities and/or community groups, and our ability to control construction costs or to build in conformity with plans, specifications and timetables. Our performance also may be affected or delayed by conditions beyond our control. Moreover, delays in completion of construction also could give tenants the right to terminate preconstruction leases for space at a newly developed project. Furthermore, we must rely upon projections of rental income, expenses and estimates of the fair market value of property upon completion of construction before agreeing to a property’s purchase price. If our projections are inaccurate, we may pay too much for a property and our return on our investment could suffer.

If we set aside insufficient reserves for capital expenditures, we may be required to defer necessary property improvements. If we do not have enough reserves for capital expenditures to supply needed funds for capital improvements throughout the life of the investment in a property, and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property that may cause the property to suffer from a greater risk of obsolescence, a decline in value and/or a greater risk of decreased cash flow as a

 

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result of attracting fewer potential tenants to the property and adversely affecting our tenants’ businesses. If we lack sufficient capital to make necessary capital improvements, then we may not be able to maintain projected rental rates for certain properties, and our results of operations and ability to pay distributions to our stockholders may be negatively impacted.

We may be required to defer property expansion during the foreclosure period after tenant’s default. In cases where a tenant has defaulted and we have foreclosed on the leases and engaged a third-party manager to operate the property for a period of time, we are prohibited by tax regulations from conducting any new construction during the foreclosure period to expand these properties. The inability to continue to expand certain of our properties may reduce the competitiveness of the properties and result in declining revenues and operating income. This may impact properties’ value and the level of distributions we can pay.

Our failure or the failure of the tenants and managers of our facilities to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect the operations of our senior living properties. The operations of our senior living properties are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing laws. The ultimate timing or effect of any changes in these laws and regulations cannot be predicted. Failure to obtain licensure or loss or suspension of licensure or certification may prevent a facility from operating or result in a suspension of certain revenue sources until all licensure or certification issues have been resolved. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. State laws may require compliance with extensive standards governing operations and agencies administering those laws regularly inspect such facilities and investigate complaints. Failure to comply with all regulatory requirements could result in the loss of the ability to provide or bill and receive payment for health care services at our senior living facilities. Additionally, transfers of operations of certain senior living facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate. We may have no direct control over the tenant’s or manager’s ability to meet regulatory requirements and failure to comply with these laws, regulations and requirements may materially adversely affect the operations of these properties.

Cost control and other health care reform measures may reduce reimbursement revenue available to certain of our senior living properties. The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs and the vertical and horizontal consolidation of health care providers. The pressure to control health care costs has intensified in recent years as a result of the national health care reform debate and has continued as Congress attempts to slow the rate of growth of federal health care expenditures as part of its effort to balance the federal budget. Similar debates are ongoing at the state level in many states. These trends are likely to lead to reduced or slower growth in reimbursement for services provided at some of our senior living properties and could therefore result in reduced profitability of such properties, adversely affecting our income or results from investments in such properties.

Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, nationally or at the state level. We cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, these proposals would have on those of our senior living facilities offering health care services and, thus, our business. Health care, including the long-term care and assisted living sectors, remains a dynamic, evolving industry. On March 23, 2010, the Patient Protection and Affordable Care Act of 2010 was enacted and on March 30, 2010, the Health Care and Education Reconciliation Act was enacted, which in part modified the Patient Protection and Affordable Care Act. Together, the two Acts serve as the primary vehicle for comprehensive health care reform in the United States. The two Acts are intended to reduce the number of individuals in the United States without health insurance and effect significant other changes to the ways in which health care is organized, delivered and reimbursed. The legislation will become effective in a phased approach, beginning in 2010 and concluding in 2018. At this time,

 

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the effects of the legislation and its impact on our business are not yet known. Our business could be materially and adversely affected by the two Acts and further governmental initiatives undertaken pursuant to the two Acts.

We may incur significant costs complying with the Americans with Disabilities Act and similar laws. Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted an audit or investigation of all of our properties to determine our compliance with the ADA. If one or more of our properties does not comply with the ADA, then we would be required to incur additional costs to bring the property into compliance. 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 ultimate cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

Lending Related Risks

Our loans may be affected by unfavorable real estate market conditions. When we make loans, we are at risk of default on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the properties collateralizing mortgage loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop or in some instances fail to rise, our risk will increase and the value of our interests may decrease.

Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments. When we acquire property by foreclosure following defaults under our mortgage, bridge or mezzanine loans, we have the economic and liability risks as the owner of such property. This additional liability could adversely impact our returns on mortgage investments.

Our loans will be subject to interest rate fluctuations. If we invest in fixed-rate, long-term loans and interest rates rise, the loans will yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid, because we will not be able to make new loans at the previously higher interest rate.

Lack of principal amortization of loans increases the risk of borrower default at maturity and delays in liquidating defaulted loans could reduce our investment returns and our cash available for distributions. Certain of the loans that we have made do not require the amortization of principal during their term. As a result, a substantial amount of, or the entire principal balance of such loans, will be due in one balloon payment at their maturity. Failure to amortize the principal balance of loans may increase the risk of a default during the term, and at maturity of loans. In addition, certain of our loans have or may have a portion of the interest accrued and payable upon maturity. We may not receive any of that accrued interest if our borrower defaults. A default under loans could have a material adverse effect on our ability to pay distributions to stockholders. Further, if there are defaults under our loans, we may not be able to repossess and sell the underlying properties or other security quickly. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a mortgaged property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due on our loan. Any failure or delay by a borrower in making scheduled payments to us may adversely affect our ability to make distributions to stockholders.

We may make loans on a subordinated and unsecured basis and may not be able to collect outstanding principal and interest. Although our loans to third parties are usually collateralized by properties pledged by such borrowers, we have made loans that are unsecured and/or subordinated in right of payment to such third parties’

 

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existing and future indebtedness. In the event of a foreclosure, bankruptcy, liquidation, winding up, reorganization or other similar proceeding relating to such third party, and in certain other events, such third party’s assets may only be available to pay obligations on our unsecured loans after the third party’s other indebtedness has been paid. As a result, there may not be sufficient assets remaining to pay the principal or interest on the unsecured loans we may make.

Financing Related Risks

Anticipated borrowing creates risks. We have borrowed and will continue to borrow money to acquire assets, to preserve our status as a REIT or for other corporate purposes. We generally mortgage or put a lien on one or more of our assets in connection with any borrowing. We intend to maintain one or more revolving lines of credit of up to $150 million to provide financing for the acquisition of assets, although our board of directors could determine to borrow a greater amount. We may repay the line of credit using equity offering proceeds, including proceeds from our stock offering, proceeds from the sale of assets, working capital or long-term financing. We also have and intend to continue to obtain long-term financing. We may not borrow more than 300% of the value of our net assets without the approval of a majority of our Independent Directors and the borrowing must be disclosed and explained to our stockholders in our first quarterly report after such approval. Borrowing may be risky if the cash flow from our properties and other permitted investments is insufficient to meet our debt obligations. In addition, our lenders may seek to impose restrictions on future borrowings, distributions to our stockholders and operating policies, including with respect to capital expenditures and asset dispositions. If we mortgage assets or pledge equity as collateral and we cannot meet our debt obligations, then the lender could take the collateral, and we would lose the asset or equity and the income we were deriving from the asset.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders. When providing financing, a lender may impose restrictions on us that affect our operating policies, ability to incur additional debt and our ability to pay distributions to stockholders. Loan documents we enter into may also contain covenants that limit our ability to further mortgage a property or affect other operating policies. Such limitations would hamper our flexibility and may impair our ability to achieve our operating plans.

Continued uncertainty and volatility in the credit markets could affect our ability to obtain debt financing on reasonable terms, which could reduce the number of properties we may be able to acquire. The global and U.S. economy began to show some signs of improvement in late 2009 and throughout 2010. However, unemployment remains high and concerns continue to exist about inflation and the strength of the recovery. If mortgage debt continues to be limited and, when available, on unfavorable terms as a result of increased interest rates, increased credit spreads, decreased liquidity or other factors, our ability to acquire properties may be limited and we risk being unable to refinance our existing debt upon maturity.

There is no guarantee that borrowing arrangements or other arrangements for obtaining leverage will be available, or if available, will be available on terms and conditions acceptable to us. Unfavorable economic conditions have increased financing costs and limited access to the capital markets. In addition, any decline in market value of our assets may have adverse consequences in instances where we borrow money based on the fair value of those assets and may make refinancing more difficult.

Currently, the market for credit facilities is very challenging and many lenders are actively seeking to reduce their balances outstanding by lowering advance rates on financed assets and increasing borrowing costs, to the extent such facilities continue to be available. Our current line of credit is subject to various requirements and financial covenants. In the event we are unable to maintain or extend existing and/or secure new lines of credit or collateralized financing on favorable terms, our ability to make new investments and improvements in existing properties as well as our ability to make distributions may be significantly impacted.

 

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Defaults on our borrowings may adversely affect our financial condition and results of operations. Defaults on loans collateralized by a property we own may result in foreclosure actions and our loss of the property or properties securing the loan that is in default. Such legal actions are expensive. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt collateralized by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable income on the foreclosure and all or a portion of such taxable income may be subject to tax and/or required to be distributed to our stockholders in order for us to qualify as a REIT. In such case, we would not receive any cash proceeds to enable us to pay such tax or make such distributions. If any mortgages contain cross collateralization or cross default provisions, more than one property may be affected by a default. If any of our properties are foreclosed upon due to a default, our financial condition, results of operations and ability to pay distributions to stockholders may be adversely affected.

Financing arrangements involving balloon payment obligations may adversely affect our ability to make distributions. Some of our fixed-term financing arrangements may require us to make “balloon” payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or sell a particular property. At the time the balloon payment is due, we may not be able to raise equity or refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. These refinancing or property sales could negatively impact the rate of return to stockholders and the timing of disposition of our assets. In addition, payments of principal and interest may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders. We may borrow money that bears interest at a variable rate and, from time to time, we may pay mortgage loans or refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have a material adverse effect on our operating cash flow and our ability to make distributions to our stockholders.

We may borrow money to make distributions and distributions may not come from funds from operations which may have negative tax implications and a negative effect on the value of your shares under certain conditions. In the past, we have borrowed from affiliates and other persons to make distributions, and in the future we may continue to borrow money as we consider necessary or advisable to meet our distribution requirements. Our distributions have exceeded our funds from operations in the past and may do so in the future. In the event that we make distributions in excess of our earnings and profits, such distributions could constitute a return of capital for federal income tax and accounting purposes. Furthermore, in the event that we are unable to fund future distributions from our funds from operations, the value of your shares upon the possible listing of our stock, the sale of our assets or any other liquidity event may be negatively affected.

We may acquire various financial instruments for purposes of “hedging” or reducing our risks which may be costly and/or ineffective and will reduce our cash available for distribution to our stockholders. Use of derivative instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in the hedging transaction becoming worthless or a speculative hedge. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the asset being hedged. Use of hedging activities generally may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available for distribution to our stockholders.

Tax Related Risks

We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes. We believe that we have been organized and have operated, and intend to continue to be organized and to operate, in a manner that will enable us to meet the requirements for qualification and taxation as a REIT for federal income tax

 

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purposes, commencing with our taxable year ended December 31, 2004. A REIT is generally not subject to federal tax at the corporate level to the extent that it distributes annually at least 90% of its taxable income to its stockholders and meets other compliance requirements. We have not requested, and do not plan to request, a ruling from the IRS that we qualify as a REIT. Based upon representations made by our officers with respect to certain factual matters, and upon counsel’s assumption that we have operated and will continue to operate in the manner described in the representations and in our prospectus relating to our common stock offerings, our tax counsel, Arnold & Porter LLP, has rendered an opinion that we were organized and have operated in conformity with the requirements for qualification as a REIT and that our proposed method of operation will enable us to continue to meet the requirements for qualification as a REIT. Our continued qualification as a REIT will depend on our continuing ability to meet highly technical and complex requirements concerning, among other things, the ownership of our outstanding shares of common stock, the nature of our assets, the sources of our income, the amount of our distributions to our stockholders and the filing of TRS elections. No assurance can be given that we qualify or will continue to qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT.

You should be aware that opinions of counsel are not binding on the IRS or on any court. The conclusions stated in the opinion of our tax counsel are conditioned on, and our continued qualification as a REIT will depend on, our company meeting various requirements.

If we fail to qualify as a REIT, we would be subject to additional federal income tax at regular corporate rates. If we fail to qualify as a REIT, we may be subject to additional federal income and alternative minimum taxes. Unless we are entitled to relief under specific statutory provisions, we also could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. Therefore, if we fail to qualify as a REIT, the funds available for distribution to stockholders may be reduced substantially for each of the years involved.

Our leases may be recharacterized as financings which would eliminate depreciation deductions on our properties. We believe that we would be treated as the owner of properties where we would own the underlying land, except with respect to leases structured as “financing leases,” which would constitute financings for federal income tax purposes. If the lease of a property does not constitute a lease for federal income tax purposes and is recharacterized as a secured financing by the IRS, then we believe the lease should be treated as a financing arrangement and the income derived from such a financing arrangement should satisfy the 75% and the 95% gross income tests for REIT qualification as it would be considered to be interest on a loan collateralized by real property. Nevertheless, the recharacterization of a lease in this fashion may have adverse tax consequences for us. In particular, we would not be entitled to claim depreciation deductions with respect to the property (although we should be entitled to treat part of the payments we would receive under the arrangement as the repayment of principal). In such event, in some taxable years our taxable income, and the corresponding obligation to distribute 90% of such income, would be increased. With respect to leases structured as “financing leases,” we will report income received as interest income and will not take depreciation deductions related to the real property. Any increase in our distribution requirements may limit our ability to invest in additional properties and to make additional mortgage loans. No assurance can be provided that the IRS would recharacterize such transactions as financings that would qualify under the 95% and 75% gross income tests.

Excessive non-real estate asset values may jeopardize our REIT status. In order to qualify as a REIT, among other requirements, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents and government securities. Accordingly, the value of any other property that is not considered a real estate asset for federal income tax purposes must represent in the aggregate not more than 25% of our total assets. In addition, under federal income tax law, we may not own securities in, or make loans to, any one company (other than a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary) which represent in excess of 10% of the voting securities or 10% of the value of all securities of that company or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more taxable REIT subsidiaries which have, in the aggregate, a value in excess of 25% of our total assets.

 

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The 25%, 10% and 5% REIT qualification tests are determined at the end of each calendar quarter. If we fail to meet any such test at the end of any calendar quarter, and such failure is not remedied within 30 days after the close of such quarter, we will cease to qualify as a REIT, unless certain requirements are satisfied.

Despite our REIT status, we remain subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred. Even if we qualify as a REIT, we are subject to some federal, state and local taxes on our income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed real estate investment trust taxable income; (ii) “alternative minimum tax” on our items of tax preference; (iii) certain state income taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions;” (v) tax on gains from the sale of certain “foreclosure property;” (vi) tax on gains of sale of certain “built-in gain” properties; and (vii) certain taxes and penalties if we fail to comply with one or more REIT qualification requirements, but nevertheless qualify to maintain our status as a REIT. Foreclosure property includes property with respect to which we acquire ownership by reason of a borrower’s default on a loan or possession by reason of a tenant’s default on a lease. We may elect to treat certain qualifying property as “foreclosure property,” in which case, the income from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, we must satisfy additional requirements, including that we operate the property through an independent contractor after a short grace period. We will be subject to tax on our net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income. Any such tax incurred will reduce the amount of cash available for distribution.

We may be required to pay a penalty tax upon the sale of a property. The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. The 2008 Housing and Economic Recovery Act changed the safe harbor rules such that a REIT, among other things, is required to hold the property for only two years rather than four years. We intend that we and our subsidiaries will hold the interests in our properties for investment with a view to long-term appreciation, to engage in the business of acquiring and owning properties, and to make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will make no more than seven sales within a year to satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.

The lease of qualified health care properties to a taxable REIT subsidiary is subject to special requirements. We intend to lease certain qualified health care properties we acquire from operators to a taxable REIT subsidiary (or a limited liability company of which the taxable REIT subsidiary is a member), which lessee will contract with such operators (or a related party) to manage and operate the health care operations at these properties. The rents from this taxable REIT subsidiary lessee structure will be treated as qualifying rents from real property if (1) they are paid pursuant to an arms-length lease of a qualified health care property with a taxable REIT subsidiary and (2) the operator qualifies as an eligible independent contractor. If any of these conditions are not satisfied, then the rents will not be qualifying rents for purposes of the 75% and 95% gross income tests for REIT qualification.

Company Related Risks

We may have difficulty funding distributions solely from cash flow from operations, which could reduce the funds we have available for investments and your overall return. There are many factors that can affect the

 

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availability and timing of distributions to stockholders. We expect to fund distributions principally from cash flows from operations; however, if our properties are not generating sufficient cash flow or our other operating expenses require it, we may fund our distributions from borrowings. If we fund distributions from borrowings, then we will have fewer funds available for the acquisition of properties and your overall return may be reduced. Further, to the extent distributions exceed earnings and profits calculated on a tax basis, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain in the future.

We may not be able to pay distributions at our current or an increasing rate. In the future, our ability to declare and pay distributions at our current or an increasing rate will be subject to evaluation by our board of directors of our current and expected future operating results, capital levels, financial condition, future growth plans, general business and economic conditions and other relevant considerations, and we cannot assure you that we will continue to pay distributions on any schedule or that we will not reduce the amount of or cease paying distributions in the future.

We rely on the senior management team of our Advisor, the loss of whom could significantly harm our business. Our continued success will depend to a significant extent on the efforts and abilities of the senior management team of our Advisor. These individuals are important to our business and strategy and to the extent that any of them departs and is not replaced with a qualified substitute; such person’s departure could harm our operations and financial condition.

The price of our shares is subjective and may not bear any relationship to what a stockholder could receive if their shares were resold.

We determined the offering price of our shares in our sole discretion based on:

 

   

the price that we believed investors would pay for our shares;

 

   

estimated fees to be paid to third parties and to our Advisor and its affiliates; and

 

   

the expenses of this offering and funds we believed should be available for us to invest in properties, loans and other permitted investments.

There is no public market for our shares on which to base market value and there can be no assurance that one will develop. However, eighteen months following the completion of our last offering, we will be required to provide an estimated value of our shares to our stockholders.

Although we have adopted a redemption plan, we have discretion not to redeem your shares, to suspend the plan and to cease redemptions. Our redemption plan includes restrictions that limit a stockholders’ ability to have their shares redeemed. Our stockholders must hold their shares for at least one year before presenting for our consideration all or any portion equal to at least 25% of such shares to us for redemption, except for redemption sought upon death, qualifying disability, bankruptcy or unforeseeable emergency of a stockholder. We limit the number of shares redeemed pursuant to the redemption plan as follows: (i) at no time during any 12-month period, may we redeem more than 5% of the weighted-average shares of our common stock at the beginning of such 12-month period and (ii) during each quarter, redemptions will be limited to an amount determined by our board and from the sale of shares under our dividend reinvestment plan during the prior quarter. The redemption plan has many limitations and you should not rely upon it as a method of selling shares promptly at a desired price. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”—“Redemption of Shares” for additional information.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

As of December 31, 2010, through various wholly-owned limited partnerships and limited liability companies, we had invested in 122 real estate investment properties. The following tables set forth details about our property holdings by asset class beginning with wholly-owned properties followed by properties owned through joint venture arrangements (in thousands):

 

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 
Ski and Mountain Lifestyle          

Brighton Ski Resort—

Brighton, Utah

  1,050 skiable acres, seven chairlifts; permit and fee interests   Boyne   $ 15,304      $ 35,000        1/8/07   

Crested Butte Mountain Resort—

Mt. Crested Butte, Colorado

  1,167 skiable acres, 16 chairlifts; permit and leasehold interests   Triple Peaks   $ 13,109      $ 41,000        12/5/08   

Cypress Mountain—

Vancouver, BC, Canada

  358 skiable acres, five chairlifts; permit and fee interests   Boyne   $ 19,494      $ 27,500        5/30/06   

Gatlinburg Sky Lift—

Gatlinburg, Tennessee

  Scenic chairlift; leasehold interest   Boyne   $ —        $ 19,940        12/22/05   
Jiminy Peak Mountain Resort— Hancock, Massachusetts   800 skiable acres, eight chairlifts; fee interest   FO Ski Resorts,
LLC
  $ 9,664      $ 27,000        1/27/09   

Loon Mountain Resort—

Lincoln, New Hampshire

  275 skiable acres, ten chairlifts; leasehold, permit and fee interests   Boyne   $ 12,529      $ 15,539        1/19/07   
Mount Sunapee Mountain Resort— Newbury, New Hampshire   230 skiable acres, ten chairlifts leasehold interest   Triple Peaks   $ 6,075      $ 19,000        12/5/08   
Mountain High Resort— Wrightwood, California   290 skiable acres, 59 trails, 16 chairlifts; permit interest   Mountain High
Resorts Associates,
LLC
  $ —        $ 45,000        6/29/07   

Northstar-at-Tahoe Resort—

Lake Tahoe, California

  2,480 skiable acres, 16 chairlifts; permit and fee interests   Trimont Land
Company
  $ 40,720      $ 80,097        1/19/07   
Okemo Mountain Resort— Ludlow, Vermont   624 skiable acres, 19 chairlifts; leasehold interest   Triple Peaks   $ 32,816      $ 72,000        12/5/08   

Sierra-at-Tahoe Resort—

South Lake Tahoe, California

  1,680 skiable acres, 12 chairlifts; permit and fee interests   Booth   $ 18,704      $ 39,898        1/19/07   
Sugarloaf Mountain Resort— Carrabassett Valley, Maine   525 skiable acres, 15 chairlifts; fee and leasehold interests   Boyne   $ —   (2)    $ 26,000        8/7/07   
Summit-at-Snoqualmie Resort— Snoqualmie Pass, Washington   1,697 skiable acres, 26 chairlifts; permit and fee interests   Boyne   $ 12,529      $ 34,466        1/19/07   

Sunday River Resort—

Newry, Maine

  668 skiable acres, 18 chairlifts; leasehold, permit and fee interests   Boyne   $ —   (2)    $ 50,500        8/7/07   

The Village at Northstar—

Lake Tahoe, California

  79,898 leasable square feet   Trimont Land
Company
  $ —        $ 36,100        11/15/07   
                     
  Total     $ 180,944      $ 569,040     
                     

 

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Name and Location

 

Description

  Operator     Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 
Golf          

Ancala Country Club—

Scottsdale, Arizona

  18-hole private course     EAGLE      $ 6,702      $ 14,107        11/30/07   

Arrowhead Country Club—

Glendale, Arizona

  18-hole private course     EAGLE      $ 8,290      $ 17,357        11/30/07   

Arrowhead Golf Club—

Littleton, Colorado

  18-hole public course     EAGLE      $ 9,171      $ 15,783        11/30/07   

Bear Creek Golf Club—

Dallas, Texas

  36-hole public course; leasehold interest     Billy Casper Golf      $ 5,356      $ 11,100        9/8/06   

Canyon Springs Golf Club—

San Antonio, Texas

  18-hole public course     EAGLE      $ 7,389      $ 13,010        11/16/06   

Clear Creek Golf Club—

Houston, Texas

  18-hole public course; concession-hold interest     EAGLE      $ —        $ 1,888        1/11/07   

Continental Golf Course—

Scottsdale, Arizona

  18-hole public course     EAGLE      $ 3,527      $ 6,419        11/30/07   

Cowboys Golf Club—

Grapevine, Texas

  18-hole public course; leasehold interest     EAGLE      $ 11,785      $ 25,000        12/26/06   

David L. Baker Golf Course—

Fountain Valley, California

  18-hole public course; concession interest     EAGLE      $ —        $ 9,492        4/17/08   

Deer Creek Golf Club—

Overland Park, Kansas

  18-hole public course     EAGLE      $ 4,321      $ 8,934        11/30/07   

Desert Lakes Golf Club—

Bullhead City, Arizona

  18-hole public course     EAGLE      $ 1,146      $ 2,637        11/30/07   

Eagle Brook Country Club—

Geneva, Illinois

  18-hole private course     EAGLE      $ 8,113      $ 16,253        11/30/07   

Foothills Golf Club—

Phoenix, Arizona

  18-hole public course     EAGLE      $ 5,027      $ 9,881        11/30/07   

Forest Park Golf Course—

St. Louis, Missouri

  27-hole public course; leasehold interest     EAGLE      $ —        $ 13,372        12/19/07   

Fox Meadow Country Club—

Medina, Ohio

  18-hole private course     EAGLE      $ 4,423      $ 9,400        12/22/06   

Golf Club at Fossil Creek—

Fort Worth, Texas

  18-hole public course     EAGLE      $ 4,410      $ 7,686        11/16/06   

Hunt Valley Golf Club—

Phoenix, Maryland

  27-hole public course     EAGLE      $ 12,346      $ 23,430        11/30/07   

Kokopelli Golf Club—

Phoenix, Arizona

  18-hole public course     EAGLE      $ 5,115      $ 9,416        11/30/07   

Lake Park Golf Club—

Dallas-Fort Worth, Texas

  27-hole public course; concession-hold interest     EAGLE      $ —        $ 5,632        11/16/06   
Lakeridge Country Club— Lubbock, Texas   18-hole private course     EAGLE      $ 3,725      $ 7,900        12/22/06   

 

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Name and Location

 

Description

  Operator     Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 
Golf (continued)          

Las Vegas Golf Club—

Las Vegas, Nevada

  18-hole public course     EAGLE      $ —        $ 10,951        4/17/08   
Legend at Arrowhead Golf Resort—Glendale, Arizona   18-hole public course     EAGLE      $ 5,556      $ 10,438        11/30/07   
London Bridge Golf Club—   36-hole public course     EAGLE      $ 6,173      $ 11,805        11/30/07   
Lake Havasu, Arizona          
Majestic Oaks Golf Club—   45-hole public course     EAGLE      $ 6,349      $ 13,217        11/30/07   
Ham Lake, Minnesota          

Mansfield National Golf Club—

Dallas-Fort Worth, Texas

  18-hole public course; leasehold interest     EAGLE      $ 4,082      $ 7,147        11/16/06   
Meadowbrook Golf & Country Club—   18-hole private course     EAGLE      $ 5,997      $ 11,530        11/30/07   
Tulsa, Oklahoma          

Meadowlark Golf Course—

Huntington Beach, California

  18-hole public course; leasehold interest     EAGLE      $ —        $ 16,945        4/17/08   
Mesa del Sol Golf Club—   18-hole public course     EAGLE      $ 3,222      $ 6,850        12/22/06   
Yuma, Arizona          
Micke Grove Golf Course—   18-hole public course;     EAGLE      $ —        $ 6,550        12/19/07   
Lodi, California   leasehold interest        
Mission Hills Country Club—   18-hole private course     EAGLE      $ 1,587      $ 4,779        11/30/07   
Northbrook, Illinios          
Montgomery Country Club—   18-hole private course     Traditional Golf      $ —        $ 6,300        9/11/08   
Laytonsville, Maryland          
Painted Desert Golf Club—   18-hole public course     EAGLE      $ 4,762      $ 9,468        11/30/07   
Las Vegas, Nevada          
Painted Hills Golf Club—   18-hole public course     EAGLE      $ 1,816      $ 3,850        12/22/06   
Kansas City, Kansas          
Palmetto Hall Plantation Club—   36-hole public course     Heritage Golf      $ 3,658      $ 7,600        4/27/06   
Hilton Head, South Carolina          
Plantation Golf Club—   18-hole public course     EAGLE      $ 2,565      $ 4,424        11/16/06   
Dallas-Fort Worth, Texas          
Raven Golf Club at South Mountain—   18-hole public course     I.R.I. Golf      $ 6,135      $ 12,750        6/9/06   
Phoenix, Arizona          
Royal Meadows Golf Course—   18-hole public course     EAGLE      $ 1,141      $ 2,400        12/22/06   
Kansas City, Missouri          
Ruffled Feathers Golf Club—   18-hole public course     EAGLE      $ 7,319      $ 13,883        11/30/07   
Lemont, Illinois          

Shandin Hills Golf Club—

San Bernardino, California

  18-hole public course; leasehold interest     EAGLE      $ —        $ 5,249        3/7/08   

Signature Golf Course—

  18-hole private course     EAGLE      $ 8,032      $ 17,100        12/22/06   

Solon, Ohio

         

 

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Table of Contents

Name and Location

 

Description

  Operator     Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 
Golf (continued)          

Stonecreek Golf Club—

  18-hole public course     EAGLE      $ 7,760      $ 14,095        11/30/07   

Phoenix, Arizona

         

Superstition Springs Golf Club—

  18-hole public course     EAGLE      $ 5,644      $ 11,042        11/30/07   

Mesa, Arizona

         

Tallgrass Country Club—

  18-hole private course     EAGLE      $ 2,469      $ 5,405        11/30/07   

Wichita, Kansas

         

Tamarack Golf Club—

  18-hole public course     EAGLE      $ 3,968      $ 7,747        11/30/07   

Naperville, Illinois

         

Tatum Ranch Golf Club—

  18-hole private course     EAGLE      $ 2,116      $ 6,379        11/30/07   

Cave Creek, Arizona

         

The Golf Club at Cinco Ranch—

  18-hole public course     EAGLE      $ 4,322      $ 7,337        11/16/06   

Houston, Texas

         

The Links at Challedon Golf Club—

  18-hole public course     Traditional Golf      $ —        $ 3,650        9/11/08   

Mount Airy, Maryland

         

The Tradition Golf Club at Broad Bay—

  18-hole private course     Traditional Golf      $ 5,661      $ 9,229        3/26/08   

Virginia Beach, Virginia

         

The Tradition Golf Club at Kiskiack—

  18-hole public course     Traditional Golf      $ —        $ 6,987        3/26/08   

Williamsburg, Virginia

         

The Tradition Golf Club at The Crossings—

  18-hole public course     Traditional Golf      $ —        $ 10,084        3/26/08   

Glen Allen, Virginia

         

Valencia Country Club—

  18-hole private course     Kemper Sports      $ 18,206      $ 39,533        10/16/06   

Santa Clarita, California

         

Weston Hills Country Club—

  36-hole private course     Century Golf      $ 16,280      $ 35,000        10/16/06   

Weston, Florida

         

Weymouth Country Club—

  18-hole private course     EAGLE      $ 4,935      $ 10,500        12/22/06   

Medina, Ohio

         
                     
  Total     $ 240,601      $ 578,921     
                     

Attractions

         

Camelot Park—

Bakersfield, California

  Miniature golf course, go-karts, batting cages and arcade; fee and leasehold interest    
 
 
Amusement(1)
Management
Partners, LLC
  
  
  
  $ —        $ 948        10/6/06   

Darien Lake—

Buffalo, New York

  978-acre theme park and waterpark    
 
 
 
Herschend
Family
(1)
Entertainment
Corp.
  
  
  
  
  $ —   (2)    $ 109,000        4/6/07   

Elitch Gardens—

Denver, Colorado

  62-acre theme park and waterpark    
 
 
 
Herschend
Family
(1)
Entertainment
Corp.
  
  
  
  
  $ —        $ 109,000        4/6/07   

Fiddlesticks Fun Center—

Tempe, Arizona

  Miniature golf course, bumper boats, batting cages and go-karts    
 
 
Amusement(1)
Management
Partners, LLC
  
  
  
  $ —        $ 5,016        10/6/06   

 

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Table of Contents

Name and Location

 

Description

  Operator     Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 

Attractions (continued)

         

Frontier City—

Oklahoma City, Oklahoma

  113-acre theme park    
 
Premier Attractions(1)
Management, LLC
  
  
  $  —   (2)    $ 17,750        4/6/07   

Funtasticks Fun Center—

Tucson, Arizona

  Miniature golf course, go-karts, batting cages, bumper boats and kiddie land with rides    
 
 
Amusement(1)
Management
Partners, LLC
  
  
  
  $ —        $ 6,424        10/6/06   

Grand Prix Tampa—

Tampa, Florida

  Miniature golf course, go-kart and batting cages     Grand Prix Tampa      $ —        $ 3,254        10/6/06   

Hawaiian Falls-Garland—

Garland, Texas

  11-acre waterpark; leasehold interest     HFE Horizon      $ —        $ 6,318        4/21/06   

Hawaiian Falls-The Colony—

The Colony, Texas

  12-acre waterpark; leasehold interest     HFE Horizon      $ —        $ 5,807        4/21/06   

Magic Springs and Crystal Falls—

Hot Springs, Arkansas

  70-acre theme park and waterpark    
 
 
Amusement(1)
Management
Partners, LLC
  
  
  
  $ —        $ 20,000        4/16/07   

Mountasia Family Fun Center—

North Richland Hills, Texas

  Two miniature golf courses, go- karts, bumper boats, batting cages, paintball fields and arcade    
 
 
Amusement(1)
Management
Partners, LLC
  
  
  
  $ —        $ 1,776        10/6/06   

Myrtle Waves Water Park—

Myrtle Beach, South Carolina

  20-acre waterpark; leasehold interest     PARC(5)      $ —        $ 9,100        7/11/08   

Pacific Park—

Santa Monica, California

  2-acre theme park; leasehold interest    
 
Santa Monica
Amusements, LLC
  
  
  $ —        $ 34,000        12/29/10   

Splashtown—

Houston, Texas

  53-acre waterpark    
 
 
Premier
Attractions
(1)
Management, LLC
  
  
  
  $  —   (2)    $ 13,700        4/6/07   

Waterworld—

Concord, California

  23-acre waterpark; leasehold interest    
 
Palace(1)
Entertainment
  
  
  $  —   (2)    $ 10,800        4/6/07   

Wet’nWild Hawaii—

Honolulu, Hawaii

  29-acre waterpark; leasehold interest     Village Roadshow      $ —        $ 25,800        5/6/09   

White Water Bay—

Oklahoma City, Oklahoma

  21-acre waterpark    
 
 
Premier
Attractions
(1)
Management, LLC
  
  
  
  $  —   (2)    $ 20,000        4/6/07   

Wild Waves —

Seattle, Washington

  67-acre theme park and waterpark; leasehold interest    
 
NorPoint(1)
Entertainment
  
  
  $ —        $ 31,750        4/6/07   

Zuma Fun Center—

Charlotte, North Carolina

 

Miniature golf course, batting

cages, bumper boats and go-karts

   

 
 

Amusement (1)

Management
Partners, LLC

  

  
  

  $ —        $ 7,378        10/6/06   

Zuma Fun Center—

Knoxville, Tennessee

  Miniature golf course, batting cages, bumper boats, rock climbing and go-karts    

 
 

Amusement (1)

Management
Partners, LLC

  

  
  

  $ —        $ 2,037        10/6/06   

 

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Table of Contents

Name and Location

 

Description

  Operator     Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 

Attractions (continued)

         

Zuma Fun Center—

North Houston, Texas

  Miniature golf course, batting cages, bumper boats and go-karts    

 
 

Amusement(1)

Management
Partners, LLC

  

  
  

  $ —        $ 916        10/6/06   

Zuma Fun Center—

South Houston, Texas

  Miniature golf course, batting cages, bumper boats and go-karts    

 
 

Amusement(1)

Management
Partners, LLC

  

  
  

  $ —        $ 4,883        10/6/06   
                     
 

Total

    $ —        $ 445,657     
                     

Marinas

         

Anacapa Isle Marina—

Oxnard, California

  438 wet slips; leasehold interest    
 
Almar
Management, Inc.
  
  
  $   2,709      $ 9,829        3/12/10   

Ballena Isle Marina—

Alameda, California

  504 wet slips; leasehold interest    
 
Almar
Management, Inc.
  
  
  $ —        $ 8,179        3/12/10   

Beaver Creek Marina—

Monticello, Kentucky

  275 wet slips; leasehold interest    
 
Marinas
International
  
  
  $ —        $ 10,525        12/22/06   

Brady Mountain Resort & Marina—

Royal (Hot Springs), Arkansas

  585 wet slips, 55 dry storage units; leasehold interest    
 
Marinas
International
  
  
  $ —        $ 14,140        4/10/08   

Bohemia Vista Yacht Basin—

Chesapeake City, Maryland

  239 wet slips; fee interest    
 
Aqua Marine
Partners, LLC
  
  
  $ —        $ 4,970        5/20/10   

Burnside Marina—

Somerset, Kentucky

  400 wet slips; leasehold interest    
 
Marinas
International
  
  
  $ —        $ 7,130        12/22/06   

Cabrillo Isle Marina—

San Diego, California

  463 slips; leasehold interest    
 
Almar
Management, Inc.
  
  
  $ 6,479      $ 20,575        3/12/10   

Crystal Point Marina—

Point Pleasant, New Jersey

  200 wet slips    
 
Marinas
International
  
  
  $ —   (2)    $ 5,600        6/8/07   

Eagle Cove Marina—

Byrdstown, Tennessee

  106 wet slips; leasehold and fee interests    
 
Marinas
International
  
  
  $ —        $ 5,300        8/1/07   

Great Lakes Marina—

Muskegon, Michigan

  350 wet slips, 150 dry storage units    
 
Marinas
International
  
  
  $ —   (2)    $ 10,088        8/20/07   

Hack’s Point Marina—

Earleville, Maryland

  239 wet slips; fee interest    
 
Aqua Marine
Partners, LLC
  
  
  $ —        $ 2,030        5/20/10   

Holly Creek Marina—

Celina, Tennessee

  250 wet slips; leasehold and fee interests    
 
Marinas
International
  
  
  $ —        $ 6,790        8/1/07   

Lakefront Marina—

Port Clinton, Ohio

  470 wet slips; leasehold and fee interests    
 
Marinas
International
  
  
  $ —        $ 5,600        12/22/06   

Manasquan River Club—

Brick Township, New Jersey

  199 wet slips    
 
Marinas
International
  
  
  $ —   (2)    $ 8,900        6/8/07   

Pier 121 Marina and Easthill Park—

Lewisville, Texas

  1,007 wet slips, 250 dry storage units; leasehold interest    
 
Marinas
International
  
  
  $ —        $ 37,190        12/22/06   

 

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Table of Contents

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 

Marinas (continued)

         

Sandusky Harbor Marina—

Sandusky, Ohio

  660 wet slips; leasehold and fee interests   Marinas
International
  $ —        $ 8,953        12/22/06   

Ventura Isle Marina—

Ventura, California

  579 slips; leasehold interest   Almar
Management,
Inc.
  $ 4,080      $ 16,417        3/12/10   
                     
 

Total

    $ 13,268      $ 182,216     
                     

Additional Lifestyle Properties

         

Dealership

         

Route 66 Harley-Davidson—

Tulsa, Oklahoma

  46,000 square-foot retail and service facility with restaurant   Route 66
Motorcycle,
LLC
  $ —        $ 6,500        4/27/06   
                     
 

Total

    $ —        $ 6,500     
                     

Multi-family Residential

         

Mizner Court at Broken Sound—

Boca Raton, Florida

  450-unit apartment complex   Greystar   $ 66,379 (4)    $ 104,413        12/31/07   
                     
 

Total

    $ 66,379      $ 104,413     
                     

Hotels

         

Coco Key Water Resort—

Orlando, Florida

  399-room waterpark hotel (closed during renovation)   Sage
Hospitality
  $ 18,129      $ 18,527        5/28/08   

Great Wolf Lodge—Sandusky—

Sandusky, Ohio

  271-room waterpark resort   Great Wolf
Resorts
  $ 32,213      $ 43,400 (3)      8/6/09   

Great Wolf Lodge—Wisconsin Dells—

Wisconsin Dells, Wisconsin

  309-room waterpark resort   Great Wolf
Resorts
  $ 26,610      $ 46,900 (3)      8/6/09   

The Omni Mount Washington Resort and Bretton Woods Ski Area—

Bretton Woods, New Hampshire

  284-room hotel, 434 skiable acres and nine chairlifts   Omni Hotels
Management
Corporation
  $ 25,000      $ 45,000        6/23/06   
                     
 

Total

    $ 101,952      $ 153,827     
                     

Other

         

Granby Development Lands

Granby, Colorado

  1,553 acres with infrastructure and improvements such as roads, water, sewer, golf course in various stages of completion   N/A   $ —        $ 51,255        10/29/09   
                     
 

Total

    $ —        $ 51,255     
                     
 

Total Properties

    $ 603,144      $ 2,091,829     
                     

 

FOOTNOTES:

 

(1) These properties were previously leased to PARC and transitioned to the new operator listed above by February 2011.

 

(2) These properties are pledged as collateral for an $85.0 million revolving line of credit as of December 31, 2010.

 

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Table of Contents
(3) We acquired an initial partnership interest in these properties on October 4, 2005. We acquired all remaining partnership interests on August 6, 2009, and the amounts stated as initial purchase price represent the estimated fair value of these properties at that time.

 

(4) In connection with the debt restructure, the principal balance was reduced from approximately $85.4 million to $66.4 million. See Note 12, “Mortgages and Other Notes Payable” to the accompanying consolidated financial statements in Item 8 for additional information.

 

(5) As of the date of this filing, this property has been transferred to PARC subject to 100% seller financing.

As of December 31, 2010, we own interests in two unconsolidated entities that are in the business of owning and leasing real estate. We own an 80% interest in the Intrawest Retail Village Properties and 81.9% interest in the Dallas Market Center. As of December 31, 2010, we have invested, through unconsolidated entities, in the following properties which are divided by asset class (in thousands):

 

Name and Location

 

Description

  Mortgages and
Other Notes
Payable as of
December 31,
2010
    Initial
Purchase
Price
    Date
Acquired
 

Destination Retail—Intrawest Venture

       

Village of Baytowne Wharf—

Destin, Florida

  56,104 leasable square feet   $ 9,900      $ 17,100        12/16/04   
Village at Blue Mountain—Collingwood, ON, Canada   39,723 leasable square feet   $ 25,132 (1)    $ 10,781        12/3/04   

Village at Copper Mountain—

Copper Mountain, Colorado

  97,928 leasable square feet   $ 10,872      $ 23,300        12/16/04   
Village at Mammoth Mountain—Mammoth Lakes, California   57,924 leasable square feet   $ 12,242      $ 22,300        12/16/04   
Village of Snowshoe Mountain—Snowshoe, West Virginia   39,846 leasable square feet   $ 4,817      $ 8,400        12/16/04   

Village at Stratton—

Stratton, Vermont

  47,837 leasable square feet   $ 2,829      $ 9,500        12/16/04   

Whistler Creekside—

Vancouver, BC, Canada

  70,802 leasable square feet   $ —   (1)    $ 19,500        12/3/04   
                   
 

Total

  $ 65,792      $ 110,881     
                   

Merchandise Marts—DMC Venture

       

Dallas Market Center—

International Floral and Gift Center—Dallas, Texas

  4.8 million leasable square feet; leasehold and fee interests   $ 142,015      $ 260,659        2/14/05   
                   
 

Total

  $ 142,015      $ 260,659     
                   
 

Total Properties

  $ 207,807      $ 371,540     
                   

 

FOOTNOTE:

 

(1) This amount encumbers both the Village at Blue Mountain and Whistler Creekside properties and was converted from Canadian dollars to U.S. dollars at an exchange rate of 0.9999 Canadian dollars for $1.0000 U.S. dollar on December 31, 2010.

 

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Table of Contents

In addition to the properties listed above, on January 10, 2011, we acquired a 60% ownership interest, through an unconsolidated entity, in the following senior living properties with an agreed upon value of $630.0 million. At closing, the venture obtained a $435.0 million loan to finance a portion of the acquisition. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Acquisitions and Investments in Unconsolidated Entities” for additional information (in thousands).

 

Name and Location

 

Description

 

Operator

   
 
Mortgages
Payable
  
  
   
 
 
Initial
Purchase
Price(1)
  
  
  
   
 
Date
Acquired
  
  

Senior Living—Sunrise Venture

         

Sunrise of Alta Loma

Rancho Cucamonga, California

  59 residential units   Sunrise Senior Living Management, Inc.   $ 7,065      $ 10,170        1/10/11   

Sunrise of Baskin Ridge

Baskin Ridge, New Jersey

  77 residential units   Sunrise Senior Living Management, Inc.   $ 21,639      $ 31,150        1/10/11   

Sunrise of Belmont

Belmont, California

  78 residential units   Sunrise Senior Living Management, Inc.   $ 21,639      $ 31,150        1/10/11   

Sunrise of Chesterfield

Chesterfield, Missouri

  74 residential units   Sunrise Senior Living Management, Inc.   $ 28,759      $ 41,400        1/10/11   

Sunrise of Claremont

Claremont, California

  54 residential units   Sunrise Senior Living Management, Inc.   $ 8,135      $ 11,710        1/10/11   

Sunrise of Crystal Lake

Crystal Lake, Illinois

  58 residential units   Sunrise Senior Living Management, Inc.   $ 10,135      $ 14,590        1/10/11   

Sunrise of Dix Hills

Dix Hills, New York

  76 residential units   Sunrise Senior Living Management, Inc.   $ 23,410      $ 33,700        1/10/11   

Sunrise of East Meadow

East Meadow, New York

  82 residential units   Sunrise Senior Living Management, Inc.   $ 24,529      $ 35,310        1/10/11   

Sunrise of East Setauket

East Setauket, New York

  82 residential units   Sunrise Senior Living Management, Inc.   $ 19,937      $ 28,700        1/10/11   

Sunrise of Edgewater

Edgewater, New Jersey

  70 residential units   Sunrise Senior Living Management, Inc.   $ 18,089      $ 26,040        1/10/11   

Sunrise of Flossmoor

Flossmoor, Illinois

  62 residential units   Sunrise Senior Living Management, Inc.   $ 8,544      $ 12,300        1/10/11   

Sunrise of Gahanna

Gahanna, Ohio

  50 residential units   Sunrise Senior Living Management, Inc.   $ 6,370      $ 9,170        1/10/11   

Sunrise of Gurnee

Gurnee, Illinois

  59 residential units   Sunrise Senior Living Management, Inc.   $ 15,178      $ 21,850        1/10/11   

Sunrise of Holbrook

Holbrook, New York

  79 residential units   Sunrise Senior Living Management, Inc.   $ 21,187      $ 30,500        1/10/11   

Sunrise of Huntington Commons

Kennebunk, Maine

  180 residential units   Sunrise Senior Living Management, Inc.   $ 20,347      $ 29,290        1/10/11   

Sunrise of Lincroft

Lincroft, New York

  60 residential units   Sunrise Senior Living Management, Inc.   $ 13,435      $ 19,340        1/10/11   

Sunrise of Marlboro

Marlboro, New Jersey

  63 residential units   Sunrise Senior Living Management, Inc.   $ 8,982      $ 12,930        1/10/11   

Sunrise of Montgomery Village

Montgomery Village, Maryland

  141 residential units   Sunrise Senior Living Management, Inc.   $ 6,724      $ 9,680        1/10/11   

Sunrise of Naperville North

Naperville, Illinois

  77 residential units   Sunrise Senior Living Management, Inc.   $ 21,222      $ 30,550        1/10/11   

 

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Table of Contents

Name and Location

 

Description

 

Operator

  Mortgages
Payable
    Initial
Purchase
Price(1)
    Date
Acquired
 

Senior Living—Sunrise Venture (Continued)

         

Sunrise of Plainview

Plainview, New York

  51 residential units   Sunrise Senior Living Management, Inc.   $ 15,213      $ 21,900        1/10/11   

Sunrise of Roseville

Roseville, Minnesota

  77 residential units   Sunrise Senior Living Management, Inc.   $ 19,319      $ 27,810        1/10/11   

Sunrise of Schaumburg

Schaumburg, Illinois

  82 residential units   Sunrise Senior Living Management, Inc.   $ 21,153      $ 30,450        1/10/11   

Sunrise of Silver Spring

Silver Spring, Maryland

  65 residential units   Sunrise Senior Living Management, Inc.   $ 12,761      $ 18,370        1/10/11   

Sunrise of Tustin

Santa Ana, California

  48 residential units   Sunrise Senior Living Management, Inc.   $ 10,344      $ 14,890        1/10/11   

Sunrise of University Park

Colorado Springs, Colorado

  53 residential units   Sunrise Senior Living Management, Inc.   $ 8,739      $ 12,580        1/10/11   

Sunrise of West Babylon

West Babylon, New York

  79 residential units   Sunrise Senior Living Management, Inc.   $ 24,035      $ 34,600        1/10/11   

Sunrise of West Bloomfield

West Bloomfield, Michigan

  52 residential units   Sunrise Senior Living Management, Inc.   $ 6,738      $ 9,700        1/10/11   

Sunrise of West Hills

West Hills, California

  65 residential units   Sunrise Senior Living Management, Inc.   $ 6,092      $ 8,770        1/10/11   

Sunrise of Weston

Weston, Massachusetts

  29 residential units   Sunrise Senior Living Management, Inc.   $ 5,280      $ 7,600        1/10/11   
                     
  Total     $ 435,000      $ 626,200     
                     

 

FOOTNOTE:

 

(1) Initial purchase price represents the fair value of the properties at the date of acquisition net of cash and other working capital.

 

Item 3. Legal Proceedings

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, we believe, based upon currently available information that the final outcome of such matters will not have a material adverse effect on our results of operations or financial condition.

 

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Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. There is no established public trading market for our shares. Although we may list our shares on a national securities exchange or over-the-counter market if market conditions are satisfactory, a public market for our shares may not develop even if the shares are listed. Prior to such time, if any, as the listing of our shares occurs, any stockholder who has held shares for not less than one year (other than our Advisor or its affiliates) may present all or any portion equal to at least 25% of such stockholder’s shares to us for redemption at any time pursuant to our existing redemption plan. See the section entitled “Redemption of Shares” below for additional information regarding our redemption plan.

As of December 31, 2010, the price per share of our common stock was $10.00. We determined the price per share based upon the price we believed investors would pay for the shares and upon the price at which our shares are currently selling. We did not take into account the value of the underlying assets in determining the price per share.

We are aware of sales of our common stock made between investors totaling 50,082 shares sold at an average price of $6.63 per share during 2010, 8,640 shares sold at an average price of $8.97 per share during 2009 and 21,793 shares sold at an average price of $9.21 per share during 2008.

As of December 31, 2010, we had cumulatively raised approximately $3.0 billion (301.2 million shares) in subscription proceeds including approximately $270.1 million (28.4 million shares) received through our dividend reinvestment plan pursuant to a registration statement on Form S-11 under the Securities Act of 1933. In addition, during the period January 1, 2011 through March 10, 2011, we raised an additional $88.3 million (8.8 million shares). As of March 10, 2011, we had approximately 91,908 common stockholders of record. The below is information about our completed and current offerings as of March 10, 2011:

 

Offering

   Commenced      Closed      Maximum
Offering
     Total
Offering
Proceeds

(in thousands)
 

1st (File No. 333-108355)

     4/16/2004         3/31/2006       $ 2.0 billion       $ 520,728   

2nd (File No. 333-128662)

     4/4/2006         4/4/2008       $ 2.0 billion         1,520,035   

3rd (File No. 333-146457)

     4/9/2008         Ongoing       $ 2.0 billion         1,043,083   
                 

Total

            $ 3,083,846   
                 

We do not intend to commence another public offering of our shares following the completion of our current public offering of shares on April 9, 2011. However, we intend to continue offering shares through our reinvestment plan. In making this decision, the board of directors considered a number of factors, including the Company’s size and diversification of our portfolio and our relatively low leverage and strong cash position, as well as the current stage of our lifecycle.

 

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We have used the proceeds from our offerings primarily in our investing activities, including the acquisition of properties, the making of loans, investments in unconsolidated entities and for other capital expenditures. In addition, we used the offering proceeds to reimburse and compensate our Advisor and its affiliates for acquisition fees and costs incurred on our behalf, to pay offering costs, selling commissions and marketing support fees to our Managing Dealer and to make redemptions in connection with our redemption plan. As of December 31, 2010, approximately $2.9 billion in total proceeds raised were used in the above mentioned activities and are allocated as follows (in thousands):

 

Investing activities

   $ 2,299,142   

Acquisition fees and costs to advisor

     151,387   

Fees to Managing Dealer

     265,768   

Redemptions

     160,215   
        

Total

   $ 2,876,512   
        

Distributions. We intend to continue to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors, including:

 

   

Sources of cash available for distribution such as current year and inception to date cumulative cash flows, Funds from Operations (“FFO”) and Modified Funds from Operations (“MFFO”), as well as, expected future long-term stabilized cash flows, FFO and MFFO;

 

   

The proportion of distributions paid in cash compared to that which is being reinvested through our reinvestment program

 

   

Limitations and restrictions contained in the terms of our current and future indebtedness concerning the payment of distributions; and

 

   

Other factors such as the avoidance of distribution volatility, our objective of continuing to qualify as a REIT, capital requirements, the general economic environment and other factors.

We may use borrowings and proceeds from our dividend reinvestment plan to fund a portion of our distributions in order to avoid distribution volatility. See “Sources of Liquidity and Capital Resources” within Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information related to our sources of cash for distributions.

For the years ended December 31, 2010 and 2009, approximately 0.3% and 4.4%, respectively, of the distributions paid to stockholders were considered taxable income and approximately 99.7% and 95.6%, respectively, were considered a return of capital to stockholders for federal income tax purposes. No amounts distributed to stockholders for the years ended December 31, 2010 and 2009, were required to be or have been treated by us as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement. In determining the apportionment between taxable income and a return of capital, the amounts distributed to stockholders (other than any amounts designated as capital gains dividends) in excess of current or accumulated Earnings and Profits (“E&P”) are treated as a return of capital to the stockholders. E&P is a statutory calculation, which is derived from net income and determined in accordance with the Internal Revenue Code. It is not intended to be a measure of the REIT’s performance, nor do we consider it to be an absolute measure or indicator of our source or ability to pay distributions to stockholders.

 

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The following table represents total distributions declared including cash distributions, distributions reinvested and distributions per share for the years ended December 31, 2010 and 2009 (in thousands except per share data):

 

                                Sources of
Distributions
Paid in Cash
 

Periods

   Distributions
Per Share
    Total
Distributions
Declared(1)
     Distributions
Reinvested
     Cash
Distributions
     Cash Flows
From Operating
Activities(2)
 

2010 Quarter

                                 

First

   $ 0.1563      $ 38,987       $ 17,463       $ 21,524       $ 25,134   

Second

     0.1563        40,092         17,913         22,179         28,948   

Third

     0.1563        41,593         18,465         23,128         43,372   

Fourth

     0.1563        43,267         19,243         24,024         (17,678 )(4) 
                                           

Year

   $ 0.6252      $ 163,939       $ 73,084       $ 90,855       $ 79,776   
                                           

2009 Quarter

                                 

First

   $ 0.1538      $ 34,917       $ 16,304       $ 18,613       $ 21,644   

Second

     0.1913 (3)      44,285         20,237         24,048         3,902 (4) 

Third

     0.1563        37,160         16,910         20,250         42,106   

Fourth

     0.1563        38,091         17,167         20,924         (5,252 )(4) 
                                           

Year

   $ 0.6577      $ 154,453       $ 70,618       $ 83,835       $ 62,400   
                                           

 

FOOTNOTES:

 

(1) Distributions reinvested may be dilutive to stockholders to the extent that they are not covered by operating cash flows, FFO and MFFO and such shortfalls are instead covered by borrowings.

 

(2) Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions. For example, GAAP requires that the payment of acquisition fees and costs be classified as a use of cash in operating activities in the statement of cash flows, which directly reduces the measure of cash flows from operations. However, acquisition fees and costs are paid for with proceeds from our offerings and debt financings as opposed to operating cash flows. The board of directors also uses other measures such as FFO and MFFO in order to evaluate the level of distributions.

 

(3) Amount includes a special distribution in connection with the gain on sale of a property in late 2008.

 

(4) The shortfall in cash flows from operating activities versus cash distributions paid was funded with cumulative cash flows from operations from prior periods and temporary borrowings under our revolving line of credit.

 

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Redemption of Shares. We redeem shares pursuant to our redemption plan, which is designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any listing of our shares. The following table presents information about redemptions for the years ended December 31, 2010 and 2009 (in thousands except per share data):

 

2010 Quarters

   First     Second     Third     Fourth     Full Year  

Requests in queue

     1,324        1,387        2,263        3,043        1,324   

Redemptions requested

     1,981        1,746        1,583        1,372        6,682   

Shares redeemed:

          

Prior period requests

     (1,200     (538     (540     (558     (2,836

Current period requests

     (594     (225     (226     (208     (1,253

Adjustments(1)

     (124     (107     (37     (54     (322
                                        

Pending redemption requests(2)

     1,387        2,263        3,043        3,595        3,595   
                                        

Average price paid per share

   $ 9.73      $ 9.83      $ 9.79      $ 9.79      $ 9.77   

2009 Quarters

   First     Second     Third     Fourth     Full Year  

Requests in queue

     —          —          1,297        1,301        —     

Redemptions requested

     2,268        3,409        1,762        1,872        9,311   

Shares redeemed:

          

Prior period requests

     —          —          (1,297     (1,173     (2,470

Current period requests

     (2,268     (2,112     (461     (598     (5,439

Adjustments(1)

     —          —          —          (78     (78
                                        

Pending redemption requests(2)

     —          1,297        1,301        1,324        1,324   
                                        

Average price paid per share

   $ 9.55      $ 9.58      $ 9.70      $ 9.35      $ 9.55   

 

FOOTNOTES:

 

(1) This amount represents redemption request cancellations and other adjustments.

 

(2) Requests that are not fulfilled in whole during a particular quarter will be redeemed on a pro rata basis pursuant to the redemption plan.

The redemption price per share is based on the amount of time that the redeeming stockholder has held the applicable shares, but in no event is the redemption price greater than the price of shares sold to the public in our offerings.

In the event there are insufficient funds to redeem all of the shares for which redemption requests have been submitted, redemptions will occur on a pro rata basis at the end of each quarter, with the actual redemption occurring at the beginning of the next quarter. Stockholders whose shares are not redeemed due to insufficient funds in that quarter will have their requests carried forward and be honored at such time as sufficient funds exist. In such case, the redemption request will be retained and such shares will be redeemed before any subsequently received redemption requests are honored, subject to certain priority groups for hardship cases. Redeemed shares are considered retired and will not be reissued.

In March 2010, we amended our redemption plan to provide clarity about the board of directors’ discretion in establishing the amount of redemptions that may be processed each quarter and to allow certain priority groups of stockholders with requests made pursuant to circumstances such as death, qualifying disability, bankruptcy or unforeseeable emergency to have their redemption requests processed ahead of the general stockholder population.

We are not obligated to redeem shares under our redemption plan. However, if we elect to redeem shares, the aggregate amount of funds that will be used to redeem shares pursuant to the redemption plan will be

 

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determined on a quarterly basis in the sole discretion of our board of directors and may be less than, but is not expected to exceed, the aggregate proceeds received through our dividend reinvestment plan. In addition, our board of directors determined that we will redeem shares pursuant to the redemption plan of no more than $7.5 million per calendar quarter beginning in the second quarter of 2010. Our board of directors will continue to evaluate and determine the amount of shares to be redeemed based on what it believes to be in the best interests of the company and our stockholders, as the redemption of shares dilutes the amount of cash available to make acquisitions. At no time during a 12-month period, however, may the number of shares we redeem pursuant to the redemption plan (if we determine to redeem shares) exceed 5% of the weighted-average shares of our common stock at the beginning of such 12-month period. To date we have not exceeded this limit, and we do not anticipate that we will reach the maximum number of shares redeemable under our Redemption Plan during the next twelve months.

Subject to certain restrictions discussed below, we may redeem shares, from time to time, at the following prices:

 

   

92.5 % of the original purchase price per share for stockholders who have owned their shares for at least one year;

 

   

95.0% of the original purchase price per share for stockholders who have owned their shares for at least two years;

 

   

97.5% of the original purchase price per share for stockholders who have owned their shares for at least three years; and

 

   

for stockholders who have owned their shares for at least four years, a price determined by our board of directors but in no event less than 100.0 % of the original purchase price per share.

During the period of any public offering, the repurchase price will not exceed the current public offering price of the shares. If there is no current offering, the redemption price will not exceed the estimated fair market value of the shares as determined by the discretion of management. In addition, we have the right to waive the above holding periods and redemption prices in the event of the death, qualifying disability, bankruptcy or unforeseeable emergency of a stockholder as defined under the plan. Redemption of shares issued pursuant to our dividend reinvestment plan will be priced based upon the purchase price from which shares are being reinvested.

Any stockholder who has held shares for not less than one year (other than our Advisor) may present for our consideration, all or any portion equal to at least 25% of such shares to us for redemption at any time. At such time, we may, at our sole option, choose to redeem such shares presented for redemption for cash to the extent we have sufficient funds available. There is no assurance that there will be sufficient funds available for redemption or that we will exercise our discretion to redeem such shares and, accordingly, a stockholder’s shares may not be redeemed. Factors that we will consider in making our determinations to redeem shares include:

 

   

whether such redemption impairs our capital or operations;

 

   

whether an emergency makes such redemption not reasonably practical;

 

   

whether any governmental or regulatory agency with jurisdiction over us demands such action for the protection of our stockholders;

 

   

whether such redemption would be unlawful; and

 

   

whether such redemption, when considered with all other redemptions, sales, assignments, transfers and exchanges of our shares, could prevent us from qualifying as a REIT for tax purposes.

In the event there are insufficient funds to redeem all of the shares for which redemption requests have been submitted, and we have determined to redeem shares, we will redeem pending requests at the end of each quarter in the following order:

 

  (i) pro rata as to redemptions sought upon a stockholder’s death;

 

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  (ii) pro rata as to redemptions sought by stockholders with a qualifying disability;

 

  (iii) pro rata as to redemptions sought by stockholders subject to bankruptcy;

 

  (iv) pro rata as to redemptions sought by stockholders in the event of an unforeseeable emergency;

 

  (v) pro rata as to stockholders subject to mandatory distribution requirements under an individual retirement arrangement (an “IRA”);

 

  (vi) pro rata as to redemptions that would result in a stockholder owning less than 100 shares; and

 

  (vii) pro rata as to all other redemption requests.

With respect to a stockholder whose shares are not redeemed due to insufficient funds in that quarter, the redemption request will be retained by us unless it is withdrawn by the stockholder, and such shares will be redeemed in subsequent quarters as funds become available and before any subsequently received redemption requests are honored, subject to the priority for redemption requests listed in (i) through (vi) above. Until such time as the company redeems the shares, a stockholder may withdraw its redemption request as to any remaining shares not redeemed.

Our board of directors, in its sole discretion, may amend or suspend the redemption plan at any time it determines that such amendment or suspension is in our best interest. If our board of directors amends or suspends the redemption plan, we will provide stockholders with at least 30 days advance notice prior to effecting such amendment or suspension: (i) in our annual or quarterly reports or (ii) by means of a separate mailing accompanied by disclosure in a current or periodic report under the Securities Exchange Act of 1934. While we are engaged in an offering, we will also include this information in a prospectus supplement or post-effective amendment to the registration statement as required under federal securities laws. The redemption plan will terminate, and we no longer shall accept shares for redemption, if and when listing occurs.

Issuer Purchases of Equity Securities. The following table presents details regarding our repurchase of securities between October 1, 2010 and December 31, 2010 (in thousands except per share data).

 

Period

   Total
Number
of Shares
Purchased
     Average
Price Paid
Per Share
     Total Number
of Shares
Purchased

as Part of
Publicly
Announced
Plan
     Maximum
Number of
Shares That

May Yet be
Purchased
Under the
Plan
 

October 1, 2010 through October 31, 2010

     —              —           6,361,248   

November 1, 2010 through November 30, 2010

     —              —           6,361,248   

December 1, 2010 through December 31, 2010

     765,851       $ 9.79         765,851         7,704,391 (1) 
                       

Total

     765,851            765,851      
                       

 

FOOTNOTE:

 

(1) This number represents the maximum number of shares which can be redeemed under the redemption plan without exceeding the five percent limitation in a rolling 12-month period described above and does not take into account the amount the board has determined to redeem or whether there are sufficient proceeds under the redemption plan. Under the redemption plan, we can, at our discretion, use up to $100,000 per calendar quarter of the proceeds from any public offering of our common stock for redemptions.

 

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Item 6. Selected Financial Data

SELECTED FINANCIAL DATA

The following selected financial data for CNL Lifestyle Properties, Inc. should be read in conjunction with “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8.—Financial Statements and Supplementary Data” (in thousands except per share data):

 

    Year Ended December 31,  
    2010     2009     2008     2007     2006  

Operating Data:

         

Revenues

  $ 304,428      $ 253,271      $ 210,415      $ 139,422      $ 21,887   

Operating income (loss)(1)

    (60,271     13,012        57,578        34,661        1,295   

Income (loss) from continuing operations(1)

    (81,889     (19,320     34,240        35,356        19,250   

Discontinued operations(2)

    —          —          2,396        169        135   

Net income (loss)(1)

    (81,889     (19,320     36,636        35,525        19,385   

Net income (loss) per share (basic and diluted):

         

From continuing operations

    (0.31     (0.08     0.16        0.22        0.31   

From discontinued operations

    —          —          0.01        —          —     

Weighted average number of shares outstanding (basic and diluted)

    263,516        235,873        210,192        159,807        62,461   

Distributions declared(3)(4)

    163,939        154,453        128,358        94,067        33,726   

Distributions declared per share(4)

    0.63        0.66        0.62        0.60        0.56   

Cash provided by operating activities

    79,776        62,400        118,782        117,212        45,293   

Cash used in investing activities

    138,575        141,884        369,193        1,221,387        562,480   

Cash provided by financing activities

    75,603        53,459        424,641        842,894        721,293   
    Year Ended December 31,  
    2010     2009     2008     2007     2006  

Balance Sheet Data:

         

Real estate investment properties, net

  $ 2,025,522      $ 2,021,188      $ 1,862,502      $ 1,603,061      $ 464,892   

Investments in unconsolidated entities

    140,372        142,487        158,946        169,350        178,672   

Mortgages and other notes receivable, net

    116,427        145,640        182,073        116,086        106,356   

Cash

    200,517        183,575        209,501        35,078        296,163   

Total assets

    2,673,926        2,672,128        2,529,735        2,042,210        1,103,699   

Long-term debt obligations

    603,144        639,488        539,187        355,620        69,996   

Line of credit

    58,000        99,483        100,000        —          3,000   

Total liabilities

    742,886        822,912        707,363        424,896        104,505   

Rescindable common stock

    —          —          —          —          21,688   

Stockholders’ equity

    1,931,040        1,849,216        1,822,372        1,617,314        977,506   

Other Data:

         

Funds from operations (“FFO”)(1)(5)

    55,553        120,576        148,853        118,378        40,037   

FFO per share

    0.21        0.51        0.71        0.74        0.64   

Modified funds from operations (“MFFO”)(5)

    122,206        141,422        148,853        118,378        40,037   

MFFO per share

    0.46        0.60        0.71        0.74        0.64   

Properties owned directly at the end of period

    114        107        104        90        42   

Properties owned through unconsolidated entities at end of the period

    8        8        10        10        10   

Investments in mortgages and other notes receivable at the end of period

    10        10        11        9        7   

 

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FOOTNOTES:

 

(1) Certain of our tenants continued to experience operating challenges and limited ability to obtain working capital from lenders or capital partners and defaulted on leases and loan obligations to us. For the year ended December 31, 2010, we recorded a loss on lease termination of approximately $55.5 million and recorded a loan loss provision of approximately $4.1 million in notes receivable that were deemed uncollectible in connection with the lease terminations. In addition, we recorded impairment provisions totaling approximately $26.9 million for the year ended December 31, 2010 for the two Great Wolf properties, one golf property and one attraction property. See Item 8, Note 4 “Real Estate Investment Properties, net” to the accompanying consolidated financial statements for additional information.

For the years ended December 31, 2010 and 2009, acquisition fees and costs were approximately $14.1 million and $14.6 million, respectively. These fees were historically capitalized but are currently expensed as a result of new accounting standards effective January 1, 2009.

 

(2) On December 12, 2008, we sold our Talega Golf Course property. In accordance with GAAP, we have reclassified and included the results from the property sold in 2008 as discontinued operations in the consolidated statements of operations for all periods presented.

 

(3) Cash distributions are declared by the board of directors and generally are based on various factors, including actual and future expected net cash from operations, FFO and MFFO, and our general financial condition, among others. Approximately 0.3%, 4.4%, 41.0%, 58.0% and 71.9% of the distributions received by stockholders were considered to be taxable income and approximately 99.7%, 95.6%, 59.0%, 42.0% and 28.1% were considered a return of capital for federal income tax purposes for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively. We have not treated such amounts as a return of capital for purposes of calculating the stockholders’ return on their invested capital, as described in our advisory agreement.

 

(4) In 2009, amount includes a special distribution in connection with the gain on sale of a property in late 2008.

 

(5) FFO is a non-GAAP financial measure that is widely recognized in the REIT industry as a supplemental measure of operating performance. FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate has historically not depreciated on the basis as determined under GAAP, which implies that the value of real estate assets diminishes predictably over time. We believe that FFO is a useful measure that should be considered along with, but not as an alternative to, net income (loss) when evaluating operating performance.

In addition to FFO, we use MFFO, which further adjusts net income (loss) and FFO to exclude acquisition-related costs, impairments, contingent purchase price adjustments and other non-recurring charges in order to further evaluate our ongoing operating performance. Changes in the accounting and reporting rules under GAAP that have been put into effect since the establishment of NAREIT’s definition of FFO have increased the number of non-cash and non-operating items included in net income (loss) and FFO, which management consider to be more reflective of investing activities. For example, the accounting for acquisition costs and expenses have changed from a capitalize and depreciate model to expense as incurred. These costs are paid for with proceeds from our common stock offerings or debt proceeds rather than paid for with cash generated from operations. Similarly, recent accounting standards require us to estimate any future contingent purchase consideration at the time of acquisition and subsequently record changes to those estimates or eventual payments in the statement of operations even though the payment is funded by offering proceeds. Previously under GAAP, these amounts would be capitalized, which is consistent with how these incremental payments are added to the contractual lease basis used to calculate rent for the related property and generates future rental income. Impairments and other non-recurring non-cash write-offs are

 

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not indicative of ongoing results of operations. Therefore, we exclude these amounts in the computation of MFFO. By providing MFFO, we present information that we believe is more consistent with management’s long term view of our core operating activities and is more reflective of a stabilized asset base.

We believe that in order to facilitate a clear understanding of our operating performance between periods and as compared to other equity REITs, FFO and MFFO should be considered in conjunction with our net income (loss) and cash flows as reported in the accompanying consolidated financial statements and notes thereto. FFO and MFFO (i) do not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO or MFFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income (loss)), (ii) are not necessarily indicative of cash flow available to fund cash needs and (iii) should not be considered as alternatives to net income (loss) determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO or MFFO as presented may not be comparable to amounts calculated by other companies.

The following table presents a reconciliation of net income (loss) to FFO and MFFO for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 (in thousands except per share data):

 

     Year Ended December 31,  
     2010     2009     2008     2007      2006  

Net income (loss)

   $ (81,889   $ (19,320   $ 36,636      $ 35,525       $ 19,385   

Adjustments:

           

Depreciation and amortization

     126,223        124,040        98,901        64,883         8,489   

Gain on sale of real estate investment properties

     —          —          (4,470     —           —     

Net effect of FFO adjustment from unconsolidated entities(a)

     11,219        15,856        17,786        17,970         12,163   
                                         

Total funds from operations

     55,553        120,576        148,853        118,378         40,037   
                                         

Acquisition fees and expenses(b)

     14,149        14,616        —          —           —     

Impairments of real estate related investments

     26,880        —          —          —           —     

Impairments of lease assets

     21,347        569        —          —           —     

Impairments of notes receivable

     4,072        —          —          —           —     

Assumption of non-cash deferred charges in connection with lease terminations

     1,705        2,189        —          —           —     

Contingent purchase price adjustments

     (1,500     3,472        —          —           —     
                                         

Modified funds from operations

   $ 122,206      $ 141,422      $ 148,853      $ 118,378       $ 40,037   
                                         

Weighted average number of shares of common stock outstanding (basic and diluted)

     263,516        235,873        210,192        159,807         62,461   
                                         

FFO per share (basic and diluted)

   $ 0.21      $ 0.51      $ 0.71      $ 0.74       $ 0.64   
                                         

MFFO per share (basic and diluted)

   $ 0.46      $ 0.60      $ 0.71      $ 0.74       $ 0.64   
                                         

 

FOOTNOTES:

 

(a) This amount represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) multiplied by the percentage of income or loss recognized under the hypothetical liquidation at book value (“HLBV”) method.

 

(b) Acquisition fees and costs that were directly identifiable with properties acquired were not required to be expensed under GAAP prior to January 1, 2009. Accordingly, no adjustments to funds from operations are necessary for periods prior to 2009.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

CNL Lifestyle Properties, Inc. was organized pursuant to the laws of the State of Maryland on August 11, 2003. We were formed primarily to acquire lifestyle properties in the United States that we lease on a long-term (generally five to 20 years, plus multiple renewal options), triple-net or gross basis to tenants or operators that we consider to be significant industry leaders and engage third-party operators to manage certain properties on our behalf as permitted under applicable tax regulations. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. We also make and acquire loans (including mortgage, mezzanine and other loans) generally collateralized by interests in real estate. We currently operate and have elected to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2004. We have retained CNL Lifestyle Company, LLC, as our Advisor to provide management, acquisition, advisory and administrative services.

GENERAL

Our principal business objectives include investing in and owning a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We have built a portfolio of properties that we consider to be well-diversified by region, asset type and operator. As of March 10, 2011 we had a portfolio of 150 lifestyle properties, which when aggregated by initial purchase price was diversified as follows: approximately 23% in ski and mountain lifestyle, 21% in golf facilities, 14% in senior living, 16% in attractions, 7% in marinas and 19% in additional lifestyle properties. These assets consist of 22 ski and mountain lifestyle properties, 53 golf facilities, 29 senior living, 21 attractions, 17 marinas and eight additional lifestyle properties. Thirty seven of these 150 properties are owned through unconsolidated entities. As of December 31, 2010, we had 122 properties, of which 89 consolidated properties were subject to long-term triple-net leases to single tenant operators (fully occupied) with a weighted-average lease rate of 8.8% and average lease expiration of 17 years. This rate is based on the weighted-average annualized straight-lined base rent due under our leases.

Economic and Market Trends

Although the U.S economy has shown signs of recovery, concerns continue to exist over the general economic conditions including unemployment rates, the effects of unrest in the Middle East and rising oil prices, inflationary risks, rising costs, and a lack of consumer confidence. In addition, the availability of debt continued to be limited and when available, we have seen an increase in the cost of borrowing over historical rates, which we expect to continue. Across our portfolio, we have seen indications of recovery. Entering the 2010/2011 season, our ski resorts saw strong sales of season passes, with multiple resorts pacing ahead of prior year revenues and units sold. We have also noticed a slight rise in early bookings for events at certain golf and resort properties.

Our research indicates that consumers are still spending time and money on the type of lifestyle and leisure activities supported by our properties. The trend in “staycations”, which is generally defined as a period of time in which an individual or family engages in nearby leisure activities or takes regional day trips from their home to area attractions as opposed to taking destination or fly-to vacations, that emerged in 2008 continued into 2010. Even in a down market, spending on leisure pursuits continues. While certain consumers reduce their spending, they continue to seek leisure and recreational outlets to create memories with family and friends. We believe that many of our properties managed through the recession because of their accessible drive-to locations and the types of activities and experiences offered at a range of affordable price points. This is evidenced by the generally sustained or only modest decreases in visitation levels, on average across our portfolio. See “Asset Classes and Industry Trends” below for additional information about recent trends impacting the industries in which we operate.

Our total assets were approximately 25% leveraged at December 31, 2010, with approximately 85% of our debt comprised of long-term, fixed-rate mortgage loans (including amounts which are effectively fixed through the use of interest rate swaps). We expect to see greater availability of debt financing in the next 12 months,

 

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however, at increasing borrowing rates. The limited availability of debt continued to create challenges for our tenants during 2010, especially those operators with seasonal business that have historically relied on working capital from lenders or capital partners during their off season.

We continue to monitor the economic environment, capital markets and the financial stability of our tenants in an effort to mitigate the impact of any negative trends. We cannot predict the extent to which these trends will continue, worsen or improve or the timing and nature of any changes to the macroeconomic environment, including the impact it may have on our future results of operations and cash flows. In response to the economic and market pressures, we have focused on liquidity, maintained a strong balance sheet with significant cash balances and low leverage, proactively monitored tenant performance, restructured tenant leases and terminated tenant relationships when necessary and strengthened relationships with key constituents including tenants and lenders. Going forward, we will focus on asset management in order to drive income and capitalize on the economic recovery.

We have, and intend to maintain, a low leverage ratio. Our conservative lease structures generally require security deposits and include cross-default provisions when multiple properties are leased to a single tenant. Our leases also provide inflationary protection through scheduled increases in base rent over the term as well as additional rents due based on a percentage of gross revenues at the properties.

Asset Class and Industry Trends

Although we primarily lease our properties to tenant operators that bear the primary variability in property performance and net operating results, certain economic and industry trends that impact our tenants’ operations can ultimately impact our operating performance. For example, positive growth in visitation and per capita spending may result in our receipt of additional percentage rent and declines may impact our tenants’ ability to pay rent to us.

Ski and Mountain Lifestyle. According to the National Ski Area Association (NSAA) and the Kottke National End of Season Survey 2009/10, the U.S. ski industry recorded an exceptional snow year with 59.8 million ski and snowboard visits for the 2009/10 ski season, representing the second best season ever and only 1.2% below the all time record of 60.5 million visits in 2007/08. On average, our ski resorts finished the winter season for 2009/2010 with skier visits totaling 5.5 million, or 2.5% below the previous year. Entering the 2010/2011 ski season, our resorts saw strong sales of season passes, with multiple resorts pacing ahead of prior year revenues and units sold. As of the date of this filing, and although the 2010/11 season is not completed, we have seen revenue per visit trends improve over the 2009/10 season, largely attributed to favorable snow conditions and an improvement in the U.S. economy with visitors increasing discretionary spending on retail items and food and beverage, in addition to “core” revenue areas including lift tickets, ski and snowboard rentals, and ski school. The trend experienced during the past two ski seasons that saw regional destination and day ski resorts prosper to a greater extent than fly-to destination resorts continues to affect the U.S. ski industry in general, as well as our ski and Mountain lifestyle portfolio. As our portfolio continues to be heavily weighted toward regional and day ski resorts located near large drive-to markets, we are well positioned to continue benefitting from this trend.

Golf. According to Golf Datatech, one of the industry’s leading providers of information, reported total rounds played in the U.S. for the twelve month period ended December 2010 was down by 2.3% from the same period in 2009. The National Golf Foundation (“NFG”) continues to expect the net supply of facilities (openings less closures) to decline until the supply and demand reach equilibrium. Our golf facilities experienced a decrease in total rounds played by 3.4% compared to the same period in 2009. Although, we have seen slight improvements in private clubs, we believe unfavorable weather patterns and high unemployment contributed to the decline in rounds played.

Attractions. Our properties include regional gated amusement parks and water parks that generally draw most of their visitation from local markets. Regional and local attractions have historically been somewhat resistant to recession, with inclement weather being a more significant factor impacting attendance. Our portfolio on average experienced an increase in revenue and per capita spending of 3.4% and 10.5%, respectively, over prior year. According to the most recent IBIS World Industry Report for “Amusement & Themeparks in the US” released in November 2010, revenues at domestic parks are expected to grow by an average annual rate of

 

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3.1% through 2015. Based on these trends and industry research we believe that the attraction properties in our portfolio have the potential for long term growth and revenue generation.

Marinas. According to the September 2010 IBIS World Industry Report on “Marinas in the US”, the industry is highly fragmented, with 93% of companies employing fewer than 20 people. Therefore, the industry has a large number of small, locally operated and owned establishments. High barriers to entry limit the supply of competing properties and demand is projected to rise as the number of boat sales increase. Common industry drivers are boat ownerships, slip rental, and occupancy. Marina operators are affected by government regulations, rising fuel prices, and general economic conditions. During 2010, we added six properties to our portfolio for a total of 17 marinas which are located primarily in the West, Southeast, Great Lakes and Mid Atlantic regions. According to IBIS World, the industry is relatively mature and revenue is forecasted to grow by approximately 0.9% per year through 2015. The report also indicates that the economic recession has had a relatively limited impact on the industry, as revenues were projected to fall approximately 0.3% in 2010 over 2009 to $3.88 billion.

Effects of Recent Trends on Our Portfolio

Lease Terminations. As noted above, although visitation at our properties has generally been sustained or slightly changed, some of our tenants continued to experience operating challenges and limited ability to obtain working capital from lenders or capital partners. While PARC Management (“PARC”) was current on its contractual scheduled rent payments to us through September 30, 2010 and reported improved property-level performance over the prior year, its management continued to experience working capital issues and defaulted on its leases and loan obligations to us in October 2010. As a result, we terminated our leases with PARC and transitioned the properties to new third-party operators effective on or before February 2011. In connection with this transition, we recorded a loss on lease terminations for the year ended December 31, 2010 totaling approximately $53.7 million, which includes the write-offs and expenses of approximately $5.5 million in intangible lease assets, approximately $14.6 million in lease incentives, approximately $18.4 million in deferred rents and approximately $15.2 million in lease termination payments. In addition, we recorded a loan loss provision of approximately $4.1 million related to the notes receivable and accrued interest, which were deemed uncollectible. For the year ended December 31, 2010, we also terminated our lease on an additional lifestyle property and recorded loss on lease termination of approximately $1.8 million. Going forward, the rental income that was previously recorded under the operating leases will be replaced by the operating revenues and expenses of the properties in our consolidated statements of operations until new leases are entered into. Our operating results will experience seasonal fluctuations on these attraction properties resulting in losses during the winter months due to closure of the properties and income during their profitable summer months.

We continue to have concentrations of credit risk with our EAGLE and Boyne tenants, which, individually accounted for 10% or more of our total revenue for the years ended December 31, 2010, 2009 and 2008, and we continuously monitor the property performance and health of these operators. The failure of any of these tenants to pay contractual lease payments could significantly impact our results of operations and cash flows from operations.

We continue to closely monitor the performance of all tenants, their financial strength and their ability to pay rent under the leases for our properties. Our asset managers review operating results and rent coverage compared to budget for each of our properties on a monthly basis, monitor the local and regional economy, competitor activity, and other environmental, regulatory or operating conditions for each property, make periodic site visits and engage in regular discussions with our tenants.

Impairments. We have been monitoring the performance of our two Great Wolf Lodge properties, which have had ongoing challenges due to the general economic conditions, local market conditions and competition over the past several years. During 2010, management determined that the property level performance was not recovering as originally anticipated and that it was no longer in our best interest to fund debt service on the non-recourse loans encumbering the properties at the current level without a modification of the existing terms. If we are unable to restructure the loans with more favorable terms, we may decide to deed the properties back to the lender in lieu of foreclosure to satisfy the non-recourse loans. As of the date of this filing, we continue our negotiation to modify the loan in an attempt to obtain more favorable terms. Due to these changes in circumstances, we evaluated the carrying values of the properties for impairment, and based on a probability weighted analysis of the estimated undiscounted cash flows under the potential scenarios and holding periods, we

 

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determined that the carrying value of the assets may not be recoverable. As a result, at September 30, 2010, we reduced the carrying values of the properties to the estimated fair value of approximately $58.9 million by recording an impairment provision in the amount of $24.2 million.

Also, during the year ended December 31, 2010, we determined that the carrying values of one golf property and one attractions property were not fully recoverable and recorded an impairment provision of approximately $2.7 million for the related assets.

We continue to believe that our properties have long-term value, and we will continue to manage our portfolio through these temporary and cyclical market conditions with a long-term view. Our portfolio contains unique, iconic or nonreplicable properties with long-established operating histories. The following information shows the average operating history of each of our operating asset classes based on the date the properties in our portfolio were first opened. Further, it demonstrates the longevity of these assets through a number of economic down-cycles during their operating history.

LOGO

SOURCE: Economic Cycles as defined by the National Bureau of Economic Research. Average years of operation by property and asset class compiled from Schedule III as included in this filing on form 10-K.

 

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LIQUIDITY AND CAPITAL RESOURCES

General

During the year ended December 31, 2010, we focused on maintaining our liquidity and the preservation of capital. Our principal demand for funds during the short and long-term will be for property acquisitions and enhancements, payment of operating expenses, debt service and distributions to stockholders. Generally, our cash needs for items other than property acquisitions and enhancements are generated from operations and our existing investments. The sources of our operating cash flows are primarily driven by the rental income, net security deposits received from leased properties, property operating income for managed properties, interest payments on the loans we make, interest earned on our cash balances and distributions from our unconsolidated entities. A reduction in cash flows from any of these sources could result in the need to borrow more to maintain the same level of distributions or in a decrease in the level of distributions. In addition, we have a revolving line of credit of $85.0 million, of which $58.0 million was drawn as of December 31, 2010.

Going forward, we intend to make select property acquisitions within the parameters of our conservative investment policies with our cash on hand, the proceeds from our distribution reinvestment plan, our line of credit and other long-term debt financing. If sufficient funds are not raised, or if affordable debt is unavailable, it could limit our ability to make significant acquisitions.

We intend to continue to pay distributions to our stockholders on a quarterly basis. Operating cash flows are expected to continue to be generated from properties, loans and other permitted investments to cover a significant portion of such distributions and any temporary shortfalls are expected to be funded with cash borrowed under our line of credit. In the event that our properties do not perform as expected or our lenders place additional limitations on our ability to pay distributions, we may not be able to continue to pay distributions to stockholders or may need to reduce the distribution rate or borrow to continue paying distributions, all of which may negatively impact a stockholder’s investment in the long-term.

We believe that our current liquidity needs for operating expenses, debt service and cash distributions to stockholders will be adequately covered by cash generated from our investments and other sources of available cash. We believe that we will be able to refinance the majority of our debt as it comes due and will be exploring additional borrowing opportunities. The acquisition of additional real estate investments will be dependent upon the amount and pace of capital raised through our public offerings and our ability to obtain additional long-term debt financing.

Sources of Liquidity and Capital Resources

Common Stock Offering

Our main source of capital is from our common stock offerings. As of December 31, 2010, we had received approximately $3.0 billion (301.2 million shares) in total offering proceeds from all three offerings. During the period from January 1, 2011 through March 10, 2011, we received additional subscription proceeds of approximately $88.3 million (8.8 million shares).

The amount of capital raised through our public offerings for the years ended December 31, 2010, 2009 and 2008 was approximately $406.4 million, $293.3 million and $387.0 million, respectively, which represents an increase of 38.6% from 2010 compared to 2009 and a decrease of 24.2% from 2009 compared to 2008. We believe the increase was, in part, due to a slight improvement in the U.S economy. The decrease from 2009 as compared to 2008 resulted from impact of the economic downturn and increased competition in the unlisted REIT industry.

We do not intend to commence another public offering of our shares following the termination of our current public offering on April 9, 2011. However, we intend to continue offering shares through our

 

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reinvestment plan. In making this decision, the board of directors considered a number of factors, including the Company’s size and diversification of our portfolio and our relatively low leverage and strong cash position, as well as the current stage of our lifecycle.

Borrowings

We have borrowed and intend to continue to borrow money to acquire properties and to pay certain related fees and to cover periodic shortfalls between distributions paid and cash flows from operating activities. See “Distributions” below for additional information. In general, we have pledged our assets in connection with such borrowings. We have also borrowed, and may continue to borrow, money to pay distributions to stockholders in order to avoid distribution volatility. As discussed above, the availability of debt has been significantly restricted in the last two years due to the global economic downturn. The aggregate amount of long-term financing is not expected to exceed 50% of our total assets on an annual basis. As of December 31, 2010, our leverage ratio was 25% using our total indebtedness over our total assets.

As of December 31, 2010 and 2009, we had the following indebtedness (in thousands):

 

     December 31,
2010
     December 31,
2009
 

Mortgages payable

     

Fixed rate debt

   $ 412,478       $ 416,527   

Variable rate debt(1)

     138,666         145,861   

Sellers financing

     

Fixed rate debt

     52,000         77,100   
                 

Total mortgages and other notes payable

     603,144         639,488   
                 

Line of credit

     58,000         99,483   
                 

Total indebtedness

   $ 661,144       $ 738,971   
                 

 

FOOTNOTE:

 

(1) Amount includes variable rate debt of approximately $95.5 million and $103.0 million as of December 31, 2010 and 2009, respectively that has been swapped to fixed rates.

On December 6, 2010, we restructured the mortgage loan collateralized by our multi-family residential property with an original principal balance of approximately $85.4 million to $66.4 million, under a troubled debt restructure. In connection with the restructure, Tranche B and C notes with a principal balance of $22.1 million were satisfied with a repayment of $6.0 million and the remaining balance was forgiven. The Tranche A was modified to an interest rate of LIBOR + 1.25% and the maturity was extended to January 2, 2016. At the same time, we terminated two interest rate swaps that were designated as cash flow hedges totaling $74.0 million with fixed interest rates of 5.805% to 6.0% and entered into a new interest rate swap of $57.3 million with a blended fixed rate of 3.12% for the term of the loan. The fair value of this instrument has been recorded as an asset of approximately $0.5 million as of December 31, 2010. Through the December 6, 2010 date of termination, we recorded the changes in the fair value of these interest rate swaps of approximately $9.0 million included in other comprehensive loss of which approximately $2.4 million relating to the ineffectiveness change in fair value and reduction in hedge liabilities resulting from the termination were reclassified and included in statements of operations as interest expense. In addition, we began amortizing the remaining approximately $6.6 million in other comprehensive loss over the remaining period of the loan since the originally forecasted payments are still probable of occurring. The troubled debt restructure resulted in a gain on extinguishment of debt of approximately $14.4 million or a gain in earnings of approximately $0.05 per share and is included in the accompanying consolidated statements of operations for the year ended December 31, 2010. Our management evaluated the residential property’s operating performance and based on the estimated current and projected operating cash flows, the property is not deemed impaired.

 

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In connection with the lease termination and settlement agreement with PARC as discussed above, the Company repaid the unsecured seller financing with the $10.0 million collateral provided in March 2010 and approximately $6.0 million in cash resulting in a gain in extinguishment of debt of approximately $0.9 million.

On November 1, 2010, in order to induce the special servicer of the loan pool to enter into discussions regarding a loan restructure, we elected not to make the scheduled loan payment, thereby defaulting under the non-recourse loan which had an outstanding principal balance of approximately $62.0 million as of that date. As a result, the loan may be accelerated at the option of the lender. As of the date of this filing, we continue our negotiation to modify the loan in an attempt to obtain more favorable terms; however, there can be no assurances that we will be successful in obtaining a modification of the loan terms. If we are successful in obtaining a modification of the loan, we may consider continuing to hold the properties long term. However, if we are unsuccessful in negotiating more favorable terms, we may decide that it is in our best interest to deed the properties back to the lender in lieu of foreclosure to satisfy the non-recourse loan.

See Note 12 “Mortgages and Other Notes Payable” and Note 13 “Line of Credit” to the accompanying consolidated financial statements in Item 8. for additional information including interest rates, maturity dates and other loan terms.

As of December 31, 2010, three of our loans require us to meet certain customary financial covenants and ratios, with which we were in compliance. Our other long-term borrowings are not subject to any significant financial covenants.

See also “Off Balance Sheet and Other Arrangements—Borrowings of Our Unconsolidated Entities” for a description of the borrowings of our unconsolidated entities.

Operating Cash Flows

Our net cash flows provided by operating activities was approximately $79.8 million for the year ended December 31, 2010 which consisted primarily of rental income from operating leases, property operating revenues, interest income on mortgages and other notes receivable, distributions from our unconsolidated entities and interest earned on cash balances offset by payments made for operating expenses including property operating expenses and asset management fees to our Advisor. Net cash flows provided by operating activities was approximately $62.4 million for the year ended December 31, 2009. The increase in operating cash flows of approximately $17.4 million or 27.9% as compared to the prior year is principally attributable to:

 

   

A reduction in rent deferrals during 2010 as compared to 2009;

 

   

An increase in interest income received from mortgages and other notes receivable resulting from additional issuances of loans during 2010;

 

   

An increase in distributions received from our unconsolidated entities. In 2009, we contributed cash to the DMC Partnership to exercise our option to purchase the land under the DMC property, which increased our ownership in the partnership, offset, in part, by;

 

   

The incurrence of off-season carrying costs associated with the transition of the properties previously leased to PARC;

 

   

An increase in interest expenses on our borrowings due to our higher level of indebtedness; and

 

   

An increase in our operating expenses as a result of the increase in our total assets under management.

 

Distributions from Unconsolidated Entities

As of December 31, 2010, we had investments in eight properties through unconsolidated entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities to the extent there is cash

 

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available to distribute. For the years ended December 31, 2010 and 2009, we were declared operating distributions of approximately $12.8 million and $11.2 million, respectively, from the operation of these entities. These distributions are generally received within 45 days after each quarter end. We received cash distributions from our unconsolidated entities of approximately $12.7 million and $10.8 million for the years ended December 31, 2010 and 2009, respectively.

The following table summarizes the change in distributions declared to us from our unconsolidated entities (in thousands):

 

      For the year ended December 31,  

Period

   2010      2009      $ Change      % Change  

DMC Partnership

   $ 11,263       $ 10,427       $ 836         8.0

Intrawest Venture

     1,579         809         770         95.2
                             

Total

   $ 12,842       $ 11,236       $ 1,606      
                             

The Retail Villages owned by the Intrawest Venture were impacted by the recession resulting in reduced cash distributions declared to us in 2009. During the year ended December 31, 2010, operating results at these properties began to improve, which resulted in greater distributions to us as compared to the same period in 2009. Distributions from the DMC Partnership increased as a result of additional capital we invested in the venture in August 2009 and the distribution preferences we have ahead of our partner in this investment.

Uses of Liquidity and Capital Resources

Acquisitions and Investments in Unconsolidated Entities

Since our inception we have used proceeds from our common stock offerings to acquire new properties, make additional capital improvements at existing properties, make and acquire loans and make investments in unconsolidated entities. During the year ended December 31, 2010, we acquired the following properties (in thousands).

 

Property/Description

   Location      Date of
Acquisition
     Purchase
Price
 

Anacapa Isle Marina—

One marina (leasehold interest)

     California         3/12/2010       $ 9,829   

Ballena Isle Marina—

One marina (leasehold and fee interests)

     California         3/12/2010         8,179   

Cabrillo Isle Marina—

One marina (leasehold interest)

     California         3/12/2010         20,575   

Ventura Isle Marina—

One marina (leasehold interest)

     California         3/12/2010         16,417   

Bohemia Vista Yacht Basin—

One marina (fee interest)

     Maryland         5/20/2010         4,970   

Hack's Point Marina—

One marina (fee interest)

     Maryland         5/20/2010         2,030   

Pacific Park—

One attraction (leasehold interest)

     California         12/29/2010         34,000   
              
        Total       $ 96,000   
              

The properties above are subject to long-term triple-net leases with renewal options. In connection with the transactions, we paid approximately $81.0 million in cash, net of approximately $1.0 million deposit made in

 

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2009, excluding transaction costs, and assumed three existing loans collateralized by three properties, Anacapa Isle Marina, Cabrillo Isle Marina and Ventura Isle Marina, with an aggregate outstanding principal balance of approximately $14.0 million, which were recorded at their estimated fair values of approximately $13.6 million.

On January 10, 2011, we acquired an ownership interest in 29 senior living facilities (the “Communities”). We entered into agreements with US Assisted Living Facilities III, Inc., an affiliate of an institutional investor (“Seller”), and Sunrise Senior Living Investments, Inc. (“Sunrise”) to acquire the Communities through a new joint venture formed by us and Sunrise (the “Sunrise Venture”), valued at approximately $630.0 million. We acquired sixty percent (60%) of the membership interests in the Sunrise Venture for an equity contribution of approximately $134.3 million, including certain transactional and closing costs. Sunrise contributed cash and its interest in the previous joint venture with Seller (the “Old Venture”) for a forty percent (40%) membership interest in the Sunrise Venture. The Sunrise Venture obtained $435.0 million in loan proceeds from new debt financing, a portion of which was used to refinance the existing indebtedness encumbering the Communities.

Mortgages and Other Notes Receivable, net

We use cash raised through our public offerings to make or acquire real estate related loans. As of December 31, 2010 and 2009, we had loans outstanding with carrying values of approximately $116.4 million and $145.6 million, respectively. During 2010, we collected $38.6 million in repayment of loans and made additional loans totaling approximately $14.9 million. As of December 31, 2010 and 2009, mortgages and other notes receivable consisted of the following (in thousands):

 

      December 31,  
      2010     2009  

Principal

   $ 116,503      $ 140,228   

Accrued interest

     2,347        2,628   

Acquisition fees, net

     1,750        2,956   

Loan origination fees, net

     (101     (172

Loan loss provision

     (4,072     —     
                

Total carrying amount

   $ 116,427      $ 145,640   
                

See Note 8, “Mortgages and Other Notes Receivable, net” to the accompanying consolidated financial statements in Item 8. for additional information including interest rates, maturity dates and other loan terms.

The following is a schedule of future maturities for all mortgages and other notes receivable (in thousands):

 

2011

   $ 93   

2012

     86,310   

2013

     4,112   

2014

     122   

2015

     134   

Thereafter

     20,673   
        

Total

   $ 111,444 (1) 
        

 

FOOTNOTE:

 

(1) Amount is presented net of loan loss provision and a parcel of land with a fair value of $1.0 million to be deeded to us to satisfy a portion of the loan.

 

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Distributions

We intend to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”—“Distributions” for additional information.

Approximately 99.7% and 95.6% of the distributions for the years ended 2010 and 2009, respectively, constitute a return of capital for federal income tax purposes. Due to seasonality of rent collections, rent deferrals and other factors, the characterization of distributions declared for the year ended December 31, 2010 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2011. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement.

Common Stock Redemptions

The following details our redemptions for the year ended December 31, 2010 (in thousands except per share data).

 

2010 Quarters

   First     Second     Third     Fourth     Year to Date  

Requests in queue

     1,324        1,387        2,263        3,043        1,324   

Redemptions requested

     1,981        1,746        1,583        1,372        6,682   

Shares redeemed:

          

Prior period requests

     (1,200     (538     (540     (558     (2,836

Current period requests

     (594     (225     (226     (208     (1,253

Adjustments(1)

     (124     (107     (37     (54     (322
                                        

Pending redemption requests(2)

     1,387        2,263        3,043        3,595        3,595   
                                        

Average price paid per share

   $ 9.73      $ 9.83      $ 9.79      $ 9.79      $ 9.77   

2009 Quarters

   First     Second     Third     Fourth     Year to Date  

Requests in queue

     —          —          1,297        1,301        —     

Redemptions requested

     2,268        3,409        1,762        1,872        9,311   

Shares redeemed:

          

Prior period requests

     —          —          (1,297     (1,173     (2,470

Current period requests

     (2,268     (2,112     (461     (598     (5,439

Adjustments(1)

     —          —          —          (78     (78
                                        

Pending redemption requests(2)

     —          1,297        1,301        1,324        1,324   
                                        

Average price paid per share

   $ 9.55      $ 9.58      $ 9.70      $ 9.35      $ 9.55   

 

FOOTNOTES:

 

(1) This amount represents redemption request cancellations and other adjustments.

 

(2) Requests that are not fulfilled in whole during a particular quarter will be redeemed on a pro rata basis pursuant to the redemption plan.

The redemption price per share is based on the amount of time that the redeeming stockholder has held the applicable shares, but in no event is the redemption price greater than the price of shares sold to the public in our offerings.

In the event there are insufficient funds to redeem all of the shares for which redemption requests have been submitted, redemptions will occur on a pro rata basis at the end of each quarter, with the actual redemption

 

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occurring at the beginning of the next quarter. Stockholders whose shares are not redeemed due to insufficient funds in that quarter will have their requests carried forward and be honored at such time as sufficient funds exist. In such case, the redemption request will be retained and such shares will be redeemed before any subsequently received redemption requests are honored subject to certain priority groups for hardship cases. Redeemed shares are considered retired and will not be reissued.

In March 2010, we amended our redemption plan to provide clarity about the board of directors’ discretion in establishing the amount of redemptions that may be processed each quarter and to allow certain priority groups of stockholders with requests made pursuant to circumstances such as death, qualifying disability, bankruptcy or unforeseeable emergency to have their redemption requests processed ahead of the general stockholder population. In addition, our board of directors determined that we will redeem shares pursuant to the redemption plan of no more than $7.5 million per calendar quarter beginning in the second quarter of 2010. Our board of directors will continue to evaluate and determine the amount of shares to be redeemed based on what it believes to be in the best interests of the company and our stockholders, as the redemption of shares dilutes the amount of cash available to make acquisitions.

Stock Issuance Costs and Other Related Party Arrangements

Certain of our directors and officers hold similar positions with our Advisor and CNL Securities Corp. (the “Managing Dealer”), which is the managing dealer for our public offerings. Our chairman of the board indirectly owns a controlling interest in CNL Financial Group, LLC, the parent company of our Advisor and indirect parent of the Managing Dealer. These entities receive fees and compensation in connection with our stock offerings and the acquisition, management and sale of our assets. Amounts incurred relating to these transactions were approximately $72.4 million, $56.3 million and $69.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Of these amounts, approximately $5.6 million and $4.2 million is included in the due to affiliates line item in the accompanying consolidated balance sheets as of December 31, 2010 and 2009, respectively. Our Advisor and its affiliates are entitled to reimbursement of certain expenses and amounts incurred on our behalf in connection with our organization, offering, acquisitions, and operating activities. Reimbursable expenses for the years ended December 31, 2010, 2009 and 2008 were approximately $13.2 million, $13.3 million and $11.6 million, respectively.

Pursuant to the advisory agreement, we will not reimburse our Advisor for any amount by which total operating expenses paid or incurred by us exceed the greater of 2.0% of average invested assets or 25.0% of net income (the “Expense Cap”) in any expense year. For the expense years ended December 31, 2010, 2009 and 2008, operating expenses did not exceed the Expense Cap.

We also maintain accounts at a bank in which our chairman and vice-chairman serve as directors. We had deposits at that bank of approximately $5.3 million and $26.1 million as of December 31, 2010 and 2009, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Consolidation. Our consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All inter-company transactions, balances and profits have been eliminated in consolidation. In addition, we evaluate our investments in partnerships and joint ventures for consolidation based on whether we have a controlling interest, including those in which we have been determined to be a primary beneficiary of a variable interest entity (“VIE”) or meets certain criteria of a sole general partner or managing member in accordance with the Consolidation guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

Effective January 1, 2010, we adopted the amended accounting guidance on consolidations as follows: (i) replaced the quantitative-based risks and rewards calculation for determining when a reporting entity has a

 

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controlling financial interest in a variable interest entity (“VIE”) with a qualitative approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity and (ii) requires additional disclosures about a reporting entity’s involvement in VIEs. This consolidation guidance for VIEs also: (i) requires ongoing consideration, rather than only when specific events occur, of whether an entity is a primary beneficiary of a VIE; (ii) eliminates substantive removal rights consideration in determining whether an entity is VIE; and (iii) eliminates the exception for troubled debt restructurings as an event triggering reconsideration of an entity’s status as a VIE. The adoption of this guidance did not have a material impact on our financial position or results of operations.

The application of these accounting principles requires management to make significant estimates and judgments about our rights and our venture partners’ rights, obligations and economic interests in the related venture entities. For example, under this pronouncement, there are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and if so, if we are the primary beneficiary. This includes determining the expected future losses of the entity, which involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our the financial statements.

Investments in unconsolidated entities. The equity method of accounting is applied with respect to investments in entities for which we have determined that consolidation is not appropriate and we have significant influence. We record equity in earnings of the entities under the HLBV method of accounting. Under this method, we recognize income in each period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. Under this method, in any given period, we could be recording more or less income than actual cash distributions received and more or less than what we may receive in the event of an actual liquidation.

Leases. Our leases are accounted for as operating leases. Lease accounting principles require management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant in order to determine the proper lease classification. Changes in our estimates or assumptions regarding collectability of lease payments, the residual value or economic lives of the leased property could result in a change in lease classification and our accounting for leases.

Revenue recognition. For properties subject to operating leases, rental revenue is recorded on a straight-line basis over the terms of the leases. Additional percentage rent that is due contingent upon tenant performance thresholds, such as gross revenues, is deferred until the underlying performance thresholds have been achieved. Property operating revenues from managed properties, which are not subject to leasing arrangements, are derived from room rentals, food and beverage sales, ski and spa operations, golf operations, membership dues, ticket sales, concessions, waterpark and themepark operations and other service revenues. Such revenues, excluding membership dues, are recognized when rooms are occupied, when services have been performed, and when products are delivered. Membership dues are recognized ratably over the term of the membership period. For mortgages and other notes receivable, interest income is recognized on an accrual basis when earned, except for loans placed on non-accrual status, for which interest income is recognized when received. Any deferred portion of contractual interest is recognized on a straight-line basis over the term of the corresponding note. Loan origination fees charged and acquisition fees incurred in connection with the making of loans are recognized as interest income, and a reduction in interest income, respectively over the term of the notes.

Impairments. We test the recoverability of our directly-owned real estate whenever events or changes in circumstances indicate that the carrying value of those assets may be impaired. Factors that could trigger an

 

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impairment analysis include, among others: (i) significant underperformance relative to historical or projected future operating results; (ii) significant changes in the manner of use or estimated holding period of our real estate assets or the strategy of our overall business; (iii) a significant increase in competition; (iv) a significant adverse change in legal factors or an adverse action or assessment by a regulator, which could affect the value of our real estate assets; or (v) significant negative industry or economic trends. When such factors are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we would recognize an impairment provision to adjust the carrying amount of the asset to the estimated fair value. Fair values are generally determined based on incorporating market participant assumptions, discounted cash flow models and our estimates reflecting the facts and circumstances of each acquisition.

For investments in unconsolidated entities, management monitors on a continuous basis whether there are any indicators, including the underlying investment property operating performance and general market conditions, that the value of the investments in unconsolidated entities may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent an impairment has occurred, the loss would be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

The estimated fair values of our unconsolidated entities are based upon a discounted cash flow model that includes all estimated cash inflows and outflows over the expected holding period. The discounted cash flow model contains significant judgments and assumptions including discount and capitalization rates and forecasted operating performance of the underlying properties. The capitalization rates and discount rates utilized in these models are based upon rates that we believe to be within a reasonable range of current market rates for the underlying properties.

Mortgages and other notes receivable. Mortgages and other notes receivable are recorded at the stated principal amounts net of deferred loan origination costs or fees. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the note. An allowance for loan loss is calculated by comparing the carrying value of the note to the estimated fair value of the underlying collateral. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan loss not to exceed the original carrying amount of the loan. Interest income on performing loans is accrued as earned. Interest income on impaired loans is recognized as collected. The estimated fair market value of the underlying loan collateral is determined by management using appraisals and internally developed valuation methods. These models are based on a variety of assumptions. Changes in these assumptions could positively or negatively impact the valuation of our impaired loans.

Derivative instruments and hedging activities. We utilize derivative instruments to partially offset the effect of fluctuating interest rates on the cash flows associated with our variable-rate debt. We follow established risk management policies and procedures in our use of derivatives and do not enter into or hold derivatives for trading or speculative purposes. We record all derivative instruments on the balance sheet at fair value. On the date we enter into a derivative contract, the derivative is designated as a hedge of the exposure to variable cash flows of a forecasted transaction. The effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently recognized in the statement of operations in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. Any ineffective portion of the gain or loss is reflected in interest expense in the statement of operations. Determining fair value and testing effectiveness of these financial instruments requires management to make certain estimates and judgments. Changes in assumptions could have a positive or negative impact on the estimated fair values and measured effectiveness of such instruments could in turn impact our results of operations.

 

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Accounting for property acquisitions. For each acquisition, we record the fair value of the land, buildings, equipment, intangible assets, including in-place lease origination costs and above or below market lease values, and any assumed liabilities on contingent purchase consideration. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values are determined based on incorporating market participant assumptions, discounted cash flow models and our estimates reflecting the facts and circumstances of each acquisition.

Mortgages and other notes payable. Mortgages and other notes payable are recorded at the stated principal amount and are generally collateralized by our lifestyle properties with monthly interest only and/or principal payments. A loan that is accounted for as a troubled debt restructure is recorded at the future cash payments, principal and interest, specified by the new terms. We have and may undergo a troubled debt restructuring if management determines that the underlying collateralized properties are not performing to meet debt service. In order to qualify as a troubled debt restructuring, the following must apply: (i) the underlying collateralized property value decreased as a result of the economic environment, (ii) transfer of asset (cash) to partially satisfy the loan has occurred and (iii) new loan terms decrease the interest rate and extend the maturity date. The difference between the future cash payments specified by the new terms and the carrying value immediately preceding the restructure is recorded as gain on extinguishment of debt. For the year ended December 31, 2010, we restructured one of our loans with a principal outstanding balance of approximately $85.4 million, repaid $6.0 million in cash and recorded a gain on extinguishment of debt of approximately $14.4 million resulting in a new outstanding balance of approximately $66.4 million, as of December 31, 2010.

Fair value of non-financial assets and liabilities. Effective January 1, 2009, we adopted a new fair value pronouncement for non-financial assets and liabilities such as real estate, intangibles, investments in unconsolidated entities and other long-lived assets, including the incorporation of market participant assumptions. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement dated. We generally determine fair value based on incorporating market participant assumptions, discounted cash flow models and our management’s estimates reflecting the facts and circumstances of each non-financial asset or liability. Consequently, the adoption of this guidance did not have a material impact.

Acquisition fees and costs. Effective January 1, 2009, we began expensing acquisition fees and costs in accordance with a new accounting pronouncement. Prior to this date, acquisition fees and costs were capitalized and allocated to the cost basis of the assets acquired in connection with a business combination. The adoption of this pronouncement had, and will continue to have, a significant impact on our operating results due to the highly acquisitive nature of our business. This pronouncement also causes a decrease in cash flows from operating activities, as acquisition fees and costs historically have been included in cash flows from investing activities, but are treated as cash flows from operating activities under this new pronouncement. The characterization of these acquisition fees and costs to operating activities in accordance with GAAP does not change the nature and source of how the amounts are funded and paid with proceeds from our public offerings. Upon the adoption of this pronouncement, we expensed approximately $5.9 million in acquisition fees and costs for acquisitions that were being pursued in 2008 but which did not close as of December 31, 2008. Additionally, we expensed approximately $14.1 million and $8.7 million in new acquisition fees and costs incurred during the years ended December 31, 2010 and 2009, respectively. We will continue to capitalize acquisition fees and costs incurred in connection with the making of loans, simple asset purchases and other investments not subject to this pronouncement.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Item 8. “Financial Statements and Supplementary Data” for additional information about the impact of recent accounting pronouncements.

 

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RESULTS OF OPERATIONS

General Trends and Effects of Seasonality

As of December 31, 2010 and 2009, we owned 122 and 115 properties directly and indirectly, of which 90 and 99 were 100% leased under long-term triple-net leases and eight were owned through unconsolidated joint ventures for both periods, respectively. Fifteen and six were operated by third-party managers under management contracts, excluding the nine properties that were previously leased to PARC that were subsequently transitioned to new third-party managers as of March 10, 2011. In addition, we had one property held for development as of December 31, 2010 and 2009, respectively.

Certain of our properties are operated seasonally due to geographic location, climate and weather patterns. Generally, the effect of seasonality will not significantly affect our recognition of base rental income from operating leases due to straight-line revenue recognition in accordance with GAAP. However, seasonality does impact the timing of when base rent payment is made by our tenants which impacts our operating cash flows, the amount of rental revenue w