UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
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Commission File Number:
000-52612
APARTMENT TRUST OF
AMERICA, INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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20-3975609
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4901 Dickens Road, Suite 101, Richmond, Virginia
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23230
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number,
including area code:
(804) 237-1335
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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None
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None
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Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value $0.01
per share
(Title of class)
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
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Yes o No þ
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
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Yes o No þ
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
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subject to such filing requirements for the past 90 days.
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Yes þ No o
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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
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(or for such shorter period that the registrant was required to
submit and post such files).
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Yes o No o
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in
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Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange Act).
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Yes o No þ
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While there is no established market for the Registrants
shares of common stock, the Registrant currently has an
effective public offering of shares of its common stock pursuant
to a Registration Statement on
Form S-11.
The Registrant suspended offering shares of its common stock in
the primary portion of such offering as of December 31,
2010. The last price paid to acquire a share in the
Registrants primary public offering was $10.00 per share.
There were approximately 18,406,900 shares of common stock
held by non-affiliates at June 30, 2010, the last business
day of the registrants most recently completed second
fiscal quarter.
As of March 25, 2011, there were 19,714,787 shares of
common stock of Apartment Trust of America, Inc. outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for the 2011
annual stockholders meeting, which is expected to be filed no
later than April 30, 2011, are incorporated by reference in
Part III, Items 10, 11, 12, 13 and 14.
Apartment
Trust of America, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
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PART I
The use of the words we, us,
our company, or our refers to Apartment
Trust of America, Inc. and its subsidiaries, including Apartment
Trust of America Holdings, LP, except where the context
otherwise requires.
Our
Company
Apartment Trust of America, Inc., a Maryland corporation, was
incorporated on December 21, 2005. We were initially
capitalized on January 10, 2006 and therefore we consider
that our date of inception. On December 29, 2010, we
amended our charter to change our corporate name from
Grubb & Ellis Apartment REIT, Inc. to Apartment Trust
of America, Inc. We are in the business of acquiring and holding
a diverse portfolio of quality apartment communities with stable
cash flows and growth potential in select U.S. metropolitan
areas. We may also acquire other real estate-related
investments. We focus primarily on investments that produce
current income. We have qualified and elected to be taxed as a
real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended, or the Code, for federal
income tax purposes and we intend to continue to be taxed as a
REIT.
We commenced a best efforts initial public offering on
July 19, 2006, in which we offered up to
100,000,000 shares of our common stock for $10.00 per share
in our primary offering and up to 5,000,000 shares of our
common stock pursuant to our distribution reinvestment plan, or
the DRIP, for $9.50 per share, for a maximum offering of up to
$1,047,500,000. We terminated our initial offering on
July 17, 2009. As of July 17, 2009, we had received
and accepted subscriptions in our initial offering for
15,738,457 shares of our common stock, or $157,218,000,
excluding shares of our common stock issued pursuant to the DRIP.
On July 20, 2009, we commenced a best efforts follow-on
public offering, in which we offered up to
100,000,000 shares of our common stock for sale at $10.00
per share in our primary offering and up to
5,000,000 shares of our common stock for sale pursuant to
the DRIP for $9.50 per share, for a maximum offering of up to
$1,047,500,000. As explained in more detail below, effective
December 31, 2010, we suspended the primary portion of our
follow-on offering. As of December 31, 2010, we had
received and accepted subscriptions in our follow-on offering
for 2,992,777 shares of our common stock, or $29,885,000,
excluding shares of our common stock issued pursuant to the DRIP.
Until December 31, 2010, the managing broker-dealer for our
capital formation efforts had been Grubb & Ellis
Securities, Inc., or Grubb & Ellis Securities or our Former
Dealer Manager. Effective December 31, 2010,
Grubb & Ellis Securities terminated our dealer manager
agreement, or the Grubb & Ellis Dealer Manager
Agreement. In order to transition the capital formation function
to a successor managing broker-dealer, on November 5, 2010,
we entered into a successor dealer manager agreement, or the RCS
Dealer Manager Agreement, with Realty Capital Securities, LLC,
or RCS, whereby RCS agreed to serve as our exclusive dealer
manager effective upon the satisfaction of certain conditions,
including receipt of a
no-objections
notice from the Financial Industry Regulatory Authority, or
FINRA. As of December 31, 2010, RCS had not received a
no-objections notice from FINRA and, therefore, having no
effective dealer manager agreement in place, our follow-on
offering was suspended. As of February 28, 2011, RCS still
had not received a no-objections notice from FINRA relating to
our follow-on offering. Recently, general market conditions have
caused us and RCS to reconsider the merits of continuing the
follow-on offering. Therefore, on February 28, 2011, we
provided written notice to RCS that we were terminating the
dealer manager agreement with RCS, effective immediately. As a
result, we currently do not have a managing broker-dealer. We
cannot make assurances that we will enter into a new dealer
manager agreement or that we will offer shares of our common
stock to the public in the future.
On February 24, 2011, our board of directors approved a
Second Amended and Restated Distribution Reinvestment Plan, or
the Amended and Restated DRIP, and we intend to register shares
for sale under the Amended and Restated DRIP with the Securities
and Exchange Commission, or the SEC. Upon effectiveness of the
Amended and Restated DRIP and the related registration
statement, all distribution reinvestments will
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be made pursuant to the Amended and Restated DRIP. Stockholders
who are already enrolled in the DRIP are not required to take
any further action to enroll in the Amended and Restated DRIP.
See Note 12, Equity Distribution Reinvestment
Plan and Second Amended and Restated Distribution Reinvestment
Plan to the Consolidated Financial Statements that are a part of
this Annual Report on Form 10-K, for more information on the
Amended and Restated DRIP.
We conduct substantially all of our operations through Apartment
Trust of America Holdings, LP, or our operating partnership.
Until December 31, 2010, we were externally advised by
Grubb & Ellis Apartment REIT Advisor, LLC, or our
Former Advisor, pursuant to an advisory agreement, as amended
and restated, or the Grubb & Ellis Advisory Agreement,
between us and our Former Advisor. Our Former Advisor is jointly
owned by entities affiliated with Grubb & Ellis
Company and ROC REIT Advisors, LLC, or ROC REIT Advisors. Prior
to the termination of the Grubb & Ellis Advisory
Agreement, our
day-to-day
operations were managed by our Former Advisor and our properties
were managed by Grubb & Ellis Residential Management,
Inc., an affiliate of our Former Advisor. Our Former Advisor is
affiliated with our company in that all of our executive
officers, Stanley J. Olander, Jr., David L. Carneal and
Gustov G. Remppies, are indirect owners of a minority interest
in our Former Advisor through their ownership of ROC REIT
Advisors. In addition, one of our directors, Andrea R. Biller,
was an indirect owner of a minority interest in our Former
Advisor until October 2010. In addition, Messrs. Olander,
Carneal and Remppies served as executive officers of our Former
Advisor. Mr. Olander and Ms. Biller also own interests
in Grubb & Ellis Company, and served as executive
officers of Grubb & Ellis Company until November 2010
and October 2010, respectively.
On November 1, 2010, we received written notice from our
Former Advisor stating that it had elected to terminate the
Grubb & Ellis Advisory Agreement. In accordance with
the Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice without cause or penalty. Therefore, the
Grubb & Ellis Advisory Agreement terminated on
December 31, 2010, and our Former Advisor no longer serves
as our advisor. In connection with the termination of the
Grubb & Ellis Advisory Agreement, our Former Advisor
has notified us that it has elected to defer the redemption of
its incentive limited partnership interest in our operating
partnership until, generally, the earlier to occur of (i) a
listing of our shares on a national securities exchange or
national market system or (ii) a liquidity event. See
Note 19, Subsequent Events Termination of the
Grubb & Ellis Advisory Agreement to the Consolidated
Financial Statements that are a part of this Annual Report on
Form 10-K, for a further discussion of the termination of the
Grubb & Ellis Advisory Agreement.
On February 25, 2011, we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors, referred to herein as our Advisor. Our Advisor is
affiliated with us in that ROC REIT Advisors is owned by our
executive officers, Messrs. Olander, Carneal and Remppies.
The new advisory agreement has a one-year term and may be
renewed for an unlimited number of successive one-year terms.
Pursuant to the terms of the new advisory agreement, our Advisor
will use its commercially reasonable efforts to present to us a
continuing and suitable investment program and opportunities to
make investments consistent with our investment policies. Our
Advisor is also obligated to provide us with the first
opportunity to purchase any Class A income producing
multi-family property which satisfies our investment objectives.
In performing these obligations, our Advisor generally will
(i) provide and perform our
day-to-day
management; (ii) serve as our investment advisor;
(iii) locate, analyze and select potential investments for
us and structure and negotiate the terms and conditions of
acquisition and disposition transactions; (iv) arrange for
financing and refinancing with respect to our investments; and
(v) enter into leases and service contracts with respect to
our investments. Our Advisor is subject to the supervision of
our board of directors and has a fiduciary duty to us and our
stockholders. See Note 19, Subsequent Events
New Advisory Agreement for a discussion of the new advisory
agreement with ROC REIT Advisors.
Key
Developments During 2010 and 2011
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Effective March 17, 2010, Gustav G. Remppies was promoted
to serve as our President, having previously served as our
Executive Vice President and Chief Investment Officer from
December 2005 to March 2010. Concurrent with
Mr. Remppies appointment, Stanley J.
Olander, Jr. resigned from his
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position as our President. Mr. Olander currently serves as
our Chief Executive Officer, Chief Financial Officer and
chairman of our board of directors, as noted below.
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On March 24, 2010, we purchased Bella Ruscello Luxury
Apartment Homes, or the Bella Ruscello property, located in
Duncanville, Texas, for a purchase price of $17,400,000, plus
closing costs, from an unaffiliated party.
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On August 11, 2010, we amended the consolidated unsecured
promissory note, or the Amended Consolidated Promissory Note,
payable to NNN Realty Advisors, Inc., or NNN Realty Advisors,
which is a wholly-owned subsidiary of Grubb & Ellis
Company. The Amended Consolidated Promissory Note decreased the
principal amount outstanding to $7,750,000 due to our pay down
of the principal balance, extended the maturity date from
January 1, 2011 to July 17, 2012 and fixed the
interest rate at 4.50% per annum and the default interest rate
at 6.50% per annum. The principal outstanding balance of the
Amended Consolidated Promissory Note at December 31, 2010
was $7,750,000.
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On September 30, 2010, we acquired from an unaffiliated
party Mission Rock Ridge Apartments, or the Mission Rock Ridge
property, located in Arlington, Texas, for a purchase price of
$19,857,000, plus closing costs.
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Effective October 22, 2010, Andrea Biller resigned from her
position as our Secretary. As noted above, Mr. Remppies now
serves as our Secretary. Ms. Biller continues to serve as a
director.
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On November 1, 2010, we received written notice from our
Former Advisor that it had elected to terminate the
Grubb & Ellis Advisory Agreement. Pursuant to the
Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice without cause or penalty. Therefore, the
Grubb & Ellis Advisory Agreement terminated on
December 31, 2010. As a result, Grubb & Ellis
Company is no longer our sponsor.
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On November 1, 2010, we received written notice from
Grubb & Ellis Securities that it had elected to
terminate the dealer manager agreement between our company and
Grubb & Ellis Securities. Pursuant to the dealer
manager agreement, either party was permitted to terminate the
agreement upon 60 days written notice. Therefore, the
dealer manager agreement terminated on December 31, 2010
and Grubb & Ellis Securities no longer serves as our
dealer manager. We currently do not have a dealer manager, and
as of December 31, 2010, we suspended the primary portion
of our follow-on public offering.
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Effective November 1, 2010, Shannon K S Johnson resigned
from her position as our Chief Financial Officer. As noted
below, Mr. Olander currently serves as our Chief Financial
Officer, in addition to his other positions with our company.
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Effective November 2, 2010, Stanley J. Olander, Jr.
resigned from his position as chief executive officer and
president of our Former Advisor, and as executive vice
president, multifamily division, of Grubb & Ellis
Company.
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Effective November 3, 2010, our board of directors elected
Stanley J. Olander, Jr. to serve as our Chief Financial
Officer, filling the vacancy that was created by
Ms. Johnsons resignation. As noted above,
Mr. Olander also serves as our Chief Executive Officer and
Chairman of our board of directors. Our board of directors also
elected Gustav G. Remppies to serve as our Secretary, replacing
Ms. Biller.
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On November 3, 2010, we received written notice from
Grubb & Ellis Equity Advisors, Transfer Agent, LLC, or
Grubb & Ellis Transfer Agent, that it had elected to
terminate our February 1, 2010 agreement for transfer agent
and investor services. The agreement requires Grubb &
Ellis Transfer Agent to provide us with a 180 day advance
written notice for any termination. In January 2011, we engaged
DST Systems, Inc. to act as our transfer agent, and all transfer
agent and investor services have been transferred to DST
Systems, Inc.
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On November 5, 2010, we, through MR Property Management
LLC, or MR Property Management, which is a wholly-owned taxable
REIT subsidiary, or TRS, of our operating partnership, completed
the
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acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management, LLC, or Mission
Residential Management, including the in-place workforce of
approximately 300 employees. In connection with the
closing, we assumed 41 property management agreements containing
12,000 units, including the Mission Rock Ridge property
that we acquired on September 30, 2010. We paid total
consideration of $5,513,000 of cash plus the assumption of
certain liabilities and other payments totaling approximately
$1,500,000, subject to post closing adjustments. As of
January 1, 2011, we have successfully transferred all
property management functions to our subsidiary, MR Property
Management.
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As of December 31, 2010, we had received and accepted
subscriptions in our follow-on offering for
2,992,777 shares of our common stock, or $29,885,000,
excluding shares of our common stock issued pursuant to the
DRIP. We have suspended the primary portion of our follow-on
offering, and we cannot give assurance that we will offer shares
of our common stock to the public in the future.
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On December 29, 2010, we filed an amendment to our charter
to change our corporate name from Grubb & Ellis
Apartment REIT, Inc. to Apartment Trust of America, Inc.
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On December 30, 2010, our operating partnership filed a
certificate of amendment of its certificate of limited
partnership with the Commonwealth of Virginia State Corporation
Commission to change the name of the operating partnership from
Grubb & Ellis Apartment REIT Holdings, LP to Apartment
Trust of America Holdings, LP. The filing was effective on
December 31, 2010.
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On February 2, 2011, NNN Realty Advisors sold the Amended
Consolidated Promissory Note to G & E Apartment
Lender, LLC, a party unaffiliated with us, for a purchase price
of $6,200,000. The material terms of the Amended Consolidated
Promissory Note did not change upon the sale of the note. The
principal outstanding balance of the Amended Consolidated
Promissory Note at February 2, 2011 remained $7,750,000.
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On February 24, 2011, our board of directors adopted the
Amended and Restated DRIP, to be effective as of March 11,
2011. The purchase price for shares under the Amended and
Restated DRIP will be $9.50 per share until such time as our
board of directors determines a reasonable estimate of the value
of shares of our common stock.
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On February 24, 2011, our board of directors authorized us
to engage the investment banking firm of Robert A.
Stanger & Co., Inc. to advise our management regarding
available strategic alternatives for our company. On
February 24, 2011, our board of directors elected Glenn W.
Bunting, Jr. as our lead independent director.
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On February 24, 2011, our board of directors determined
that it is in the best interest of our company and its
stockholders to preserve our companys cash, and terminated
our companys share repurchase plan. Accordingly, pending
share repurchase requests will not be fulfilled.
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On February 25, 2011, we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors.
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Our
Structure
The following is a diagram of our organizational structure as of
December 31, 2010:
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The following is a diagram of our organizational structure as of
March 25, 2011:
Principal
Offices
Our principal executive offices are located at 4901 Dickens
Road, Suite 101, Richmond, Virginia 23230 and the telephone
number is
(804) 237-1335.
The e-mail
address of our investor relations department is
investor-relations@atareit.com. We currently do not
maintain a web site, however our annual, periodic and current
reports can be accessed on the web site of the SEC at
www.sec.gov and printed free of charge.
Investment
Objectives
Our investment objective is to acquire quality apartment
communities so we can provide our stockholders with:
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stable cash flows available for distributions to our
stockholders;
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preservation, protection and return of capital; and
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growth of income and principal without taking undue risk.
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Additionally, we intend to:
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invest in income-producing real estate and other real
estate-related investments in a manner which permits us to
maintain our qualification as a REIT for federal income tax
purposes; and
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realize capital appreciation upon the ultimate sale of our
properties.
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We cannot assure our stockholders that we will attain these
objectives. Our board of directors may change our investment
objectives if it determines it is advisable and in the best
interest of our stockholders.
Decisions relating to the purchase or sale of investments are
made by our Advisor, subject to the oversight and approval of
our board of directors.
Business
Strategy
We believe the following will be key factors for our success in
meeting our objectives.
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Following
Demographic Trends and Population Shifts to Find Attractive
Tenants in Quality Apartment Community Markets
According to the U.S. Census Bureau, nearly 80.0% of the
estimated total U.S. population growth between 2000 and
2030 will occur in the South and West. We will emphasize
property acquisitions in regions of the U.S. that seem
likely to benefit from the ongoing population shift
and/or are
poised for strong economic growth. We further believe that these
markets will likely attract quality tenants who have good income
and a strong credit profile and choose to rent an apartment
rather than buy a home because of their life circumstances. For
example, they may be baby-boomers or retirees who desire freedom
from home maintenance costs and property taxes. They may also be
individuals who need housing while awaiting selection or
construction of a home. We believe that attracting and retaining
quality tenants strongly correlates with the likelihood of
providing stable cash flows to our investors as well as
increasing the value of our properties.
The current market environment has made it more difficult to
qualify for a home loan, and the down payment required to
purchase a new home may be substantially greater than it has
been in the past, potentially making home ownership more
expensive. We believe that as the pool of potential renters
increases, the demand for apartments is also likely to increase.
With this increased demand, we believe that it may be possible
to raise rents and decrease rental concessions in the future at
our apartment communities, including those we may acquire.
Leveraging
the Experience of Our Management
We believe that a critical success factor in property
acquisition lies in having a management team that possesses the
flexibility to move quickly when an opportunity presents itself
to buy or sell a property. The owners and officers of our
Advisor possess considerable experience in the apartment housing
sector, which we believe will help enable us to identify
appropriate opportunities to buy and sell properties to meet our
objectives and goals.
Each of our key executives has considerable experience building
successful real estate companies. As an example, Stanley J.
Olander, Jr., our Chief Executive Officer, Chief Financial
Officer and Chairman of the board of directors, has been
responsible for the acquisition and financing of approximately
40,000 apartment units, has been an executive in the real estate
industry for almost 30 years and previously served as
President and Chief Financial Officer and a member of the board
of directors of Cornerstone Realty Income Trust, Inc., or
Cornerstone, a publicly-traded apartment REIT. Likewise, Gustav
G. Remppies, our President, and David L. Carneal, our Executive
Vice President and Chief Operating Officer, are the former Chief
Investment Officer and Chief Operating Officer, respectively, of
Cornerstone, where they oversaw the growth of that company.
Investment
Strategy
We invest primarily in existing apartment communities. To the
extent that it is in our stockholders best interest, we
strive to invest in a geographically diversified portfolio of
apartment communities that will satisfy our primary investment
objectives of: (1) providing our stockholders with stable
cash flows; (2) preservation, protection and return of
capital; and (3) growth of income and principal without
taking undue risk. Because a significant factor in the valuation
of income-producing real estate is their potential for future
income, we anticipate that the majority of properties we acquire
will have both current net income and the potential for
long-term net income.
We do not intend to enter into purchase and leaseback
transactions, under which we would purchase a property from an
entity and lease the property back to such entity under a net
lease.
We do not intend to purchase interests in hedge funds.
Our Advisor and its affiliates may purchase properties in their
own names, assume loans in connection with the purchase of
properties and temporarily hold title to such properties in
order to facilitate our acquisition of such properties,
financing of such properties, completing construction of such
properties, or for any other purpose related to our business.
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Our Advisor may receive acquisition fees of up to 1.0% of the
contract purchase price of each property we acquire and up to
14.0% of the origination price or purchase price of real
estate-related securities. We also will reimburse our Advisor
for expenses actually incurred related to selecting, evaluating
or acquiring such properties. The total of all acquisition fees
and expenses paid to our Advisor or affiliates of our Advisor,
including any real estate commissions or other fees paid to
third parties, but excluding any development fees and
construction fees paid to persons affiliated with our sponsor in
connection with the actual development and construction of a
project, will not exceed an amount equal to 6.0% of the contract
purchase price of the property, or in the case of a loan, 6.0%
of the funds advanced, unless fees in excess of such limits are
determined to be commercially competitive, fair and reasonable
to us by a majority of our directors not interested in the
transaction and by a majority of our independent directors not
interested in the transaction.
Although our focus is on apartment communities, our charter and
bylaws do not preclude us from acquiring other types of
properties. We may acquire other real estate assets, including,
but not limited to, income-producing commercial properties. The
purchase of any apartment community or other property type will
be based upon the best interest of our company and its
stockholders as determined by our board of directors. Regardless
of the mix of properties we may acquire or own, our primary
business objectives are to maximize stockholder value by
acquiring apartment communities that have stable cash flows and
growth potential, and to preserve capital.
Acquisition
Standards
We generally invest in metropolitan areas that are projected to
have population growth rates in excess of the national average
and that we believe will continue to perform well over time.
While our acquisitions are not limited to any state or
geographic region, we will emphasize property acquisitions in
regions of the U.S. that seem likely to benefit from the
shifts of population and assets
and/or are
poised for strong economic growth.
Our primary investment focus is existing apartment communities
that produce immediate rental income. However, we may acquire
newly developed apartment communities with some
lease-up
risk if we believe the investment will result in long-term
benefits for our stockholders. We generally purchase newer
properties, less than five years old, with reduced capital
expenditure requirements and high occupancy. However, we may
purchase older properties, including properties that need
capital improvements or
lease-up to
maximize their value and enhance our returns. Because these
properties may have short-term decreases in income during the
lease-up or
renovation phase, we will acquire them only when management
believes in the long-term growth potential of the investment
after necessary
lease-up or
renovations are completed. We do not anticipate a significant
focus on such properties.
MR Property Management, our indirect wholly-owned subsidiary,
currently serves as the property manager for all our properties.
We generally seek to acquire well located and well constructed
properties where the average income of the tenants generally
exceeds the average income for the metropolitan area in which
the community is located. We expect that all of our apartment
communities will lease to their tenants under similar lease
terms, and that substantially all of the leases will be for a
term of one year or less. We believe that the relatively short
lease terms that are customary in most markets may allow us to
aggressively raise rental rates in appropriate circumstances.
We may also consider purchasing apartment communities that
include land or development opportunities as part of the
purchase package. Acquisitions of unimproved real property will
comprise no more than 10.0% of our aggregate portfolio value,
and our intent in those circumstances is to transfer development
risk to the developer. Acquisitions of this type, while
permitted, are not anticipated and do not represent a primary
objective of our acquisition strategy. In fact, such
acquisitions would require special consideration by our board of
directors because of their increased risk.
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We believe that our acquisition strategy will benefit our
stockholders for the following reasons:
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We seek to purchase apartment communities at favorable prices
and obtain immediate income from tenant rents, with the
potential for appreciation in value over time.
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We seek to preserve capital through selective acquisitions and
professional management, whereby we intend to increase rental
rates, maintain high occupancy rates, reduce tenant turnover,
make value-enhancing and income-producing capital improvements,
where appropriate, and control operating costs and capital
expenditures.
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We seek to acquire apartment properties in growth markets, at
attractive prices relative to replacement cost, that provide the
opportunity to improve operating performance through
professional management, marketing and selective leasing and
renovation programs.
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We believe, based on our managements prior real estate
experience, that we have the ability to identify quality
properties capable of meeting our investment objectives. In
evaluating potential acquisitions, the primary factor we
consider is the propertys current and projected cash flow.
We also consider a number of other factors, including:
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geographic location and type;
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construction quality and condition;
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potential for capital appreciation;
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the general credit quality of current and potential tenants;
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potential for rent increases;
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the interest rate environment;
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potential for economic growth in the tax and regulatory
environment of the community in which the property is located;
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potential for expanding the physical layout of the property;
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occupancy and demand by tenants for properties of a similar type
in the same geographic vicinity;
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prospects for liquidity through sale, financing or refinancing
of the property;
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competition from existing properties and the potential for the
construction of new properties in the area; and
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treatment of the property and acquisition under applicable
federal, state and local tax and other laws and regulations.
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Our Advisor has substantial discretion with respect to the
selection of specific properties.
We do not purchase any property unless and until we obtain an
environmental assessment, at a minimum, a Phase I review and
generally are satisfied with the environmental status of the
property, as determined by our Advisor.
We may also enter into arrangements with the seller or developer
of a property, whereby the seller or developer agrees that if,
during a stated period, the property does not generate specified
cash flows, the seller or developer will pay us in cash in an
amount necessary to reach the specified cash flow level, subject
in some cases to negotiated dollar limitations.
In determining whether to acquire a particular property, we may,
in accordance with customary practices, obtain an option on the
property. The amount paid for an option, if any, is normally
surrendered if the property is not purchased, and is normally
credited against the purchase price if the property is purchased.
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In purchasing properties, we are subject to risks generally
incidental to the ownership of real estate, including:
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changes in general to national, regional or local economic
conditions;
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changes in supply of or demand for similar competing properties
in a geographic area;
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changes in interest rates and availability of permanent mortgage
funds, which may render the sale of a property difficult or
unattractive;
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changes in tax, real estate, environmental and zoning laws;
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periods of high interest rates and tight money supply, which may
make the sale of properties more difficult;
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tenant turnover; and
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general overbuilding or excess supply of rental housing in the
geographic market area.
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We anticipate that the purchase price of properties we acquire
will vary widely depending on a number of factors, including the
size and location of the property. In addition, the amount of
fees paid to our Advisor, its affiliates and third parties will
vary based on the amount of debt we incur in connection with
financing the acquisition. If we raise significantly less than
the maximum offering, we may not be able to purchase a diverse
portfolio of properties or we may not be able to acquire a
substantial number of properties; however, it is difficult to
predict the actual number of properties that we will acquire
because of variables such as purchase price and the amount of
leverage we use.
Real
Estate Investments
Our Advisor makes recommendations on all property acquisitions
to our board of directors. Our board of directors, including a
majority of our independent directors, must approve all of our
property acquisitions.
We primarily acquire properties through wholly owned
subsidiaries of our operating partnership. We intend to acquire
fee simple ownership of our apartment communities; however, we
may acquire properties subject to long-term ground leases. Other
methods of acquiring a property may be used when advantageous.
For example, we may acquire properties through a joint venture
or the acquisition of substantially all of the interests of an
entity that in turn owns a property.
We may commit to purchase properties subject to completion of
construction in accordance with terms and conditions specified
by our Advisor. In such cases, we will be obligated to purchase
the property at the completion of construction, provided that
(1) the construction conforms to definitive plans,
specifications and costs approved by us in advance and embodied
in the construction contract and (2) an agreed upon
percentage of the property is leased. We will receive a
certificate from an architect, engineer or other appropriate
party, stating that the property complies with all plans and
specifications. Our intent is to transfer development risk to
the developer. Acquisitions of this type, while permitted, are
not anticipated and do not represent a primary objective of our
acquisition strategy. In fact, such acquisitions would require
special consideration by our board of directors because of their
increased risk.
If remodeling is required prior to the purchase of a property,
we will pay a negotiated maximum amount either upon completion
or in installments commencing prior to completion of the
remodeling. Such amount will be based on the estimated cost of
such remodeling. In such instances, we also will have the right
to review the lessees books during and following
completion of the remodeling to verify actual costs. In the
event of substantial disparity between estimated and actual
costs, we may negotiate an adjustment in the purchase price.
We are not specifically limited in the number or size of
properties we may acquire. The number and mix of properties we
acquire will depend upon our access to sources of capital, real
estate and market conditions and other circumstances existing at
the time we are acquiring our properties.
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Joint
Ventures
We may invest in general partnerships and joint venture
arrangements with other real estate programs formed by,
sponsored by or affiliated with our Advisor or an affiliate of
our Advisor if a majority of our independent directors who are
not otherwise interested in the transaction approve the
transaction as being fair and reasonable to us and our
stockholders and on substantially the same terms and conditions
as those received by the other joint venturers. We may also
invest with nonaffiliated third parties by following the general
procedures to obtain approval of an acquisition. However, we
will not co-invest and acquire interests in properties through
tenant in common syndications.
We may invest in general partnerships or joint venture
arrangements with our Advisor and its affiliates only when:
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there are no duplicate property management or other fees;
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the investment in each entity is on substantially the same terms
and conditions as those received by other joint
venturers; and
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we have a right of first refusal to acquire the property if the
other joint venturers wish to sell their interest in the
property.
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In addition, we have the right to enter into joint venture
arrangements with entities unaffiliated with our Advisor and its
affiliates.
There is a potential risk that we and our joint venture partner
will be unable to agree on a matter material to the joint
venture and we may not control the decision. Furthermore, we
cannot assure our stockholders that we will have sufficient
financial resources to exercise any right of first refusal.
Real
Estate-Related Investments
In addition to our acquisition of apartment communities and
other income-producing commercial properties, we may make real
estate-related investments, such as mortgage, mezzanine, bridge
and other loans, common and preferred equity securities,
commercial mortgage-backed securities and certain other
securities, including collateralized debt obligations and
foreign securities.
Making
Loans and Investments in Mortgages
We will not make loans to other entities or persons unless
secured by mortgages, and we will not make any mortgage loans to
our Advisor or any of its affiliates. We will not make or invest
in mortgage loans unless we obtain an appraisal concerning the
underlying property from a certified independent appraiser. In
addition to the appraisal, we will seek to obtain a customary
lenders title insurance policy or commitment as to the
priority of the mortgage or condition of the title.
We will not make or invest in mortgage loans on any one property
if the aggregate amount of all mortgage loans outstanding on the
property, including our loans, would exceed an amount equal to
85.0% of the appraised value of the property as determined by an
appraisal from a certified independent appraiser, unless we find
substantial justification due to the presence of other
underwriting criteria. In no event will we invest in mortgage
loans that exceed the appraised value of the property as of the
date of the loans.
The value of our investments in secured loans, including
mezzanine loans, as shown on our books in accordance with
accounting principles generally accepted in the United States of
America, or GAAP, after all reasonable reserves but before
provision for depreciation, will not exceed 5.0% of our total
assets.
Investments
in Securities
We may invest in the following types of securities:
(1) equity securities such as common stocks, preferred
stocks and convertible preferred securities of public or private
real estate companies (including other REITs, real estate
operating companies and other real estate companies);
(2) debt securities such as commercial mortgage-backed
securities and debt securities issued by other real estate
companies; and (3) certain other
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types of securities that may help us reach our diversification
and other investment objectives. These other securities may
include, but are not limited to, various types of collateralized
debt obligations and certain
non-U.S. dollar
denominated securities.
Our Advisor will have substantial discretion with respect to the
selection of specific securities investments. Our charter
provides that we may not invest in equity securities unless a
majority of our directors (including a majority of our
independent directors) not otherwise interested in the
transaction approve such investment as being fair, competitive
and commercially reasonable. Consistent with such requirements,
in determining the types of securities investments to make, our
Advisor will adhere to a board-approved asset allocation
framework consisting primarily of components such as:
(1) target mix of securities across a range of risk/reward
characteristics; (2) exposure limits to individual
securities; and (3) exposure limits to securities
subclasses (such as common equities, debt securities and foreign
securities).
Operating
Strategy
Our primary operating strategy is to acquire suitable properties
that meet our acquisition standards and investment objectives
and to enhance the performance and value of those properties
through management strategies designed to address the needs of
current and prospective tenants. Our management strategies
include:
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aggressively leasing available space through targeted marketing;
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emphasizing regular maintenance and periodic renovation to meet
the needs of tenants and to maximize long-term returns; and
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financing acquisitions and refinancing properties when favorable
terms are available to increase cash flow.
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Disposition
Strategy
Our Advisor and our board of directors will determine whether a
particular property should be sold or otherwise disposed of
after consideration of the relevant factors, including
performance or projected performance of the property and market
conditions, with a view toward achieving our principal
investment objectives.
In general, we intend to hold properties, prior to sale, for a
minimum of four years. When appropriate to minimize our tax
liabilities, we may structure the sale of a property as a
like-kind exchange under the federal income tax laws
so that we may acquire qualifying like-kind replacement property
meeting our investment objectives without recognizing taxable
gain on the sale. Furthermore, our general strategy will be to
reinvest in additional properties, proceeds from the sale,
financing, refinancing or other disposition of our properties
that represent our initial investment in such property or,
secondarily, to use such proceeds for the maintenance or repair
of existing properties or to increase our reserves for such
purposes. The objective of reinvesting such portion of the sale,
financing and refinancing proceeds is to increase the total
value of real estate assets that we own and the cash flows
derived from such assets to pay distributions to our
stockholders.
Despite this strategy, our board of directors, in its sole
discretion, may distribute to our stockholders all or a portion
of the proceeds from the sale, financing, refinancing or other
disposition of properties. In determining whether any of such
proceeds should be distributed to our stockholders, our board of
directors will consider, among other factors, the desirability
of properties available for purchase, real estate market
conditions and compliance with the REIT distribution
requirements. Because we may reinvest such portion of the
proceeds from the sale, financing or refinancing of our
properties, we could hold our stockholders capital
indefinitely. However, the affirmative vote of stockholders
controlling a majority of our outstanding shares of common stock
may force us to liquidate our assets and dissolve.
In connection with a sale of a property, our general preference
will be to obtain an all-cash sale price. However, we may
provide seller financing on certain properties if, in our
judgment, it is prudent to do so, and we may take a purchase
money obligation secured by a mortgage on the property as
partial payment. There
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are no limitations or restrictions on our taking such purchase
money obligations. The terms of payment upon sale will be
affected by custom in the area in which the property being sold
is located and the then prevailing economic conditions. To the
extent we receive notes, securities or other property instead of
cash from sales, such proceeds, other than any interest payable
on such proceeds, will not be included in net sale proceeds
available for distribution until and to the extent the notes or
other property are actually paid, sold, refinanced or otherwise
disposed of. Thus, the distribution of the proceeds of a sale to
our stockholders, to the extent contemplated by our board of
directors, may be delayed until such time. Also, our taxable
income may exceed the cash received in the sale. In such cases,
we will receive payments in the year of sale in an amount less
than the selling price and subsequent payments will be spread
over a number of years.
While it is our intention to hold each property we acquire for a
minimum of four years, circumstances might arise which could
result in the early sale of some properties. A property may be
sold before the end of the expected holding period if:
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we believe the value of a property might decline substantially;
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an opportunity has arisen to improve other properties;
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we can increase cash flows through the disposition of the
property; or
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we believe the sale of the property is in our best interest.
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The determination of whether a particular property should be
sold or otherwise disposed of will be made after consideration
of the relevant factors, including prevailing economic
conditions, with a view towards achieving maximum capital
appreciation. We cannot assure our stockholders that this
objective will be realized.
Borrowing
Policies
We intend to acquire properties with cash and mortgage loans or
other debt, but we may acquire properties free and clear of
permanent mortgage indebtedness by paying the entire purchase
price for such property in cash or in units of limited
partnership interest in our operating partnership. With respect
to properties purchased on an all-cash basis, we may later incur
mortgage indebtedness by obtaining loans secured by selected
properties, if favorable financing terms are available. In such
event, the proceeds from the loans will be used to acquire
additional properties in order to increase our cash flows and
provide further diversification.
We generally anticipate that aggregate borrowings, both secured
and unsecured, will not exceed 65.0% of the combined fair market
value of all of our real estate and real estate-related
investments, as determined at the end of each calendar year. For
these purposes, the fair market value of each asset will be
equal to the purchase price paid for the asset or, if the asset
was appraised subsequent to the date of purchase, then the fair
market value will be equal to the value reported in the most
recent independent appraisal of the asset. However, we incurred
higher leverage during the period prior to the investment of all
of the net proceeds from our follow-on offering. As of
December 31, 2010, our aggregate borrowings were 66.8% of
the combined fair market value of all of our real estate and
real estate-related investments and such excess over 65.0% was
due to the unsecured note payable to an affiliate we incurred to
purchase Kedron Village and Canyon Ridge Apartments.
Our board of directors reviews our aggregate borrowings at least
quarterly to ensure that such borrowings are reasonable in
relation to our net assets. Our borrowing policies provide that
the maximum amount of such borrowings in relation to our net
assets will not exceed 300.0% of our net assets, unless any
excess in such borrowing is approved by a majority of our
independent directors and is disclosed in our next quarterly
report along with the justification for such excess. For
purposes of this determination, net assets are our total assets,
other than intangibles, valued at cost before deducting
depreciation, amortization, bad debt or other similar non-cash
reserves, less total liabilities. We compute our leverage at
least quarterly on a consistently-applied basis. Generally, the
preceding calculation is expected to approximate 75.0% of the
aggregate cost of our real estate and real estate-related
investments before depreciation, amortization, bad debt and
other similar
non-cash
reserves. We may also incur indebtedness to finance improvements
to properties and, if necessary,
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for working capital needs or to meet the distribution
requirements applicable to REITs under the federal income tax
laws. As of March 25, 2011 and December 31, 2010, our
leverage did not exceed 300.0% of our net assets.
When incurring secured debt, we generally expect to incur
recourse indebtedness, which means that the lenders rights
upon our default generally will not be limited to foreclosure on
the property that secured the obligation. When we incur mortgage
indebtedness, we endeavor to obtain level payment financing,
meaning that the amount of debt service payable would be
substantially the same each year, although some mortgages are
likely to provide for one large payment and we may incur
floating or adjustable rate financing when our board of
directors determines it to be in our best interest.
Our board of directors controls our strategies with respect to
borrowing and may change such strategies at any time without
stockholder approval, subject to the maximum borrowing limit of
300.0% of our net assets described above.
Board
Review of Our Investment Policies
Our board of directors has established written policies on
investments and borrowing. Our board of directors is responsible
for monitoring the administrative procedures, investment
operations and performance of our Company and our Advisor to
ensure such policies are carried out. Our charter requires that
our independent directors review our investment policies at
least annually to determine that the policies we are following
are in the best interest of our stockholders. Each determination
and the basis thereof is required to be set forth in the minutes
of our applicable meetings of our directors. Implementation of
our investment policies also may vary as new investment
techniques are developed. Our investment policies may not be
altered by our board of directors without the approval of our
stockholders.
As required by our charter, our independent directors have
reviewed our investment policies and determined that they are in
the best interest of our stockholders because: (1) they
increase the likelihood that we will be able to acquire a
diversified portfolio of income producing properties, thereby
reducing risk in our portfolio; (2) there are sufficient
property acquisition opportunities with the attributes that we
seek; (3) our executive officers, directors and affiliates
of our Advisor have expertise with the type of real estate
investments we seek; and (4) our borrowings have enabled us
to purchase assets and earn rental income more quickly than
otherwise would be possible, thereby increasing our likelihood
of generating income for our stockholders and preserving
stockholder capital.
Tax
Status
We qualified and elected to be taxed as a REIT beginning with
our taxable year ended December 31, 2006 under
Sections 856 through 860 of the Code and we intend to
continue to be taxed as a REIT. To maintain our qualification as
a REIT for federal income tax purposes, we must meet certain
organizational and operational requirements, including a
requirement to pay distributions to our stockholders of at least
90.0% of our annual taxable income, excluding net capital gains.
As a REIT, we generally will not be subject to federal income
tax on net income that we distribute to our stockholders. During
2010, we acquired substantially all of the assets and certain
liabilities of Mission Residential Management through our
taxable REIT subsidiary, MR Property Management, including an
in-place work force to perform property management and leasing
services for our properties. MR Property Management also serves
as the property manager for approximately 39 additional
multi-family apartment communities that are owned by
unaffiliated third parties.
If we fail to maintain our qualification as a REIT in any
taxable year, we will then be subject to federal income taxes on
our taxable income and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost
unless the Internal Revenue Service, or the IRS, grants us
relief under certain statutory provisions. Such an event could
have a material adverse effect on our results of operations and
net cash available for distribution to our stockholders.
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Distribution
Policy
In order to continue to qualify as a REIT for federal income tax
purposes, among other things, we must distribute each taxable
year at least 90.0% of our annual taxable income, excluding net
capital gains, to our stockholders. We do not intend to maintain
cash reserves to fund distributions to our stockholders.
We intend to avoid, to the extent possible, the fluctuations in
distributions that might result if distribution payments were
based on actual cash received during the distribution period.
Accordingly, we may use cash received during prior periods or
cash received subsequent to the distribution period and prior to
the payment date for such distribution payment, to pay
annualized distributions consistent with the distribution level
established from time to time by our board of directors. Our
ability to maintain regular and predictable distributions will
depend upon the availability of cash flows and applicable
requirements for qualification as a REIT under the federal
income tax laws. Therefore, there may not be cash flows
available to pay distributions or distributions may fluctuate.
If cash available for distribution is insufficient to pay
distributions to our stockholders, we may obtain the necessary
funds by borrowing, issuing new securities or selling assets.
These methods of obtaining funds could affect future
distributions by increasing operating costs.
To the extent that distributions to our stockholders are paid
out of our current or accumulated earnings and profits, such
distributions are taxable as ordinary income. To the extent that
our distributions exceed our current and accumulated earnings
and profits, such amounts constitute a return of capital to our
stockholders for federal income tax purposes, to the extent of
their basis in their stock, and thereafter will constitute
capital gain. All or a portion of a distribution to stockholders
may be paid from net proceeds from the follow-on offering and
thus, constitute a return of capital to our stockholders.
Monthly distributions are calculated with daily record dates so
distribution benefits begin to accrue immediately upon becoming
a stockholder. However, our board of directors could, at any
time, elect to pay distributions quarterly to reduce
administrative costs. Subject to applicable REIT rules,
generally we intend to reinvest proceeds from the sale,
financing, refinancing or other disposition of our properties
through the purchase of additional properties, although we
cannot assure our stockholders that we will be able to do so.
The amount of distributions we pay to our stockholders is
determined by our board of directors and is dependent on a
number of factors, including funds available for payment of
distributions, our financial condition, capital expenditure
requirements, annual distribution requirements needed to
maintain our status as a REIT under the Code and restrictions
imposed by Maryland Law. See Part II, Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Distributions, for a further discussion on distribution rates
authorized by our board of directors.
Competition
The residential apartment community industry is highly
competitive. This competition could reduce occupancy levels and
revenues at our apartment communities, which would adversely
affect our operations. We face competition from many sources,
including from other apartment communities both in the immediate
vicinity and the geographic market where our apartment
communities are and will be located. In addition, overbuilding
of apartment communities may occur, which would increase the
number of apartment units available and may decrease occupancy
and unit rental rates.
Furthermore, apartment communities we acquire most likely
compete, or will compete, with numerous housing alternatives in
attracting tenants, including owner occupied single- and
multi-family homes available to rent or purchase. Competitive
housing in a particular area and the increasing affordability of
owner occupied single- and multi-family homes available to rent
or buy caused by declining mortgage interest rates and
government programs to promote home ownership could adversely
affect our ability to retain our tenants, lease apartment units
and increase or maintain rental rates.
We also face competition for real estate investment
opportunities. These competitors may be other REITs and other
entities that have, among other things, substantially greater
financial resources and a lower cost of capital than we do. We
also face competition for investors from other residential
apartment community REITs and real estate entities.
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Government
Regulations
Many laws and governmental regulations are applicable to our
properties and changes in these laws and regulations, or their
interpretation by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities
Act. Under the Americans with Disabilities Act of
1990, as amended, or the ADA, all public accommodations must
meet federal requirements for access and use by disabled
persons. Although we believe that we are in substantial
compliance with present requirements of the ADA, none of our
properties have been audited, nor have investigations of our
properties been conducted to determine compliance. Additional
federal, state and local laws also may require modifications to
our properties or restrict our ability to renovate our
properties. We cannot predict the cost of compliance with the
ADA or other legislation. We may incur substantial costs to
comply with the ADA or any other legislation.
Costs of Government Environmental Regulation and Private
Litigation. Environmental laws and regulations
hold us liable for the costs of removal or remediation of
certain hazardous or toxic substances which may be on our
properties. These laws could impose liability without regard to
whether we are responsible for the presence or release of the
hazardous materials. Government investigations and remediation
actions may have substantial costs and the presence of hazardous
substances on a property could result in personal injury or
similar claims by private plaintiffs. Various laws also impose
liability on a person who arranges for the disposal or treatment
of hazardous or toxic substances and such person often must
incur the cost of removal or remediation of hazardous substances
at the disposal or treatment facility. These laws often impose
liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility. As the owner and
operator of our properties, we may be deemed to have arranged
for the disposal or treatment of hazardous or toxic substances.
Other Federal, State and Local
Regulations. Our properties are subject to
various federal, state and local regulatory requirements, such
as state and local fire and life safety requirements. If we fail
to comply with these various requirements, we may incur
governmental fines or private damage awards. While we believe
that our properties are currently in material compliance with
all of these regulatory requirements, we do not know whether
existing requirements will change or whether future requirements
will require us to make significant unanticipated expenditures
that will adversely affect our ability to make distributions to
our stockholders. We believe, based in part on engineering
reports which are generally obtained at the time we acquire the
properties, that all of our properties comply in all material
respects with current regulations. However, if we were required
to make significant expenditures under applicable regulations,
our financial condition, results of operations, cash flows and
ability to satisfy our debt service obligations and to pay
distributions could be adversely affected.
Geographic
Concentration
For the year ended December 31, 2010, we owned nine
properties located in Texas, which accounted for 60.2% of our
total rental income and other property revenues, two properties
located in Georgia, which accounted for 14.1% of our total
rental income and other property revenues, two properties
located in Virginia, which accounted for 13.1% of our total
rental income and other property revenues, one property located
in Tennessee, which accounted for 8.8% of total rental income
and other property revenues and one property located in North
Carolina, which accounted for 3.8% of our total rental income
and other property revenues. Accordingly, there is a geographic
concentration of risk subject to fluctuations in each
states economy.
Employees
We have no paid employees; however, MR Property Management, our
indirect wholly-owned subsidiary, has a staff of approximately
361 employees who perform a range of services for us,
principally, property management and leasing services for our
properties. MR Property Management also serves as the property
manager for approximately 39 additional multi-family apartment
communities that are owned by unaffiliated third parties. Our
day-to-day
management is performed by our Advisor. All of our executive
officers are employed by our Advisor.
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Financial
Information About Industry Segments
Financial Accounting Standards Board, or FASB, Accounting
Standards Codification, or ASC, Topic 280, Segment Reporting,
establishes standards for reporting financial and
descriptive information about a public entitys reportable
segments. We have determined that we have one reportable
segment, with activities related to investing in apartment
communities. Our investments in real estate are geographically
diversified and management evaluates operating performance on an
individual property level. However, as each of our apartment
communities has similar economic characteristics, tenants and
products and services, our apartment communities have been
aggregated into one reportable segment for the years ended
December 31, 2010, 2009 and 2008.
Investment
Risks
There
is no public market for the shares of our common stock sold in
our offerings. Therefore, it will be difficult for our
stockholders to sell their shares of our common stock and, if
they are able to sell their shares of our common stock, they
will likely sell them at a substantial discount.
There currently is no public market for the shares of our common
stock sold in our offerings and we do not expect a market to
develop prior to the listing of the shares of our common stock
on a national securities exchange. We have no current plans to
cause shares of our common stock to be listed on any securities
exchange or quoted on any market system or in any established
market either immediately or at any definite time in the future.
While we, acting through our board of directors, may attempt to
cause shares of our common stock to be listed or quoted if our
board of directors determines this action to be in our
stockholders best interest, there can be no assurance that
this event will ever occur. In addition, our charter contains
restrictions on the ownership and transfer of shares of our
common stock, which inhibits our stockholders ability to
sell shares of their common stock. Therefore, our stockholders
should consider the purchase of shares of our common stock as
illiquid and a long-term investment, and they must be prepared
to hold their shares of our common stock for an indefinite
length of time.
Our charter provides that no person may own more than 9.9% in
value of our issued and outstanding shares of capital stock or
more than 9.9% in value or in number of shares, whichever is
more restrictive, of the issued and outstanding shares of our
common stock. Any purported transfer of the shares of our common
stock that would result in a violation of either of these limits
will result in such shares being transferred to a trust for the
benefit of a charitable beneficiary or such transfer being
declared null and void.
Our board of directors has terminated our share repurchase plan.
Therefore, it will be difficult for our stockholders to sell
their shares of our common stock promptly, or at all. If they
are able to sell their shares of our common stock, they may only
be able to sell them at a substantial discount from the price
they paid. This may be the result, in part, of the fact that, at
the time we made our investments, the amount of funds available
for investment was reduced by up to 11.0% of the gross offering
proceeds, which was used to pay selling commissions, a dealer
manager fee and other organizational and offering expenses. We
also used gross offering proceeds to pay acquisition fees,
acquisition expenses, asset management fees and property
management fees. Unless our aggregate investments increase in
value to compensate for these fees and expenses, which may not
occur, it is unlikely that our stockholders will be able to sell
their shares of our common stock without incurring a substantial
loss. We cannot assure our stockholders that their shares of our
common stock will ever appreciate in value to equal the price
they paid for their shares of our common stock.
We
have experienced losses in the past and we may experience
additional losses in the future.
Historically, we have experienced net losses and we may not be
profitable or realize growth in the value of our investments.
Many of our initial losses can be attributed to
start-up
costs and operating costs incurred prior to purchasing
properties or making other investments that generate revenue,
and many of our recent losses can be attributed to the current
economic environment and capital constraints. For a further
discussion of our operational history and the factors for our
losses, see Part II, Item 7. Managements
Discussion and
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Analysis of Financial Condition and Results of Operations and
our consolidated financial statements and the notes thereto for
a discussion.
We
have paid distributions from sources other than our cash flows
from operations, including from the net proceeds from our
offerings, and from borrowed funds. We may continue to pay
distributions from borrowings in anticipation of future cash
flows. Any such distributions may reduce the amount of capital
we ultimately invest in assets and negatively impact the value
of our stockholders investments.
Distributions payable to our stockholders may include a return
of capital, rather than a return on capital. The actual amount
and timing of distributions are determined by our board of
directors in its discretion and typically will depend on the
amount of funds available for distribution, which will depend on
items such as our financial condition, current and projected
capital expenditure requirements, tax considerations and annual
distribution requirements needed to maintain our qualification
as a REIT. As a result, our distribution rate and payment
frequency may vary from time to time. We expect to have little
cash flows from operations available for distribution unless we
make substantial investments. Therefore, we may use borrowed
funds to pay cash distributions to our stockholders, including
to maintain our qualification as a REIT, which would cause us to
incur additional interest expense as a result of borrowed funds.
Further, if the aggregate amount of cash distributed in any
given year exceeds the amount of our current and accumulated
earnings and profits, the excess amount will be deemed a return
of capital. We have not established any limit on the amount of
borrowings that may be used to fund distributions, except that,
in accordance with our organizational documents and Maryland
law, we may not make distributions that would: (1) cause us
to be unable to pay our debts as they become due in the usual
course of business; (2) cause our total assets to be less
than the sum of our total liabilities plus senior liquidation
preferences; or (3) jeopardize our ability to maintain our
qualification as a REIT.
For the year ended December 31, 2010, we paid distributions
of $10,883,000 ($6,486,000 in cash and $4,397,000 in shares of
our common stock pursuant to the DRIP), as compared to cash
flows from operations of $3,698,000. From our inception through
December 31, 2010, we paid cumulative distributions of
$32,331,000 ($18,481,000 in cash and $13,850,000 in shares of
our common stock pursuant to the DRIP), as compared to
cumulative cash flows from operations of $13,479,000. The
distributions paid in excess of our cash flows from operations
were paid using net proceeds from our offerings. Our
distributions of amounts in excess of our current and
accumulated earnings and profits have resulted in a return of
capital to our stockholders. For a further discussion of
distributions, see Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Distributions.
We
have a limited operating history. Therefore, our stockholders
may not be able to adequately evaluate our ability to achieve
our investment objectives.
We were incorporated on December 21, 2005 and we commenced
our initial public offering in July 2006, and therefore we have
a limited operating history. As a result, an investment in
shares of our common stock may entail more risks than the shares
of common stock of a REIT with a substantial operating history.
Our stockholders should consider our prospects in light of the
risks, uncertainties and difficulties frequently encountered by
companies like ours that do not have a substantial operating
history, many of which may be beyond our control. Therefore, to
be successful in this market, we must, among other things:
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identify and acquire investments that further our investment
strategy;
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attract, integrate, motivate and retain qualified personnel to
manage our
day-to-day
operations;
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respond to competition both for investment opportunities and
potential investors investment in us; and
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build and expand our operational structure to support our
business.
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We cannot guarantee that we will succeed in achieving these
goals, and our failure to do so could cause our stockholders to
lose all or a portion of their investment.
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If we
raise proceeds substantially less than the maximum offering
amount in our follow-on offering, we will not be able to invest
in a diverse portfolio of real estate and real estate-related
investments, and the value of your investment may fluctuate more
widely with the performance of specific
investments.
Effective December 31, 2010, we have suspended our
follow-on offering. We currently have no effective dealer
manager agreement in place and we currently have no plans to
enter into a dealer manager agreement to recommence our
follow-on offering. As a result, we are not likely to raise a
substantial amount of proceeds from the follow-on offering in
the future, nor are we likely to achieve sales of the maximum
offering amount.
If we are unable to raise substantial funds, we will have
limited diversification in terms of the number of investments
owned, the geographic regions in which our investments are
located and the types of investments that we make. Your
investment in shares of our common stock will be subject to
greater risk to the extent that we lack a diversified portfolio
of investments. In such event, the likelihood of our
profitability being affected by the poor performance of any
single investment will increase. In addition, our fixed
operating expenses, as a percentage of gross income, would be
higher, and our financial condition and ability to pay
distributions could be adversely affected if we are unable to
raise substantial funds.
If we
are unable to find suitable investments, we may not have
sufficient cash flows available for distributions to
you.
Our ability to achieve our investment objectives and to pay
distributions to you is dependent upon the performance of our
advisor or any successor advisor in selecting additional
investments for us to acquire in the future, selecting property
managers for our properties and securing financing arrangements.
Our stockholders must rely entirely on the management ability of
our advisor and the oversight of our board of directors. In the
year ended December 31, 2010, we did not raise enough
proceeds from the sale of shares of our common stock in our
follow-on offering to significantly expand or further
geographically diversify our real estate portfolio. Our advisor
may not be successful in identifying additional suitable
investments on financially attractive terms or that, if it
identifies suitable investments we will have access to capital
or borrowings, or that our investment objectives will be
achieved. In any such an event, our ability to pay distributions
to you would be adversely affected.
We
face competition from other apartment communities and housing
alternatives for tenants, and we face competition from other
acquirers of apartment communities for investment opportunities,
both of which may limit our profitability and distributions to
our stockholders.
The residential apartment community industry is highly
competitive. This competition could reduce occupancy levels and
revenues at our apartment communities, which would adversely
affect our operations. We face competition from many sources,
including from other apartment communities both in the immediate
vicinity and the geographic market where our apartment
communities are and will be located. In addition, overbuilding
of apartment communities may occur. If so, this would increase
the number of apartment units available and may decrease
occupancy and unit rental rates.
Furthermore, apartment communities we acquire most likely
compete, or will compete, with numerous housing alternatives in
attracting tenants, including owner occupied single- and
multi-family homes available to rent or purchase. Competitive
housing in a particular area and the increasing affordability of
owner occupied single- and multi-family homes available to rent
or buy caused by declining mortgage interest rates and
government programs to promote home ownership could adversely
affect our ability to retain our tenants, lease apartment units
and increase or maintain rental rates.
The competition for apartment communities may significantly
increase the price we must pay for assets we seek to acquire,
and our competitors may succeed in acquiring those properties or
assets themselves. In addition, our potential acquisition
targets may find our competitors to be more attractive because
they may have greater resources, may be willing to pay more for
the properties or may have a more compatible operating
philosophy. In particular, larger apartment REITs may enjoy
significant competitive advantages that result from, among other
things, a lower cost of capital and enhanced operating
efficiencies. In addition, the number of entities and the amount
of funds competing for suitable investment properties may
increase. This
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competition will result in increased demand for these assets and
therefore increased prices paid for them. Because of an
increased interest in single-property acquisitions among
tax-motivated individual purchasers, we may pay higher prices if
we purchase single properties in comparison with portfolio
acquisitions. If we pay higher prices for our properties, our
business, financial condition and results of operations and our
ability to pay distributions to our stockholders may be
materially and adversely affected.
Our
success is dependent on the performance of our
advisor.
Our ability to achieve our investment objectives and to conduct
our operations is dependent upon the performance of our advisor
in managing our investments and our
day-to-day
activities, determining and negotiating any financing
arrangements, identifying and negotiating potential
acquisitions, and identifying and assessing strategic
alternatives for our business. We rely on the management ability
of our advisor, subject to the oversight and approval of our
board of directors. If our advisor suffers or is distracted by
adverse financial or operational problems in connection with its
operations unrelated to us, our advisor may be unable to
allocate time
and/or
resources to our operations. If our advisor is unable to
allocate sufficient resources to oversee and perform our
operations for any reason, we may be unable to achieve our
investment objectives or to pay distributions to our
stockholders. In addition, our success depends to a significant
degree upon the continued contributions of our advisors
key personnel, Messrs. Olander, Remppies and Carneal. The
loss of any or all of Messrs. Olander, Remppies or Carneal,
and our advisors inability to find, or any delay in
finding, a replacement with equivalent skills and experience,
could adversely impact our ability to execute our business
strategies and manage our properties. Furthermore, our advisor
may retain independent contractors to provide various services
for us, including administrative services, transfer agent
services and professional services, and our stockholders should
note that such contractors have no fiduciary duty to them and
may not perform as expected or desired. Any such services
provided by independent contractors will be paid for by us as an
operating expense.
Our
board of directors may change our investment objectives without
seeking our stockholders approval.
Our board of directors may change our investment objectives
without seeking our stockholders approval if our
directors, in accordance with their fiduciary duties to our
stockholders, determine that a change is in their best interest.
A change in our investment objectives could reduce our payment
of cash distributions to our stockholders or cause a decline in
the value of our investments.
The
commercial mortgage-backed securities in which we may invest are
subject to several types of risks.
Commercial mortgage-backed securities are bonds which evidence
interests in, or are secured by, a single commercial mortgage
loan or a pool of commercial mortgage loans. Accordingly, the
mortgage-backed securities in which we may invest are subject to
all the risks of the underlying mortgage loans. In a rising
interest rate environment, the value of commercial
mortgage-backed securities may be adversely affected when
payments on underlying mortgages do not occur as anticipated,
resulting in the extension of the securitys effective
maturity and the related increase in interest rate sensitivity
of a longer-term instrument. The value of commercial
mortgage-backed securities may also change due to shifts in the
markets perception of issuers and regulatory or tax
changes adversely affecting the mortgage securities markets as a
whole. In addition, commercial mortgage-backed securities are
subject to the credit risk associated with the performance of
the underlying mortgage properties. Commercial mortgage-backed
securities are also subject to several risks created through the
securitization process. Subordinate commercial mortgage-backed
securities are paid interest-only to the extent that there are
funds available to make payments. To the extent the collateral
pool includes a large percentage of delinquent loans, there is a
risk that interest payments on subordinate commercial
mortgage-backed securities will not be fully paid. Subordinate
securities of commercial mortgage-backed securities are also
subject to greater credit risk than those commercial
mortgage-backed securities that are more highly rated.
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The
mezzanine loans in which we may invest would involve greater
risks of loss than senior loans secured by income-producing real
properties.
We may invest in mezzanine loans that take the form of
subordinated loans secured by second mortgages on the underlying
real property or loans secured by a pledge of the ownership
interests of either the entity owning the real property or the
entity that owns the interest in the entity owning the real
property. These types of investments involve a higher degree of
risk than long-term senior mortgage lending secured by
income-producing real property because the investment may become
unsecured as a result of foreclosure by the senior lender. In
the event of a bankruptcy of the entity providing the pledge of
its ownership interests as security, we may not have full
recourse to the assets of such entity, or the assets of the
entity may not be sufficient to satisfy our mezzanine loan. If a
borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine
loan will be satisfied only after the senior debt. As a result,
we may not recover some or all of our investment. In addition,
mezzanine loans may have higher
loan-to-value
ratios than conventional mortgage loans, resulting in less
equity in the real property and increasing the risk of loss of
principal.
Risks
Related to Our Business
The
downturn in the credit markets may increase the cost of
borrowing and may make it difficult for us to obtain financing,
which may have a material adverse effect on our operations,
liquidity and/or financial condition.
Economic and business conditions in the United States continue
to be challenging, with tighter credit conditions and modest
growth. While recent economic data reflects a stabilization of
the economy and credit markets, the cost and availability of
credit may continue to be adversely affected. Concern about
continued stability of the economy and credit markets generally,
and the strength of counterparties specifically, has led many
lenders and institutional investors to reduce, and in some cases
cease, to provide funding to borrowers. The tightening of the
credit markets may have an adverse effect on our ability to
obtain financing for extensions, renewals or refinancing of our
current mortgage loan payables and other liabilities, and may
inhibit our ability to make future acquisitions, execute
strategic initiatives or meet liquidity needs. The negative
impact of the adverse changes in the credit markets and on the
real estate sector generally may have a material adverse effect
on our operations, liquidity and financial condition.
We are
uncertain of our sources of debt or equity for funding our
capital needs. If we cannot obtain funding on acceptable terms,
our ability to make necessary capital improvements to our
properties may be impaired or delayed.
In order to maintain our qualification as a REIT, we must
distribute to our stockholders at least 90.0% of our annual
taxable income, excluding net capital gains. Because of this
distribution requirement, it is not likely that we will be able
to fund a significant portion of our capital needs from retained
earnings. Sources of debt or equity for funding may not be
available to us on favorable terms or at all. If we do not have
access to sufficient funding in the future, we may not be able
to make necessary capital improvements to our properties, pay
other expenses or expand our business.
Adverse
economic and business conditions may significantly and
negatively affect our cash flows, profitability and financial
condition.
In recent years, the global financial markets have undergone
pervasive and fundamental disruptions. In the United States,
adverse economic and business conditions have resulted in higher
unemployment, weakening of consumer financial condition,
large-scale business failures and tight credit markets. Our
results of operations may be sensitive to changes in the overall
economic conditions that impact tenant leasing practices. A
continuation of ongoing adverse economic conditions affecting
disposable tenant income, such as employment levels, business
conditions, interest rates, tax rates, and fuel and energy
costs, could reduce overall tenant leasing or cause tenants to
modify their leasing behavior. At this time, it is difficult to
determine the breadth and duration of the economic and financial
market problems and the various ways our tenants may
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be affected. A general reduction in the level of tenant leasing
could adversely affect our business and profitability. The
ongoing market disruptions could also affect our operating
results and financial condition as follows:
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Valuations The ongoing market volatility may
make the valuation of our properties more difficult. There may
be significant uncertainty in the valuation, or in the stability
of the value, of our properties that could result in a
substantial decrease in the value of our properties. As a
result, we may not be able to recover the carrying amount of our
properties, which may require us to recognize an impairment
charge in earnings.
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Government Intervention The values of, and
cash flows from, the properties we own are affected by
developments in global, national and local economies. As a
result of the recent severe recession and the significant
government interventions, federal, state and local governments
have incurred record deficits and assumed or guaranteed
liabilities of private financial institutions and other private
entities. These increased budget deficits and the weakened
financial condition of federal, state and local governments may
lead to reduced governmental spending, tax increases, public
sector job losses, increased interest rates or other adverse
economic events, which may directly or indirectly adversely
affect our business, financial condition and results of
operations.
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We may
structure acquisitions of property in exchange for limited
partnership units in our operating partnership on terms that
could limit our liquidity or our flexibility.
We may acquire properties by issuing limited partnership units
in our operating partnership in exchange for a property owner
contributing property to the partnership. If we enter into such
transactions, in order to induce the contributors of such
properties to accept units in our operating partnership, rather
than cash, in exchange for their properties, it may be necessary
for us to provide them with additional incentives. For instance,
our operating partnerships limited partnership agreement
provides that any holder of units may exchange limited
partnership units on a
one-for-one
basis for shares of our common stock, or, at our option, cash
equal to the value of an equivalent number of shares of our
common stock. We may, however, enter into additional contractual
arrangements with contributors of property under which we would
agree to redeem a contributors units for shares of our
common stock or cash, at the option of the contributor, at set
times. If the contributor required us to redeem units for cash
pursuant to such a provision, it would limit our liquidity and
thus our ability to use cash to make other investments, satisfy
other obligations or pay distributions to our stockholders.
Moreover, if we were required to redeem units for cash at a time
when we did not have sufficient cash to fund the redemption, we
might be required to sell one or more properties to raise funds
to satisfy this obligation. Furthermore, we might agree that if
distributions the contributor received as a limited partner in
our operating partnership did not provide the contributor with a
defined return, then upon redemption of the contributors
units we would pay the contributor an additional amount
necessary to achieve that return. Such a provision could further
negatively impact our liquidity and flexibility. Finally, in
order to allow a contributor of a property to defer taxable gain
on the contribution of property to our operating partnership, we
might agree not to sell a contributed property for a defined
period of time or until the contributor exchanged the
contributors units for cash or shares of our common stock.
Such an agreement would prevent us from selling those
properties, even if market conditions made such a sale favorable
to us.
Our
advisor may terminate our Advisory Agreement, which may require
us to find a new advisor.
Either we or our advisor can terminate our Advisory Agreement
upon 60 days written notice to the other party. If
our advisor was to terminate our Advisory Agreement before we
were prepared to be completely self-managed, we would need to
find another advisor to provide us with
day-to-day
management services or hire employees to provide these services
directly to us. There can be no assurances that we would be able
to find a new advisor or employees or enter into agreements for
such services on acceptable terms.
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As we
transition to self-management, our success is increasingly
dependent on the performance of our board of directors and our
chairman of the board and chief executive officer.
As we transition to self-management, our ability to achieve our
investment objectives and to pay distributions will become
increasingly dependent upon the performance of our board of
directors and Stanley J. Olander, Jr., chairman of our
board of directors, and our chief executive officer and chief
financial officer, in managing our investments and our
day-to-day
activities, determining and negotiating any financing
arrangements, identifying and negotiating potential
acquisitions, and identifying and assessing strategic
alternatives for our business. We currently do not have an
employment agreement with Mr. Olander. If we were to lose
the benefit of Mr. Olanders experience, efforts and
abilities, or the benefit of any of our other directors, we may
not be able to achieve our investment objectives and our
operating results could suffer.
As we
internalize our management functions, we may incur significant
costs associated with being
self-managed.
Our long-term strategy is to become fully self-managed. As we
internalize our management functions, we may pay lower fees and
expenses we may otherwise be required to pay to an external
advisor; however our direct expenses will include general and
administrative costs, including legal, accounting, and other
expenses related to corporate governance, Securities and
Exchange Commission reporting and compliance. We also expect to
incur the compensation and benefits costs of our officers that
are now paid by our advisor or its affiliates. In addition, we
may issue equity awards to officers, employees and consultants,
which would decrease net income and FFO, and may further dilute
our stockholders investment. We cannot reasonably estimate
the amount of fees to an external advisor we would save and the
costs we would incur if we became self-managed. If the expenses
we assume as a result of an internalization are higher than the
expenses we no longer pay to an external advisor, our net income
per share and FFO per share may be lower as a result of the
internalization than it otherwise would have been, potentially
decreasing the amount of funds available to distribute to our
stockholders.
As the first step toward our long-term strategy of internalizing
our management functions, we have internalized our property
management function by acquiring substantially all of the assets
and certain liabilities of Mission Residential Management,
including the in-place workforce of approximately
300 employees, through our taxable REIT subsidiary, MR
Property Management. As of result of employing such personnel,
and any additional personnel as a result of an election to
internalize our operations, we are subject to potential
liabilities faced by employers, such as workers disability
and compensation claims, potential labor disputes and other
employee-related liabilities and grievances.
As we internalize our management functions, we could have
difficulty integrating these functions as a stand-alone entity,
and we may fail to properly identify the appropriate mix of
personnel and capital needs to operate as a stand-alone entity.
An inability to manage an internalization transaction
effectively could, therefore, result in our incurring additional
costs and/or
experiencing deficiencies in our disclosure controls and
procedures or our internal control over financial reporting.
Such deficiencies could cause us to incur additional costs, and
our managements attention could be diverted from most
effectively managing our properties.
Our
operating partnership has been named as a defendant in a
complaint seeking an injunction to prevent the acquisition of
the eight DST properties that we have contracted to
acquire.
On August 27, 2010, we entered into definitive agreements
to acquire Mission Rock Ridge Apartments, substantially all of
the assets of Mission Residential Management, and eight
additional apartment communities owned by eight separate
Delaware Statutory Trusts for which an affiliate MR Holdings,
LLC serves as trustee, or the DST properties, for total
consideration valued at $157.8 million, including
approximately $33.2 million of limited partnership
interests in the OP and the assumption of approximately
$124.6 million of in-place mortgage indebtedness
encumbering the properties. On November 9, 2010, seven of
the 277 investors who hold interests in the eight Delaware
statutory trusts that hold the DST properties filed a complaint
in the United States District Court for the Eastern District of
Virginia (Civil Action No. 3:10CV824(HEH)) (the
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Federal Action) against the trustee of each of these
trusts and certain of the trustees affiliates, as well as
against our operating partnership, seeking, among other things,
to enjoin the closing of our proposed acquisition of the eight
DST properties. The complaint alleged, among other things, that
the trustee has breached its fiduciary duties to the beneficial
owners of the trusts by entering into the eight purchase and
sale agreements with our operating partnership. The complaint
further alleged that our operating partnership aided and abetted
the trustees alleged breaches of fiduciary duty and
tortuously interfered with the contractual relations between the
trusts and the trust beneficiaries. On December, 20, 2010, the
purported replacement trustee Internacional Realty, Inc., as
well as investors in each of the 23 DSTs for which Mission
Trust Services serves as trustee, filed a complaint in the
Circuit Court of Cook County, Illinois (Case No. 10 CH
53556) (the Cook County Action). The Cook County
Action was filed against the same parties as the Federal Action,
and included the same claims against us as in the Federal
Action. On December 23, 2010, the plaintiffs in the Federal
Action dismissed that action voluntarily. On January 28,
2011, Internacional Realty, Inc. filed a third-party complaint
against us and other parties in the Circuit Court for Fairfax
County, Virginia (Case
No. 2010-17876)
(the Fairfax Action). The Fairfax Action included
the same claims against us as in the Federal Action and the Cook
County Action. On March 5, 2011, the court dismissed the
third-party complaint against us. The investors have indicated,
however, an intent to re-file the action against us in a
separate complaint in Fairfax County. We believe the allegations
contained in the complaints against us are without merit and we
intend to defend the claims vigorously. However, there is no
assurance that we will be successful in our defense.
In a Consent Order dated November 10, 2010, entered in the
Federal Action, the parties agreed that none of the eight
transactions will be closed during the
90-day
period following the date of such Consent Order.
As of February 23, 2011, the expiration date for the
lenders approval period pursuant to each of the purchase
agreements, certain conditions precedent to our obligation to
acquire the eight DST properties had not been satisfied. With
the prior approval of the board of directors, on
February 28, 2011, we provided the respective Delaware
Statutory Trusts written notice of termination of each of the
respective purchase agreements in accordance with the terms of
the agreements.
The
failure of any bank in which we deposit our funds could reduce
the amount of cash we have available to pay distributions and
make additional investments.
We expect that we will have cash and cash equivalents and
restricted cash deposited in certain financial institutions in
excess of federally insured levels. If any of the banking
institutions in which we have deposited funds ultimately fail,
we may lose the amount of our deposits over any federally
insured amount. The loss of our deposits could reduce the amount
of cash we have available to distribute or invest and could
result in a decline in the value of our stockholders
investment.
Risks
Related to Conflicts of Interest
We are subject to conflicts of interest arising out of
relationships among us, our officers, our advisor and its
affiliates, including the material conflicts discussed below.
Our
officers face conflicts of interest relating to the allocation
of their time and other resources among the various entities
that they serve or have interests in and such conflicts may not
be resolved in our favor.
Our officers and non-independent directors are also the owners
and officers of our advisor, and may be involved in other real
estate investment activities that may give rise to conflicts of
interest. As managers and owners of our advisor or with
interests in competition with our own interests, these
individuals experience conflicts between their fiduciary
obligations to us and their fiduciary obligations to, and
pecuniary interests in, our advisor and any other entities with
which they may be affiliated. These conflicts of interest could
limit the time and services that some of our officers devote to
our company and the affairs of our advisor. Because these
persons have competing interests for their time and resources,
they may have conflicts of interest in allocating their time
between our business and these other activities. Poor or
inadequate management of our
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business would adversely affect our results of operations and
the value of ownership of shares of our common stock.
Our
advisor faces conflicts of interest relating to the incentive
fee structure under our Advisory Agreement, which could result
in actions that are not necessarily in the long-term best
interests of our stockholders.
Pursuant to the terms of our Advisory Agreement, and in an
effort to align the interests of our advisor with our
stockholders interest, our advisor is entitled to fees
that are structured in a manner intended to provide incentives
to our advisor to perform in a manner that will enhance returns
on our stockholders investment in us. However, because our
advisor does not maintain a significant equity interest in us
and is entitled to receive certain fees regardless of
performance, our advisors interests are not wholly aligned
with those of our stockholders. For example, our advisor could
be motivated to recommend riskier or more speculative
investments in order for us to generate the specified levels of
performance or sales proceeds that would entitle our advisor to
fees. In addition, our Advisory Agreement requires us to pay a
performance-based termination fee to our advisor in the event
that we list our shares for trading on an exchange or in respect
of its participation in net sales proceeds. Our advisor will
have substantial influence with respect to whether and when our
shares are listed on an exchange or our assets are liquidated,
and these incentive fees could influence our advisors
recommendations to us in this regard. Furthermore, our advisor
has the right to terminate the Advisory Agreement upon a change
of control of our company and thereby obligate us to pay the
performance fee, which could have the effect of delaying,
deferring or preventing the change of control if no performance
fee would be payable at the time of the transaction.
The
absence of arms length bargaining may mean that our
Advisory Agreement may not be as favorable to our stockholders
as it otherwise could have been.
Our Advisory Agreement, and any future agreements between us and
our advisor or any affiliate of our advisor, was not and will
not be reached through arms length negotiations. Thus,
such agreements may require us to pay more than we would if we
were using unaffiliated third parties. The terms of such
agreements and compensation may not solely reflect our
stockholders best interest and may be overly favorable to
the other party to such agreements, including in terms of the
substantial compensation to be paid to these parties under these
agreements.
Risks
Related to Our Organizational Structure
Several
potential events could cause our stockholders investment
in us to be diluted, which may reduce the overall value of their
investment.
Our stockholders investment in us could be diluted by a
number of factors, including:
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future offerings of our securities, including issuances pursuant
to the DRIP and up to 50,000,000 shares of any preferred
stock that our board of directors may authorize;
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private issuances of our securities to other investors or in
exchange for assets;
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issuances of shares of our common stock to our advisor in
connection with the asset management fee;
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issuances of our securities pursuant to our 2006 Incentive Award
Plan; or
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redemptions of units of limited partnership interest in our
operating partnership in exchange for shares of our common stock.
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Our board of directors is authorized, without stockholder
approval, to cause us to issue additional shares of our common
stock or to raise capital through the issuance of preferred
stock, options, warrants and other rights, on terms and for
consideration as our board of directors in its sole discretion
may determine, subject to certain restrictions in our charter in
the instance of options and warrants. Any such issuance could
result in dilution of the equity of our stockholders. Our board
of directors may, in its sole discretion, authorize us to issue
common stock or other equity or debt securities, (1) to
persons from whom we purchase apartment
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communities, as part or all of the purchase price of the
community, or (2) to our advisor in lieu of cash payments
required under our Advisory Agreement or other contract or
obligation. Our board of directors, in its sole discretion, may
determine the value of any common stock or other equity or debt
securities issued in consideration of apartment communities or
services provided, or to be provided, to us, except that while
shares of our common stock are offered by us to the public, the
public offering price of the shares of our common stock will be
deemed their value. To the extent we issue additional equity
interests after our stockholders purchase shares of our common
stock in our follow-on offering, their percentage ownership
interest in us will be diluted. In addition, depending upon the
terms and pricing of any additional offerings and the value of
our real estate and real estate-related investments, our
stockholders may also experience dilution in the book value and
fair market value of their shares of our common stock.
Our
ability to issue preferred stock may include a preference in
distributions superior to our common stock and also may deter or
prevent a sale of shares of our common stock in which our
stockholders could profit.
Our charter authorizes our board of directors to issue up to
50,000,000 shares of preferred stock. Our board of
directors has the discretion to establish the preferences and
rights, including a preference in distributions superior to our
common stockholders, of any issued preferred stock. If we
authorize and issue preferred stock with a distribution
preference over our common stock, payment of any distribution
preferences of outstanding preferred stock would reduce the
amount of funds available for the payment of distributions on
our common stock. Further, holders of preferred stock are
normally entitled to receive a preference payment in the event
we liquidate, dissolve or wind up before any payment is made to
our common stockholders, likely reducing the amount our common
stockholders would otherwise receive upon such an occurrence. In
addition, under certain circumstances, the issuance of preferred
stock or a separate class or series of common stock may render
more difficult or tend to discourage:
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a merger, tender offer or proxy contest;
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assumption of control by a holder of a large block of our
securities; or
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removal of incumbent management.
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Upon
investment in shares of our common stock, our stockholders
experienced an immediate dilution of $1.00 per
share.
The offering price for shares of our common stock in both our
initial offering and our follow-on offering was $10.00 per
share. After the payment of selling commissions and dealer
manager fees, we received $9.00 per share. As a result of these
expenses, our stockholders experienced immediate dilution of
$1.00 in book value per share, or 10.0% of the offering price,
not including other organizational and offering expenses. We
also reimbursed our Former Advisor for certain organizational
and offering expenses. These organizational and offering
expenses included advertising and sales expenses, legal and
accounting expenses, printing costs, formation costs, SEC,
FINRA, and blue sky filing fees, investor relations and other
administrative expenses. To the extent that our stockholders do
not participate in any future issuance of our securities, they
experience dilution of their ownership percentage.
Our
stockholders ability to control our operations is severely
limited.
Our board of directors determines our major strategies,
including our strategies regarding investments, financing,
growth, debt capitalization, REIT qualification and
distributions. Our board of directors may amend or revise these
and other strategies without a vote of the stockholders. Our
charter sets forth the stockholder voting rights required to be
set forth therein under the Statement of Policy Regarding Real
Estate Investment Trusts adopted by the North American
Securities Administrators Association, or the NASAA Guidelines.
Under our charter and Maryland law, our stockholders will have a
right to vote only on the following matters:
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the election or removal of directors;
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any amendment of our charter, except that our board of directors
may amend our charter without stockholder approval to change our
name or the name of other designation or the par value of any
class or series of our stock and the aggregate par value of our
stock, increase or decrease the aggregate number of our shares
of stock, increase or decrease the number of our shares of any
class or series that we have the authority to issue, or effect
certain reverse stock splits;
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our dissolution; and
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certain mergers, consolidations and sales or other dispositions
of all or substantially all of our assets.
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All other matters are subject to the discretion of our board of
directors.
The
limitation on ownership of our common stock prevents any single
stockholder from acquiring more than 9.9% of our capital stock
or more than 9.9% of our common stock and may force him or her
to sell stock back to us.
Our charter limits direct and indirect ownership of our common
stock by any single stockholder to 9.9% of the value of the
outstanding shares of our capital stock and 9.9% of the value or
number (whichever is more restrictive) of the outstanding shares
of our common stock. We refer to these limitations as the
ownership limits. Our charter also prohibits transfers of our
stock that would result in: (1) the shares of our common
stock being beneficially owned by fewer than 100 persons;
(2) five or fewer individuals, including natural persons,
private foundations, specified employee benefit plans and trusts
and charitable trusts, owning more than 50.0% of the shares of
our common stock, applying broad attribution rules imposed by
the federal income tax laws; (3) directly or indirectly
owning 9.9% or more of one of our tenants; or (4) before
our common stock qualifies as a class of publicly-offered
securities, 25.0% or more of the shares of our common
stock being owned by the Employee Retirement Income Security
Act, or ERISA, investors. If a stockholder acquires shares of
our stock in excess of the ownership limits or in violation of
the restrictions on transfer, we:
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may consider the transfer to be null and void;
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will not reflect the transaction on our books;
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may institute legal action to enjoin the transaction;
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will not pay dividends or other distributions to him or her with
respect to those excess shares of stock;
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will not recognize his or her voting rights for those excess
shares of stock; and
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may consider the excess shares of stock held in trust for the
benefit of a charitable beneficiary.
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If such shares of stock are transferred to a trust for the
benefit of a charitable beneficiary, he or she will be paid for
such excess shares of stock a price per share equal to the
lesser of the price he or she paid or the market
price of our stock. Unless shares of our common stock are
then traded on a national securities exchange, the market price
of such shares of our common stock will be a price determined by
our board of directors in good faith. If shares of our common
stock are traded on a national securities exchange, the market
price will be the average of the last sales prices or the
average of the last bid and ask prices for the five trading days
immediately preceding the date of determination.
If a stockholder acquires our stock in violation of the
ownership limits or the restrictions on transfer described above:
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he or she may lose his or her power to dispose of the stock;
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he or she may not recognize profit from the sale of such stock
if the market price of the stock increases; and
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he or she may incur a loss from the sale of such stock if the
market price decreases.
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Limitations
on share ownership and transfer may deter a sale of our common
stock in which our stockholders could profit.
The limits on ownership and transfer of our equity securities in
our charter may have the effect of delaying, deferring or
preventing a transaction or a change in control that might
involve a premium price for a stockholders common stock.
The ownership limits and restrictions on transferability will
continue to apply until our board of directors determines that
it is no longer in our best interest to continue to qualify as a
REIT.
Maryland
takeover statutes may deter others from seeking to acquire us
and prevent our stockholders from making a profit in such
transaction.
The Maryland General Corporation Law, or the MGCL, contains many
provisions, such as the business combination statute and the
control share acquisition statute, that are designed to prevent,
or have the effect of preventing, someone from acquiring control
of us. Our bylaws exempt us from the control share acquisition
statute (which eliminates voting rights for certain levels of
shares that could exercise control over us) and our board of
directors has adopted a resolution opting out of the business
combination statute (which, among other things, prohibits a
merger or consolidation with a 10.0% stockholder for a period of
time) with respect to our affiliates. However, if the bylaw
provisions exempting us from the control share acquisition
statute or our board resolution opting out of the business
combination statute were repealed, these provisions of Maryland
law could delay or prevent offers to acquire us and increase the
difficulty of consummating any such offers, even if such a
transaction would be in our stockholders best interest.
The
MGCL and our organizational documents limit our
stockholders right to bring claims against our officers
and directors.
The MGCL provides that a director will not have any liability as
a director so long as he or she performs his or her duties in
good faith, in a manner he or she reasonably believes to be in
our best interest, and with the care that an ordinarily prudent
person in a like position would use under similar circumstances.
In addition, our charter provides that, subject to the
applicable limitations set forth therein or under the MGCL, no
director or officer will be liable to us or our stockholders for
monetary damages. Our charter also provides that we will
generally indemnify our directors, our officers, our advisor and
its affiliates for losses they may incur by reason of their
service in those capacities unless: (1) their act or
omission was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of
active and deliberate dishonesty; (2) they actually
received an improper personal benefit in money, property or
services; or (3) in the case of any criminal proceeding,
they had reasonable cause to believe the act or omission was
unlawful. However, our charter also provides that we may not
indemnify or hold harmless our directors, our advisor and its
affiliates unless they have determined that the course of
conduct that caused the loss or liability was in our best
interest, they were acting on our behalf or performing services
for us, the liability was not the result of negligence or
misconduct by our non-independent directors, our advisor and its
affiliates or gross negligence or willful misconduct by our
independent directors, and the indemnification is recoverable
only out of our net assets or the proceeds of insurance and not
from our stockholders.
Our
stockholders investment return may be reduced if we are
required to register as an investment company under the
Investment Company Act.
We intend to conduct our operations, and the operations of our
operating partnership and any other subsidiaries, so that no
such entity meets the definition of an investment
company under Section 3(a)(1) of the Investment
Company Act of 1940, as amended, or the Investment Company Act.
Under the Investment Company Act, in relevant part, a company is
an investment company if:
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pursuant to Section 3(a)(1)(A), it is, or holds itself out
as being, engaged primarily, or proposes to engage primarily, in
the business of investing, reinvesting or trading in
securities; or
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pursuant to Section 3(a)(1)(C), it is engaged, or proposes
to engage, in the business of investing, reinvesting, owning,
holding or trading in securities and owns or proposes to acquire
investment securities having a value exceeding 40%
of the value of its total assets on an unconsolidated basis (the
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40% test). Investment securities excludes
U.S. Government securities and securities of majority-owned
subsidiaries that are not themselves investment companies and
are not relying on the exception from the definition of
investment company under Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act.
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We intend to monitor our operations and our assets on an ongoing
basis in order to ensure that neither we, nor any of our
subsidiaries, meet the definition of investment
company under Section 3(a)(1) of the Investment
Company Act. If we were obligated to register as an investment
company, we would have to comply with a variety of substantive
requirements under the Investment Company Act imposing, among
other things:
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limitations on capital structure;
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restrictions on specified investments;
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prohibitions on transactions with affiliates;
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compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations that would
significantly change our operations; and
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potentially, compliance with daily valuation requirements.
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In order for us to not meet the definition of an
investment company and avoid regulation under the
Investment Company Act, we must engage primarily in the business
of buying real estate, and these investments must be made within
a year after the offering ends. If we are unable to invest a
significant portion of the proceeds of this offering in
properties within one year of the termination of the offering,
we may avoid being required to register as an investment company
by temporarily investing any unused proceeds in certificates of
deposit or other cash items with low returns. This would reduce
the cash available for distribution to investors and possibly
lower your returns.
To avoid meeting the definition of an investment
company under Section 3(a)(1) of the Investment
Company Act, we may be unable to sell assets we would otherwise
want to sell and may need to sell assets we would otherwise wish
to retain. Similarly, we may have to acquire additional income
or loss generating assets that we might not otherwise have
acquired or may have to forgo opportunities to acquire interests
in companies that we would otherwise want to acquire and would
be important to our investment strategy. In addition, a change
in the value of any of our assets could negatively affect our
ability to avoid being required to register as an investment
company. If we were required to register as an investment
company but failed to do so, we would be prohibited from
engaging in our business, and criminal and civil actions could
be brought against us. In addition, our contracts would be
unenforceable unless a court were to require enforcement, and a
court could appoint a receiver to take control of us and
liquidate our business.
Risks
Related to Investments in Real Estate
Our
results of operations, our ability to pay distributions to our
stockholders and our ability to dispose of our investments are
subject to general economic and regulatory factors we cannot
control or predict.
Our results of operations are subject to the risks of a national
economic slowdown or disruption, other changes in national or
local economic conditions or changes in tax, real estate,
environmental or zoning laws. The following factors may affect
income from our properties, our ability to dispose of properties
and yields from our properties:
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poor economic times may result in defaults by tenants of our
properties and borrowers. We may also be required to provide
rent concessions or reduced rental rates to maintain or increase
occupancy levels;
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job transfers and layoffs may cause vacancies to increase and a
lack of future population and job growth may make it difficult
to maintain or increase occupancy levels;
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increases in supply of competing properties or decreases in
demand for our properties may impact our ability to maintain or
increase occupancy levels;
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changes in interest rates and availability of debt financing
could render the sale of properties difficult or unattractive;
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periods of high interest rates may reduce cash flows from
leveraged properties; and
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increased insurance premiums, real estate taxes or energy or
other expenses may reduce funds available for distribution.
Also, any such increased expenses may make it difficult to
increase rents to tenants on turnover, which may limit our
ability to increase our returns.
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Some or all of the foregoing factors may affect the returns we
receive from our investments, our results of operations, our
ability to pay distributions to our stockholders or our ability
to dispose of our investments.
We
depend on our tenants to pay rent, and their inability to pay
rent may substantially reduce our revenues and cash available
for distribution to our stockholders.
The underlying value of our properties and the ability to pay
distributions to our stockholders generally depend upon the
ability of the tenants of our properties to pay their rents in a
consistent and timely manner. Their inability to do so may be
impacted by employment and other constraints on their personal
finances, including debts, purchases and other factors. Changes
beyond our control may adversely affect our tenants
ability to make lease payments and consequently would
substantially reduce both our income from operations and our
ability to pay distributions to our stockholders. These changes
include, among others, changes in national, regional or local
economic conditions. An increase in the number of tenant
defaults or premature lease terminations could, depending upon
the market conditions at the time and the incentives or
concessions we must make in order to find substitute tenants,
have a material adverse effect on our revenues and the value of
shares of our common stock or our cash available for
distribution to our stockholders.
Short-term
apartment leases expose us to the effects of declining market
rent, which could adversely impact our ability to pay cash
distributions to our stockholders.
We expect that substantially all of our apartment leases will
continue to be for a term of one year or less. Because these
leases generally permit the tenants to leave at the end of the
lease term without penalty, our rental revenues may be impacted
by declines in market rents more quickly than if our leases were
for longer terms.
Some
or all of our properties have incurred, and will incur,
vacancies, which may result in reduced revenue and resale value,
a reduction in cash available for distribution and a diminished
return on our stockholders investment.
Some or all of our properties have incurred, and will incur,
vacancies. If vacancies of a significant level continue for a
long period of time, we may suffer reduced revenues resulting in
less cash distributions to our stockholders. In addition, the
resale value of the property could be diminished because the
market value of a particular property will depend principally
upon the value of the leases of such property.
We are
dependent on our investment in a single asset class, making our
performance more vulnerable to economic downturns in the
apartment industry than if we had diversified
investments.
Our current strategy is to acquire interests primarily in
apartment communities in select U.S. metropolitan markets.
As a result, we are subject to the risks inherent in investing
in a single asset class. A downturn in demand for residential
apartments may have more pronounced effects on the amount of
cash available to us for distribution or on the value of our
assets than if we had diversified our investments across
different asset classes.
Lack
of geographic diversity may expose us to regional or local
economic downturns that could adversely impact our operations or
our ability to recover our investment in one or more
properties.
Geographic concentration of properties exposes us to economic
downturns in the areas where our properties are located. Because
we intend to acquire apartment communities in select
U.S. metropolitan
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markets, our portfolio of properties may not be geographically
diversified. In the year ended December 31, 2010, we did
not raise enough proceeds from the sale of shares of our common
stock in our follow-on offering to significantly expand or
further geographically diversify our real estate portfolio. A
relatively smaller, less geographically diverse portfolio could
result in increased exposure to local and regional economic
downturns and the poor performance of one or more of our
properties, and, therefore, expose our stockholders to increased
risk. A regional or local recession in any of these areas could
adversely affect our ability to generate or increase operating
revenues, attract new tenants or dispose of unproductive
properties.
We may
be unable to secure funds for future capital improvements, which
could adversely impact our ability to pay cash distributions to
our stockholders.
In order to attract and maintain tenants, we may be required to
expend funds for capital improvements to the apartment units and
common areas. In addition, we may require substantial funds to
renovate an apartment community in order to sell it, upgrade it
or reposition it in the market. If we have insufficient capital
reserves, we will have to obtain financing from other sources.
We intend to establish capital reserves in an amount we, in our
discretion, believe is necessary. A lender also may require
escrow of capital reserves in excess of any established
reserves. If these reserves or any reserves otherwise
established are designated for other uses or are insufficient to
meet our cash needs, we may have to obtain financing from either
affiliated or unaffiliated sources to fund our cash
requirements. We cannot assure our stockholders that sufficient
financing will be available or, if available, will be available
on economically feasible terms or on terms acceptable to us.
Moreover, certain reserves required by lenders may be designated
for specific uses and may not be available for capital purposes
such as future capital improvements. Additional borrowing for
capital needs and capital improvements will increase our
interest expense, and, therefore, our financial condition and
our ability to pay cash distributions to our stockholders may be
adversely affected.
We may
obtain only limited warranties when we purchase a property and
would have only limited recourse in the event our due diligence
did not identify any issues that lower the value of our
property.
The seller of a property often sells such property in its
as is condition on a where is basis and
with all faults, without any warranties of
merchantability or fitness for a particular use or purpose. In
addition, purchase and sale agreements may contain only limited
warranties, representations and indemnifications that will only
survive for a limited period after the closing. The purchase of
properties with limited warranties increases the risk that we
may lose some or all of our invested capital in the property, as
well as the loss of rental income from that property.
Uninsured
losses relating to real estate and lender requirements to obtain
insurance may reduce our stockholders
returns.
There are types of losses relating to real estate, generally
catastrophic in nature, such as losses due to wars, acts of
terrorism, earthquakes, floods, hurricanes, pollution or
environmental matters, for which we do not intend to obtain
insurance unless we are required to do so by mortgage lenders.
If any of our properties incurs a casualty loss that is not
fully covered by insurance, the value of our assets will be
reduced by any such uninsured loss. In addition, other than any
reserves we may establish, we have no source of funding to
repair or reconstruct any uninsured damaged property, and we
cannot assure our stockholders that any such sources of funding
will be available to us for such purposes in the future. Also,
to the extent we must pay unexpectedly large amounts for
uninsured losses, we could suffer reduced earnings that would
result in less cash to be distributed to our stockholders. In
cases where we are required by mortgage lenders to obtain
casualty loss insurance for catastrophic events or terrorism,
such insurance may not be available, or may not be available at
a reasonable cost, which could inhibit our ability to finance or
refinance our properties. Additionally, if we obtain such
insurance, the costs associated with owning a property would
increase and could have a material adverse effect on the net
income from the property, and, thus, the cash available for
distribution to our stockholders.
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Dramatic
increases in our insurance rates could adversely affect our cash
flows and our ability to pay future distributions to our
stockholders.
We may not be able to renew our insurance coverage at our
current or reasonable rates nor can we estimate the amount of
potential increases of policy premiums. As a result, our cash
flows could be adversely impacted by increased premiums.
Uncertain
market conditions relating to the future disposition of
properties could cause us to sell our properties at a loss in
the future.
We intend to hold our various real estate investments until such
time as our advisor determines that a sale or other disposition
appears to be advantageous to achieve our investment objectives.
Our advisor, subject to the oversight and approval of our board
of directors, may exercise its discretion as to whether and when
to sell a property, and we will have no obligation to sell
properties at any particular time. We generally intend to hold
properties for an extended period of time, and we cannot predict
with any certainty the various market conditions affecting real
estate investments that will exist at any particular time in the
future. Because of the uncertainty of market conditions that may
affect the future disposition of our properties, we cannot
assure our stockholders that we will be able to sell our
properties at a profit in the future. Additionally, we may incur
prepayment penalties in the event we sell a property subject to
a mortgage earlier than we otherwise had planned. Accordingly,
the extent to which our stockholders will receive cash
distributions and realize potential appreciation on our real
estate investments will, among other things, be dependent upon
fluctuating market conditions.
Our
inability to sell a property when we desire to do so could
adversely impact our ability to pay cash distributions to our
stockholders.
The real estate market is affected by many factors, such as
general economic conditions, availability of financing, interest
rates, supply and demand and other factors that are beyond our
control. We cannot predict whether we will be able to sell any
property for the price or on the terms set by us, or whether any
price or other terms offered by a prospective purchaser would be
acceptable to us. We may be required to expend funds to correct
defects or to make improvements before a property can be sold.
We may not have adequate funds available to correct such defects
or to make such improvements. Moreover, in acquiring a property,
we may agree to restrictions that prohibit the sale of that
property for a period of time or impose other restrictions, such
as a limitation on the amount of debt that can be placed or
repaid on that property. We cannot predict the length of time
needed to find a willing purchaser and to close the sale of a
property. Our inability to sell a property when we desire to do
so may cause us to reduce our selling price for the property.
Any delay in our receipt of proceeds, or diminishment of
proceeds, from the sale of a property could adversely impact our
ability to pay distributions to our stockholders.
Our
stockholders may not receive any profits resulting from the sale
of our properties, or receive such profits in a timely manner,
because we may provide financing to the purchaser of such
properties.
Our stockholders may experience a delay before receiving their
share of the proceeds of such liquidation. In liquidation, we
may sell our properties either subject to or upon the assumption
of any then outstanding mortgage debt or, alternatively, may
provide financing to purchasers. We may take a purchase money
obligation secured by a mortgage as partial payment. We do not
have any limitations or restrictions on our taking such purchase
money obligations. To the extent we receive promissory notes or
other property instead of cash from sales, such proceeds, other
than any interest payable on those proceeds, will not be
included in net sale proceeds until and to the extent the
promissory notes or other property are actually paid, sold,
refinanced or otherwise disposed of. In many cases, we will
receive initial down payments in the year of sale in an amount
less than the selling price and subsequent payments will be
spread over a number of years. Therefore, our stockholders may
experience a delay in the distribution of the proceeds of a sale
until such time.
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We
face possible liability for environmental cleanup costs and
damages for contamination related to properties we acquire,
which could substantially increase our costs and reduce our
liquidity and cash distributions to our
stockholders.
Because we own and operate real estate, we are subject to
various federal, state and local environmental laws, ordinances
and regulations. Under these laws, ordinances and regulations, a
current or previous owner or operator of real estate may be
liable for the cost of removal or remediation of hazardous or
toxic substances on, under or in such property. The costs of
removal or remediation could be substantial. Such laws often
impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic
substances. Environmental laws also may impose restrictions on
the manner in which property may be used or businesses may be
operated, and these restrictions may require substantial
expenditures. Environmental laws provide for sanctions in the
event of noncompliance and may be enforced by governmental
agencies or, in certain circumstances, by private parties.
Certain environmental laws and common law principles could be
used to impose liability for release of and exposure to
hazardous substances, including the release of
asbestos-containing materials into the air, and third parties
may seek recovery from owners or operators of real estate for
personal injury or property damage associated with exposure to
released hazardous substances. In addition, new or more
stringent laws or stricter interpretations of existing laws
could change the cost of compliance or liabilities and
restrictions arising out of such laws. The cost of defending
against these claims, complying with environmental regulatory
requirements, conducting remediation of any contaminated
property, or of paying personal injury claims could be
substantial, which would reduce our liquidity and cash available
for distribution to our stockholders. In addition, the presence
of hazardous substances on a property or the failure to meet
environmental regulatory requirements may materially impair our
ability to use, lease or sell a property, or to use the property
as collateral for borrowing.
Increased
construction of similar properties that compete with our
properties in any particular location could adversely affect the
operating results of our properties and our cash available for
distribution to our stockholders.
We may acquire properties in locations that experience increases
in construction of properties that compete with our properties.
This increased competition and construction could:
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make it more difficult for us to find tenants to lease units in
our apartment communities;
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force us to lower our rental prices in order to lease units in
our apartment communities; and
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substantially reduce our revenues and cash available for
distribution to our stockholders.
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Costs
required to become compliant with the Americans with
Disabilities Act at our properties may affect our ability to pay
distributions to our stockholders.
We may acquire properties that are not in compliance with the
Americans with Disabilities Act of 1990. We would be required to
pay for improvement to the properties to effect compliance with
the ADA. Under the ADA, all public accommodations must meet
federal requirements related to access and use by disabled
persons. The ADA requirements could require removal of access
barriers and could result in the imposition of fines by the
federal government or an award of damages to private litigants.
We could be liable for violations of such laws and regulations
by us or our tenants. State and federal laws in this area are
constantly evolving. Any changes in state or federal laws in
this area could place a greater cost or burden on us as landlord
of the properties we acquire. In addition, although we generally
do not expect to engage in substantial renovation or
construction work, any new construction at a property would need
to be ADA compliant and a certain percentage of the construction
costs may need to be allocated to the propertys overall
ADA compliance.
Our
real properties are subject to property taxes that may increase
in the future, which could adversely affect our cash
flows.
Our real properties are subject to property taxes that may
increase as tax rates change and as the real properties are
assessed or reassessed by taxing authorities. As the owner of
the properties, we will be
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ultimately responsible for payment of the taxes to the
applicable government authorities. If property taxes increase, a
reduction of our cash flows will occur.
Joint
ownership of an investment in real estate may involve risks not
associated with direct ownership of real estate.
Joint ownership of an investment in real estate may involve
risks not associated with direct ownership of real estate,
including the following:
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a venture partner may at any time have economic or other
business interests or goals which become inconsistent with our
business interests or goals, including inconsistent goals
relating to the sale of properties held in a joint venture or
the timing of the termination and liquidation of the venture;
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a venture partner might become bankrupt and such proceedings
could have an adverse impact on the operation of the partnership
or joint venture;
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actions taken by a venture partner might have the result of
subjecting the property to liabilities in excess of those
contemplated;
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a venture partner may be in a position to take action contrary
to our instructions or requests or contrary to our strategies or
objectives, including our strategy to qualify and maintain our
qualification as a REIT; and
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the joint venture may provide for the distribution of income to
us otherwise than in direct proportion to our ownership interest
in the joint venture.
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Under certain joint venture arrangements, neither venture
partner may have the power to control the venture, and an
impasse could occur, which might adversely affect the joint
venture and decrease potential returns to our stockholders. If
we have a right of first refusal or buy/sell right to buy out a
venture partner, we may be unable to finance such a buy-out or
we may be forced to exercise those rights at a time when it
would not otherwise be in our best interest to do so. If our
interest is subject to a buy/sell right, we may not have
sufficient cash, available borrowing capacity or other capital
resources to allow us to purchase an interest of a venture
partner subject to the buy/sell right, in which case we may be
forced to sell our interest when we would otherwise prefer to
retain our interest. In addition, we may not be able to sell our
interest in a joint venture on a timely basis or on acceptable
terms if we desire to exit the venture for any reason,
particularly if our interest is subject to a right of first
refusal of our venture partner.
Risks
Related to Debt Financing
We
have incurred, and intend to continue to incur, mortgage
indebtedness and other borrowings, which may increase our
business risks, could hinder our ability to pay distributions
and could decrease the value of our stockholders
investment.
We have financed, and we intend to continue to finance, a
portion of the purchase price of our investments in real estate
by borrowing funds. We anticipate that, after an initial phase
of our operations (prior to the investment of all of the net
proceeds of the offerings of shares of our common stock) when we
may employ greater amounts of leverage to enable us to purchase
properties more quickly and therefore generate distributions for
our stockholders sooner, our overall leverage will not exceed
65.0% of the combined market value of our real estate and real
estate-related investments. Under our charter, we have a
limitation on borrowing that precludes us from borrowing in
excess of 300% of our net assets, without the approval of a
majority of our independent directors. Net assets for purposes
of this calculation are defined to be our total assets (other
than intangibles), valued at cost prior to deducting
depreciation, amortization, bad debt and other similar non-cash
reserves, less total liabilities. Generally speaking, the
preceding calculation is expected to approximate 75.0% of the
aggregate cost of our real estate and real estate-related
investments before depreciation, amortization, bad debt and
other similar non-cash reserves. In addition, we may incur
mortgage debt and pledge some or all of our real properties as
security for that debt to obtain funds to acquire additional
real properties or for working capital. We may also borrow funds
to satisfy the REIT tax qualification
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requirement that we distribute to our stockholders at least
90.0% of our annual taxable income, excluding net capital gains.
Furthermore, we may borrow if we otherwise deem it necessary or
advisable to ensure that we maintain our qualification as a REIT
for federal income tax purposes.
High debt levels may cause us to incur higher interest charges,
which would result in higher debt service payments and could be
accompanied by restrictive covenants. If there is a shortfall
between the cash flows from a property and the cash flows needed
to service mortgage debt on that property, then the amount
available for distributions to our stockholders may be reduced.
In addition, incurring mortgage debt increases the risk of loss
since defaults on indebtedness secured by a property may result
in lenders initiating foreclosure actions. In that case, we
could lose the property securing the loan that is in default,
thus reducing the value of our stockholders investment.
For tax purposes, a foreclosure on any of our properties will be
treated as a sale of the property for a purchase price equal to
the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we will recognize taxable
income on foreclosure, but we would not receive any cash
proceeds. We may give full or partial guarantees to lenders of
mortgage debt to the entities that own our properties. When we
give a guaranty on behalf of an entity that owns one of our
properties, we will be responsible to the lender for
satisfaction of the debt if it is not paid by such entity. If
any mortgage contains cross-collateralization or cross default
provisions, a default on a single property could affect multiple
properties. If any of our properties are foreclosed upon due to
a default, our ability to pay cash distributions to our
stockholders will be adversely affected.
Higher
mortgage rates may make it more difficult for us to finance or
refinance properties, which could reduce the number of
properties we can acquire and the amount of cash distributions
we can pay to our stockholders.
If mortgage debt is unavailable on reasonable terms as a result
of increased interest rates or other factors, we may not be able
to finance the initial purchase of properties. In addition, if
we place mortgage debt on properties, we run the risk of being
unable to refinance such debt when the loans come due, or of
being unable to refinance on favorable terms. If interest rates
are higher when we refinance debt, our income could be reduced.
We may be unable to refinance debt at appropriate times, which
may require us to sell properties on terms that are not
advantageous to us, or could result in the foreclosure of such
properties. If any of these events occur, our cash flows would
be reduced. This, in turn, would reduce cash available for
distribution to our stockholders and may hinder our ability to
raise more capital by issuing securities or by borrowing more
money.
Increases
in interest rates could increase the amount of our debt payments
and therefore negatively impact our operating
results.
Interest we pay on our debt obligations reduces cash available
for distributions. Whenever we incur variable rate debt,
increases in interest rates increase our interest costs, which
would reduce our cash flows and our ability to pay distributions
to our stockholders. If we need to repay existing debt during
periods of rising interest rates, we could be required to
liquidate one or more of our investments in properties at times
which may not permit realization of the maximum return on such
investments.
To the
extent we borrow at fixed rates or enter into fixed interest
rate swaps, we will not benefit from reduced interest expense if
interest rates decrease.
We are exposed to the effects of interest rate changes primarily
as a result of borrowings used to maintain liquidity and fund
expansion and refinancing of our real estate investment
portfolio and operations. To limit the impact of interest rate
changes on earnings, prepayment penalties and cash flows and to
lower overall borrowing costs while taking into account variable
interest rate risk, we may borrow at fixed rates or variable
rates depending upon prevailing market conditions. We may also
enter into derivative financial instruments such as interest
rate swaps and caps in order to mitigate our interest rate risk
on a related financial instrument.
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Hedging
activity may expose us to risks.
To the extent that we use derivative financial instruments to
hedge against interest rate fluctuations, we will be exposed to
credit risk and legal enforceability risks. In this context,
credit risk is the failure of the counterparty to perform under
the terms of the derivative contract. If the fair value of a
derivative contract is positive, the counterparty owes us, which
creates credit risk for us. Legal enforceability risks encompass
general contractual risks, including the risk that the
counterparty will breach the terms of, or fail to perform its
obligations under, the derivative contract. If we are unable to
manage these risks effectively, our results of operations,
financial condition and ability to pay distributions to our
stockholders will be adversely affected.
Lenders
may require us to enter into restrictive covenants relating to
our operations, which could limit our ability to pay
distributions to our stockholders.
When providing financing, a lender may impose restrictions on us
that affect our ability to incur additional debt and affect our
distribution and operating strategies. Loan documents we enter
into may contain covenants that limit our ability to further
mortgage the property, discontinue insurance coverage, or
replace our advisor. These or other limitations may adversely
affect our flexibility and our ability to achieve our investment
objectives.
Interest-only
indebtedness may increase our risk of default and ultimately may
reduce our funds available for distribution to our
stockholders.
We have financed, and may continue to finance, property
acquisitions using interest-only mortgage indebtedness. During
the interest-only period, the amount of each scheduled payment
will be less than that of a traditional amortizing mortgage
loan. The principal balance of the mortgage loan will not be
reduced (except in the case of prepayments) because there are no
scheduled monthly payments of principal during this period.
After the interest-only period, we will be required either to
make scheduled payments of amortized principal and interest or
to make a lump-sum or balloon payment at maturity.
These required principal or balloon payments will increase the
amount of our scheduled payments and may increase our risk of
default under the related mortgage loan. If the mortgage loan
has an adjustable interest rate, the amount of our scheduled
payments also may increase at a time of rising interest rates.
Increased payments and substantial principal or balloon maturity
payments will reduce the funds available for distribution to our
stockholders because cash otherwise available for distribution
will be required to pay principal and interest associated with
these mortgage loans.
If we
enter into financing arrangements involving balloon payment
obligations, it may adversely affect our ability to refinance or
sell properties on favorable terms and to pay distributions to
our stockholders.
Some of our financing arrangements may require us to make a
lump-sum or balloon payment at maturity. Our ability
to make a balloon payment at maturity is uncertain and may
depend upon our ability to obtain additional financing or our
ability to sell the particular property. At the time the balloon
payment is due, we may or may not be able to refinance the
balloon payment on terms as favorable as the original loan or
sell the particular property at a price sufficient to make the
balloon payment. The refinancing or sale could affect the rate
of return to our stockholders and the projected time of
disposition of our assets. In an environment of increasing
mortgage rates, if we place mortgage debt on properties, we run
the risk of being unable to refinance such debt if mortgage
rates are higher at a time a balloon payment is due. In
addition, payments of principal and interest made to service our
debts, including balloon payments, may leave us with
insufficient cash to pay the distributions that we are required
to pay to maintain our qualification as a REIT. Any of these
results would have a significant, negative impact on our
stockholders investment.
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Risks
Related to Other Real Estate-Related Investments
We do
not have substantial experience in acquiring mortgage loans or
investing in real estate-related securities, which may result in
our real estate-related investments failing to produce returns
or incurring losses.
None of our officers or the officers of our advisor has
substantial experience in acquiring mortgage loans or investing
in the real estate-related securities in which we may invest. We
may make such investments to the extent that our advisor, in
consultation with our board of directors, determines that it is
advantageous for us to do so. Our and our advisors lack of
expertise in acquiring real estate-related investments may
result in our real estate-related investments failing to produce
returns or incurring losses, either of which would reduce our
ability to pay distributions to our stockholders.
Real
estate-related equity securities in which we may invest are
subject to specific risks relating to the particular issuer of
the securities and may be subject to the general risks of
investing in real estate or real estate-related
assets.
We may invest in the common and preferred stock of both publicly
traded and private real estate companies, which involves a
higher degree of risk than debt securities due to a variety of
factors, including the fact that such investments are
subordinate to creditors and are not secured by the
issuers property. Our investments in real estate-related
equity securities will involve special risks relating to the
particular issuer of the equity securities, including the
financial condition and business outlook of the issuer. Issuers
of real estate-related equity securities generally invest in
real estate or real estate-related assets and are subject to the
inherent risks associated with acquiring real estate-related
investments discussed in these risk factors, including risks
relating to rising interest rates. Moreover, if we acquire real
estate-related investments in connection with privately
negotiated transactions that are not registered under the
relevant securities laws, such securities would have
restrictions on transfer, sale, pledge or other disposition,
except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, the
relevant securities laws. As a result, our ability to liquidate
such holdings, in order to vary our portfolio in response to
changes in economic and other conditions, would be limited.
The
mortgage loans in which we may invest and the mortgage loans
underlying the mortgage-backed securities in which we may invest
may be impacted by unfavorable real estate market conditions,
which could decrease their value.
If we acquire investments in mortgage loans or mortgage-backed
securities, such investments will involve special risks relating
to the particular borrower or issuer of the mortgage-backed
securities and we will be at risk of loss on those investments,
including losses as a result of defaults on mortgage loans.
These losses may be caused by many conditions beyond our
control, including economic conditions affecting real estate
values, tenant defaults and lease expirations, interest rate
levels and the other economic and liability risks associated
with acquiring real estate described in the Risk
Factors Risks Related to Our Business and
Risk Factors Risks Related to Investments in
Real Estate sections. If we acquire property by
foreclosure following defaults under our mortgage loan
investments, we will have the economic and liability risks as
the owner described above. We do not know whether the values of
the property securing any of our real estate-related investments
will remain at the levels existing on the dates we initially
make the related investment. If the values of the underlying
properties drop, our risk will increase and the values of our
interests may decrease.
Federal
Income Tax Risks
Failure
to remain qualified as a REIT for federal income tax purposes
would subject us to federal income tax on our taxable income at
regular corporate rates, which would substantially reduce our
ability to pay distributions to our stockholders.
We have qualified and elected to be taxed as a REIT under the
Code for federal income tax purposes beginning with our taxable
year ended December 31, 2006 and we intend to continue to
be taxed as a REIT.
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To continue to qualify as a REIT, we must meet various
requirements set forth in the Code concerning, among other
things, the ownership of our outstanding common stock, the
nature of our assets, the sources of our income and the amount
of our distributions to our stockholders. The REIT qualification
requirements are extremely complex, and interpretations of the
federal income tax laws governing qualification as a REIT are
limited. Accordingly, we cannot be certain that we will be
successful in operating so as to qualify as a REIT. At any time,
new laws, regulations, IRS guidance or court decisions may
change the federal tax laws relating to, or the federal income
tax consequences of, qualification as a REIT. It is possible
that future economic, market, legal, tax or other considerations
may cause our board of directors to determine that it is not in
our best interest to maintain our qualification as a REIT or
revoke our REIT election, which it may do without stockholder
approval.
If we fail to qualify as a REIT for any taxable year, we will be
subject to federal income tax on our taxable income at corporate
rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the
year of losing our REIT status. Losing our REIT status would
increase our tax liability and reduce our net earnings available
for investment or distribution to our stockholders. In addition,
distributions to our stockholders would no longer qualify for
the distributions paid deduction, and we would no longer be
required to pay distributions. If we lose our REIT status, we
might be required to borrow funds or liquidate some investments
in order to pay the applicable tax.
As a result of all these factors, our failure to remain
qualified as a REIT could impair our ability to expand our
business and raise capital and would substantially reduce our
ability to pay distributions to our stockholders.
To
remain qualified as a REIT and to avoid the payment of federal
income and excise taxes, we may be forced to borrow funds, use
proceeds from the issuance of securities or sell assets to pay
distributions, which may result in our distributing amounts that
may otherwise be used for our operations.
To maintain the favorable tax treatment accorded to REITs, we
normally will be required each year to distribute to our
stockholders at least 90.0% of our annual taxable income,
excluding net capital gains. We will be subject to federal
income tax on our undistributed taxable income and net capital
gain and to a 4.0% nondeductible excise tax on any amount by
which distributions we pay with respect to any calendar year are
less than the sum of: (1) 85.0% of our ordinary income;
(2) 95.0% of our capital gain net income; and (3) 100%
of our undistributed income from prior years. These requirements
could require us to borrow funds, use proceeds from the issuance
of securities or sell assets in order to distribute enough of
our taxable income to maintain our qualification as a REIT and
to avoid the payment of federal income and excise taxes.
Our
investment strategy may cause us to incur penalty taxes, lose
our REIT status, or own and sell properties through taxable REIT
subsidiaries, each of which would diminish the return to our
stockholders.
In light of our investment strategy, it is possible that one or
more sales of our properties may be prohibited
transactions under provisions of the Code. If we are
deemed to have engaged in a prohibited transaction
(i.e., we sell a property held by us primarily for sale
in the ordinary course of our trade or business), all income
that we derive from such sale would be subject to a 100% tax.
The Code sets forth a safe harbor for REITs that wish to sell
property without risking the imposition of the 100% tax. A
principal requirement of the safe harbor is that the REIT must
hold the applicable property for not less than two years prior
to its sale. Given our investment strategy, it is entirely
possible, if not likely, that the sale of one or more of our
properties will not fall within the prohibited transaction safe
harbor.
If we desire to sell a property pursuant to a transaction that
does not fall within the safe harbor, we may be able to avoid
the 100% penalty tax if we acquired the property through a
taxable REIT subsidiary, or acquired the property and
transferred it to a TRS for a non-tax business purpose prior to
the sale (i.e., for a reason other than the avoidance of
taxes). Following the acquisition by, or transfer of the
property to, a TRS, the TRS will operate the property and may
sell such property and distribute the net proceeds from such
sale to us, and we may distribute the net proceeds to our
stockholders. Though a sale of the property by a TRS likely
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would eliminate the danger of the application of the 100%
penalty tax, the TRS itself would be subject to a tax at the
federal level, and potentially at the state and local levels, on
the gain realized by it from the sale of the property as well as
on the income earned while the property is operated by the TRS.
As a result, the amount available for distribution to our
stockholders would be substantially less than if the REIT had
not operated and sold such property through the TRS and such
transaction was not successfully characterized as a prohibited
transaction. The maximum federal income tax rate currently is
35.0%. Federal, state and local corporate income tax rates may
be increased in the future, and any such increase would reduce
the amount of the net proceeds available for distribution by us
to our stockholders from the sale of property through a TRS
after the effective date of any increase in such tax rates.
There may be circumstances that prevent us from using a TRS in a
transaction that does not qualify for the safe harbor.
Additionally, even if it is possible to effect a property
disposition through a TRS, we may decide to forego the use of a
TRS in a transaction that does not meet the safe harbor based on
our own internal analysis, the opinion of counsel or the opinion
of other tax advisors that the disposition will not be subject
to the 100% penalty tax. In cases where a property disposition
is not effected through a TRS, the IRS, could successfully
assert that the disposition constitutes a prohibited
transaction, in which event all of the net income from the sale
of such property will be payable as a tax and none of the
proceeds from such sale will be distributable by us to our
stockholders or available for investment by us.
If we own too many properties through one or more of our TRSs,
then we may lose our status as a REIT. As a REIT, the value of
the securities we hold in all of our TRSs may not exceed 25.0%
of the value of all of our assets at the end of any calendar
quarter. If we determine it to be in our best interest to own a
substantial number of our properties through one or more TRSs,
then it is possible that the IRS may conclude that the value of
our interests in our TRSs exceeds 25.0% of the value of our
total assets at the end of any calendar quarter and therefore
cause us to fail to remain qualified as a REIT. Additionally, as
a REIT, no more than 25.0% of our gross income with respect to
any year may be from sources other than real estate.
Distributions paid to us from a TRS are considered to be
non-real estate income. Therefore, we may fail to remain
qualified as a REIT if distributions from all of our TRSs, when
aggregated with all other non-real estate income with respect to
any one year, are more than 25.0% of our gross income with
respect to such year. We will use all reasonable efforts to
structure our activities in a manner intended to satisfy the
requirements for maintaining our qualification as a REIT. Our
failure to remain qualified as a REIT would adversely affect our
stockholders return on their investment.
Our
stockholders may have a current tax liability on distributions
they elect to reinvest in shares of our common
stock.
If our stockholders participate in the DRIP, they will be deemed
to have received, and for income tax purposes will be taxed on,
the amount reinvested in shares of our common stock to the
extent the amount reinvested was not a tax-free return of
capital. As a result, unless our stockholders are a tax-exempt
entity, they may have to use funds from other sources to pay
their tax liability on the value of the shares of our common
stock received.
Legislative
or regulatory action with respect to taxes could adversely
affect the returns to our investors.
In recent years, numerous legislative, judicial and
administrative changes have been made in the provisions of the
federal income tax laws applicable to investments similar to an
investment in our common stock. Additional changes to the tax
laws are likely to continue to occur, and we cannot assure our
stockholders that any such changes will not adversely affect
their taxation. Such changes could have an adverse effect on an
investment in our stock or on the market value or the resale
potential of our assets. Our stockholders are urged to consult
with their own tax advisor with respect to the impact of recent
legislation on their investment in our stock and the status of
legislative, regulatory or administrative developments and
proposals and their potential effect on an investment in shares
of our common stock.
Congress passed major federal tax legislation in 2003, with
modifications to that legislation in 2005 and 2010. One of the
changes effected by that legislation generally reduced the tax
rate on dividends paid by
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companies to individuals to a maximum of 15.0% prior to 2013.
REIT distributions generally do not qualify for this reduced
rate. The tax changes did not, however, reduce the corporate tax
rates. Therefore, the maximum corporate tax rate of 35.0% has
not been affected. However, as a REIT, we generally would not be
subject to federal corporate income taxes on that portion of our
ordinary income or capital gain that we distribute to our
stockholders, and, thus, we expect to avoid the double
taxation to which other companies are typically subject.
Although REITs continue to receive substantially better tax
treatment than entities taxed as corporations, it is possible
that future legislation would result in a REIT having fewer tax
advantages, and it could become more advantageous for a company
that invests in real estate to elect to be taxed for federal
income tax purposes as a corporation. As a result, our charter
provides our board of directors with the power, under certain
circumstances, to revoke or otherwise terminate our REIT
election and cause us to be taxed as a corporation, without the
vote of our stockholders. Our board of directors has fiduciary
duties to us and our stockholders and could only cause such
changes in our tax treatment if it determines in good faith that
such changes are in our stockholders best interest.
In
certain circumstances, we may be subject to federal and state
income taxes as a REIT, which would reduce our cash available
for distribution to our stockholders.
Even as a REIT, we may be subject to federal income taxes or
state taxes. For example, net income from a prohibited
transaction will be subject to a 100% tax. We may not be
able to pay sufficient distributions to avoid excise taxes
applicable to REITs. We may also decide to retain capital gains
we earn from the sale or other disposition of our property and
pay income tax directly on such income. In that event, our
stockholders would be treated as if they earned that income and
paid the tax on it directly. However, our stockholders that are
tax-exempt, such as charities or qualified pension plans, would
have no benefit from their deemed payment of such tax liability.
We may also be subject to state and local taxes on our income or
property, either directly or at the level of the companies
through which we indirectly own our assets. Any taxes we pay
will reduce our cash available for distribution to our
stockholders.
Distributions
to tax-exempt stockholders may be classified as
UBTI.
Neither ordinary nor capital gain distributions with respect to
the shares of our common stock nor gain from the sale of our
common stock generally constitute unrelated business taxable
income, or UBTI, to a tax-exempt stockholder. However, there are
certain exceptions to this rule. In particular:
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part of the income and gain recognized by certain qualified
employee pension trusts with respect to our common stock may be
treated as UBTI if (1) the shares of our common stock are
predominately held by qualified employee pension trusts,
(2) we only qualify as a REIT because of a special
look-through exception to the requirement that no more than
50.0% of our common stock is owned by five or fewer
stockholders, and (3) we are not operated in a manner to
avoid treatment of such income or gain as UBTI;
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part of the income and gain recognized by a tax exempt
stockholder with respect to the shares of our common stock would
constitute UBTI if the stockholder incurs debt in order to
acquire shares of our common stock; and
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part or all of the income or gain recognized with respect to the
shares of our common stock by social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts
and qualified group legal services plans which are exempt from
federal income taxation under Sections 501(c)(7), (9),
(17) or (20) of the Code may be treated as UBTI.
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Complying
with the REIT requirements may cause us to forego otherwise
attractive opportunities.
To continue to qualify as a REIT for federal income tax
purposes, we must continually satisfy tests concerning, among
other things, the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our
stockholders and the ownership of shares of our common stock. We
may be
42
required to pay distributions to our stockholders at
disadvantageous times or when we do not have funds readily
available for distribution, or we may be required to liquidate
otherwise attractive investments in order to comply with the
REIT tests. Thus, compliance with the REIT requirements may
hinder our ability to operate solely on the basis of maximizing
profits.
Foreign
purchasers of shares of our common stock may be subject to
FIRPTA tax upon the sale of their shares of our common
stock.
A foreign person disposing of a U.S. real property
interest, including shares of stock of a U.S. corporation
whose assets consist principally of U.S. real property
interests, is generally subject to the Foreign Investment in
Real Property Tax Act of 1980, as amended, or FIRPTA, on the
gain recognized on the disposition. Such FIRPTA tax does not
apply, however, to the disposition of stock in a REIT if the
REIT is domestically controlled. A REIT is
domestically controlled if less than 50.0% of the
REITs stock, by value, has been owned directly or
indirectly by persons who are not qualifying U.S. persons
during a continuous five-year period ending on the date of
disposition or, if shorter, during the entire period of the
REITs existence. We cannot assure our stockholders that we
will continue to qualify as a domestically
controlled REIT. If we were to fail to continue to so
qualify, gain realized by foreign investors on a sale of shares
of our common stock would be subject to FIRPTA tax, unless the
shares of our common stock were traded on an established
securities market and the foreign investor did not at any time
during a specified testing period directly or indirectly own
more than 5.0% of the value of our outstanding common stock.
Foreign
stockholders may be subject to FIRPTA tax upon the payment of a
capital gains dividend.
A foreign stockholder also may be subject to FIRPTA upon the
payment of any capital gain dividends by us, which dividend is
attributable to gain from sales or exchanges of U.S. real
property interests. Additionally, capital gains dividends paid
to foreign stockholders, if attributable to gain from sales or
exchanges of U.S. real property interests, would not be
exempt from FIRPTA and would be subject to FIRPTA tax.
Employee
Benefit Plan, IRA and Other Tax-Exempt Investor Risks
We, and our stockholders that are employee benefit plans as
described in Section 3(3) of ERISA, individual retirement
accounts or individual retirement annuities described in
Sections 408 or 408A of the Code, annuities described in
Sections 403(a) or (b) of the Code, Archer MSAs
described in Section 220(d) of the Code, health savings
accounts described in Section 223(d) of the Code, or
Coverdell education savings accounts described in
Section 530 of the Code (referred to generally as Benefit
Plans and IRAs, as applicable) will be subject to risks relating
specifically to our having such Benefit Plan and IRA
stockholders, which risks are discussed below.
If our
stockholders fail to meet the fiduciary and other standards
under ERISA or the Code as a result of an investment in shares
of our common stock, our stockholders could be subject to
criminal and civil penalties.
There are special considerations that apply to Benefit Plans or
IRAs investing in shares of our common stock. If our
stockholders are investing the assets of a Benefit Plan or IRA
in us, they should consider:
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whether their investment is consistent with the applicable
provisions of ERISA and the Code, or any other applicable
governing authority in the case of a government or church plan;
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whether their investment is made in accordance with the
documents and instruments governing their Benefit Plan or IRA,
including the investment policy of the Benefit Plan or IRA;
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whether their investment satisfies the prudence and
diversification requirements of Sections 404(a)(1)(B) and
404(a)(1)(C) of ERISA, if applicable;
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whether their investment will impair the liquidity of the
Benefit Plan or IRA considering the minimum and other
distribution requirements under the Code and the liquidity needs
of such Benefit Plan or IRA, after taking such investment into
account;
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43
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whether their investment will constitute a prohibited
transaction under Section 406 of ERISA or Section 4975
of the Code, if applicable;
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whether their investment will produce unrelated business taxable
income as defined in Sections 511 through 514 of the Code,
to the Benefit Plan or IRA; and
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their need to value the assets of the Benefit Plan or IRA
annually or more frequently in accordance with ERISA and the
Code.
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In addition to considering their fiduciary responsibilities
under ERISA, the prohibited transaction rules of ERISA and the
Code, and the other considerations mentioned above, a Benefit
Plan or IRA purchasing shares of our common stock should
consider the effect of the definition of plan assets
in Section 3(42) of ERISA, and the plan asset regulations
of the U.S. Department of Labor. To avoid our assets from
being considered plan assets under those regulations, our
charter prohibits benefit plan investors from owning
25.0% or more of the shares of our common stock prior to the
time that the common stock qualifies as a class of
publicly-offered securities, within the meaning of the ERISA
plan asset regulations. However, we cannot assure our
stockholders that those provisions in our charter will be
effective in limiting benefit plan investor ownership to less
than the 25.0% limit. For example, the limit could be
unintentionally exceeded if a benefit plan investor
misrepresents its status as a benefit plan. Even if our assets
are not considered to be plan assets, a prohibited transaction
could occur if we or any of our affiliates is a
party-in-interest (within the meaning of
Section 3(14) of ERISA) or a disqualified
person (within the meaning of Section 4975 of the
Code) with respect to a Benefit Plan or IRA purchasing shares of
our common stock, and, therefore, in such a case, investors
should not purchase shares of our common stock unless an
administrative or statutory exemption applies to their purchase.
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Item 1B.
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Unresolved
Staff Comments.
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Not applicable.
As a result of the termination of the Grubb & Ellis
Advisory Agreement, as of December 31, 2010, we established
separate principal executive offices from our Former Advisor and
from Grubb & Ellis Company. As of December 31,
2010, we had not entered into any leases for our newly
established principal executive offices at 4901 Dickens Road,
Suite 101, Richmond, Virginia 23230. On November 19,
2010, ROC REIT Advisors entered into a lease for our principal
executive offices with The Wilton Companies, Inc. The President
of The Wilton Companies, Inc. is Richard S. Johnson who is an
independent director of our company. The lease has a term of
three years at a monthly rental of $4,744.
Upon the purchase of substantially all of the assets and certain
liabilities of MR Property Management on November 5, 2010,
we assumed the existing lease for the property management
offices located at 10467 White Granite Drive, Suite 300,
Oakton, Virginia 22124.
44
The following table presents certain additional information
about our properties as of December 31, 2010:
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% of Total
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Annual Rent
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Property
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# of
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Ownership
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Date
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Purchase
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Annual
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Annual
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Physical
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Per Leased
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Property
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Location
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Units
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Percentage
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Acquired
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Price
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Rent(1)
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Rent(1)
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Occupancy(2)
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Unit(3)
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Consolidated Properties:
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Walker Ranch Apartment Homes
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San Antonio, TX
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325
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100
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%
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10/31/06
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$
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30,750,000
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$
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3,471,000
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9.1
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%
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97.5
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%
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$
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10,950
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Hidden Lake Apartment Homes
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San Antonio, TX
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380
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100
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%
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12/28/06
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32,030,000
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3,484,000
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9.2
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97.1
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9,443
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Park at Northgate
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Spring, TX
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248
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100
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%
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06/12/07
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16,600,000
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2,310,000
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6.1
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96.4
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9,664
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Residences at Braemar
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Charlotte, NC
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160
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100
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%
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06/29/07
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15,000,000
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1,318,000
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3.5
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91.3
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9,026
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Baypoint Resort
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Corpus Christi, TX
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350
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100
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%
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08/02/07
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33,250,000
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3,526,000
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9.3
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93.4
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10,782
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Towne Crossing Apartments
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Mansfield, TX
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268
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100
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%
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08/29/07
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21,600,000
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2,411,000
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6.3
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96.3
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9,343
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Villas of El Dorado
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McKinney, TX
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248
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100
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%
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11/02/07
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18,000,000
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1,873,000
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4.9
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94.8
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7,971
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The Heights at Olde Towne
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Portsmouth, VA
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148
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100
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%
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12/21/07
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17,000,000
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1,652,000
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4.3
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89.9
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12,422
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The Myrtles at Olde Towne
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Portsmouth, VA
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246
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100
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%
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12/21/07
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36,000,000
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2,990,000
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7.9
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90.7
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13,410
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Arboleda Apartments
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Cedar Park, TX
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312
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100
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%
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03/31/08
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29,250,000
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2,397,000
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6.3
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94.6
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8,127
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Creekside Crossing
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Lithonia, GA
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280
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100
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%
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06/26/08
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25,400,000
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2,478,000
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6.5
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91.4
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9,679
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Kedron Village
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Peachtree City, GA
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216
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100
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%
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06/27/08
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29,600,000
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2,591,000
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6.8
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94.0
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12,762
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Canyon Ridge Apartments
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Hermitage, TN
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350
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100
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%
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09/15/08
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36,050,000
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3,133,000
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8.2
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92.6
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9,670
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Bella Ruscello Luxury Apartment Homes
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Duncanville, TX
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216
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100
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%
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03/24/10
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17,400,000
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2,189,000
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5.7
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97.2
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10,426
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Mission Rock Ridge Apartments
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Arlington, TX
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226
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100
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%
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09/30/10
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19,857,000
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2,257,000
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5.9
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96.9
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10,308
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Total/Weighted Average
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3,973
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$
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377,787,000
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$
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38,080,000
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100
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%
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94.5
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%
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$
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10,144
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(1) |
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Annual rent is based on contractual base rent from leases in
effect as of December 31, 2010. |
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(2) |
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Physical occupancy as of December 31, 2010. |
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(3) |
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Average effective annual rent per leased unit as of
December 31, 2010. |
As of December 31, 2010, we owned fee simple interests in
all of our properties.
The following information generally applies to our properties:
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we believe all of our properties are adequately covered by
insurance and are suitable for their intended purposes;
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we have no plans for any material renovations, improvements or
development with respect to any of our properties, except in
accordance with planned budgets; and
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our properties are located in markets where we are subject to
competition for attracting new tenants and retaining current
tenants.
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Indebtedness
For a discussion of our indebtedness, see Note 7, Mortgage
Loan Payables, Net and Unsecured Note Payables to Affiliate, and
Note 8, Line of Credit, to the Consolidated Financial
Statements that are a part of this Annual Report on
Form 10-K.
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Item 3.
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Legal
Proceedings.
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On August 27, 2010, we entered into definitive agreements
to acquire Mission Rock Ridge Apartments, substantially all of
the assets of Mission Residential Management, and eight
additional apartment communities owned by eight separate
Delaware Statutory Trusts for which an affiliate MR Holdings,
LLC serves as trustee, or the DST properties, for total
consideration valued at $157.8 million, including
approximately $33.2 million of limited partnership
interests in the OP and the assumption of approximately
$124.6 million of in-place mortgage indebtedness
encumbering the properties. On November 9, 2010, seven of
the 277 investors who
45
hold interests in the eight Delaware statutory trusts that hold
the DST properties filed a complaint in the United States
District Court for the Eastern District of Virginia (Civil
Action No. 3:10CV824(HEH), or the Federal Action, against
the trustee of each of these trusts and certain of the
trustees affiliates, as well as against our operating
partnership, seeking, among other things, to enjoin the closing
of our proposed acquisition of the eight DST properties. The
complaint alleged, among other things, that the trustee has
breached its fiduciary duties to the beneficial owners of the
trusts by entering into the eight purchase and sale agreements
with our operating partnership. The complaint further alleged
that our operating partnership aided and abetted the
trustees alleged breaches of fiduciary duty and tortuously
interfered with the contractual relations between the trusts and
the trust beneficiaries. On December, 20, 2010, the purported
replacement trustee Internacional Realty, Inc., as well as
investors in each of the 23 DSTs for which Mission
Trust Services serves as trustee, filed a complaint in the
Circuit Court of Cook County, Illinois (Case No. 10 CH
53556), or the Cook County Action. The Cook County Action was
filed against the same parties as the Federal Action, and
included the same claims against us as in the Federal Action. On
December 23, 2010, the plaintiffs in the Federal Action
dismissed that action voluntarily. On January 28, 2011,
Internacional Realty, Inc. filed a third-party complaint against
us and other parties in the Circuit Court for Fairfax County,
Virginia (Case
No. 2010-17876),
or the Fairfax Action. The Fairfax Action included the same
claims against us as in the Federal Action and the Cook County
Action. On March 5, 2011, the court dismissed the
third-party complaint against us. The investors have indicated,
however, an intent to re-file the action against us in a
separate complaint in Fairfax County. We believe the allegations
contained in the complaints against us are without merit and we
intend to defend the claims vigorously. However, there is no
assurance that we will be successful in our defense.
In a Consent Order dated November 10, 2010, entered in the
Federal Action, the parties agreed that none of the eight
transactions will be closed during the
90-day
period following the date of such Consent Order.
As of February 23, 2011, the expiration date for the
lenders approval period pursuant to each of the purchase
agreements, certain conditions precedent to our obligation to
acquire the eight DST properties had not been satisfied. With
the prior approval of the board of directors, on
February 28, 2011, we provided the respective Delaware
Statutory Trusts written notice of termination of each of the
respective purchase agreements in accordance with the terms of
the agreements.
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Item 4.
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(Removed
and Reserved).
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46
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Market
Information
There is no established public trading market for shares of our
common stock.
In order for members of FINRA and their associated persons to
participate in the offering and sale of shares of our common
stock, we are required to disclose in each annual report
distributed to stockholders a per-share estimated value of the
shares, the method by which it was developed and the date of the
data used to develop the estimated value. In addition, we will
prepare annual statements of estimated share values to assist
fiduciaries of retirement plans subject to the annual reporting
requirements of ERISA in the preparation of their reports
relating to an investment in shares of our common stock. For
these purposes, our Former Advisors estimated value of the
shares is $10.00 per share as of December 31, 2010. The
basis for this valuation is the fact that the current public
offering price for shares of our common stock is $10.00 per
share (ignoring purchase price discounts for certain categories
of purchasers). However, there is no public trading market for
the shares of our common stock at this time, and there can be no
assurance that stockholders could receive $10.00 per share if
such a market did exist and they sold their shares of our common
stock or that they will be able to receive such amount for their
shares of our common stock in the future. We have not and do not
currently anticipate obtaining appraisals for the properties we
own, and accordingly, the estimated values should not be viewed
as an accurate reflection of the fair market value of those
properties, nor do they represent the amount of net proceeds
that would result from an immediate sale of those properties.
Until 18 months after the later of the completion of our
follow-on offering or any subsequent offering of shares of our
common stock, we intend to continue to use the offering price of
shares of our common stock in our most recent offering as the
estimated per-share value reported in our Annual Reports on
Form 10-K;
provided, however, that if we have sold a property and have made
one or more special distributions to stockholders of all or a
portion of the net proceeds from such sales, the estimated
per-share value reported in our Annual Reports on
Form 10-K
will be equal to the offering price of the shares of our common
stock in our most recent offering less the amount of net sale
proceeds per share distributed to stockholders as a result of
the sale of such property. Beginning 18 months after the
last offering of shares of our common stock, the value of the
properties and our other assets will be determined as our board
of directors deems appropriate.
Stockholders
As of March 25, 2011, we had approximately 6,105
stockholders of record.
Distributions
From March 2007 through February 2009, we paid a 7.0% annualized
distribution rate based upon a purchase price of $10.00 per
share. Beginning in March 2009, our board of directors reduced
our annualized distribution rate to 6.0% based upon a purchase
price of $10.00 per share. We paid distributions to our
stockholders at this annualized rate through February 2011. On
February 24, 2011, our board of directors authorized an
annualized distribution rate of 3.0% based upon a purchase price
of $10.00 per share for the period commencing on March 1,
2011 and ending on June 30, 2011. We generally aggregate
daily distributions and pay them monthly in arrears. The amount
of the distributions we pay to our stockholders is determined by
our board of directors and is dependent on a number of factors,
including funds available for the payment of distributions, our
financial condition, capital expenditure requirements and annual
distribution requirements needed to maintain our status as a
REIT under the Code.
For the year ended December 31, 2010, we paid aggregate
distributions of $10,883,000 ($6,486,000 in cash and $4,397,000
in shares of our common stock pursuant to the DRIP), as compared
to cash flows from operations of $3,698,000. For the year ended
December 31, 2009, we paid aggregate distributions of
$10,049,000 ($5,676,000 in cash and $4,373,000 in shares of our
common stock pursuant to the DRIP), as compared to cash flows
from operations of $5,718,000. From our inception through
December 31, 2010, we paid cumulative distributions of
$32,331,000 ($18,481,000 in cash and $13,850,000 in shares of
our common stock pursuant to the DRIP), as
47
compared to cumulative cash flows from operations of
$13,479,000. The distributions paid in excess of our cash flows
from operations were paid using net proceeds from our offerings.
Our distributions of amounts in excess of our current and
accumulated earnings and profits have resulted in a return of
capital to our stockholders.
Securities
Authorized for Issuance under Equity Compensation
Plans
We adopted our 2006 Plan, pursuant to which our board of
directors or a committee of our independent directors may make
grants of options, restricted common stock awards, stock
purchase rights, stock appreciation rights or other awards to
our independent directors, employees and consultants. The
maximum number of shares of our common stock that may be issued
pursuant to our 2006 Plan is 2,000,000, subject to adjustment
under specified circumstances.
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|
|
|
|
Number of Securities
|
|
|
|
|
|
Number of
|
|
|
|
to be Issued upon
|
|
|
Weighted Average
|
|
|
Securities
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Remaining
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Available for
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Future Issuance
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
|
|
|
|
|
|
|
|
1,985,800
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
1,985,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On July 19, 2006, we granted an aggregate of
4,000 shares of restricted common stock, as defined in our
2006 Plan, to our independent directors in connection with their
initial election, of which 20.0% vested on the grant date and
20.0% will vest on each of the first four anniversaries of the
date of the grant. On each of June 12, 2007, June 25,
2008, June 23, 2009 and June 22, 2010, in connection
with their re-election, we granted an aggregate of
3,000 shares of restricted common stock to our independent
directors under our 2006 Plan, which will vest over the same
period described above. On September 24, 2009, in
connection with the resignation of one independent director, W.
Brand Inlow, and the concurrent election of a new independent
director, Richard S. Johnson, we granted 1,000 shares of
restricted common stock to Mr. Johnson under our 2006 Plan,
which will vest over the same period described above. In
addition, 800 shares and 2,000 shares of restricted
common stock were forfeited in November 2006 and September 2009,
respectively. Such outstanding shares of restricted common stock
are not shown in the chart above as they are deemed outstanding
shares of our common stock; however, such grants reduce the
number of securities remaining available for future issuance. |
Use of
Public Offering Proceeds
Initial
Offering
On July 19, 2006, we commenced our initial offering in
which we offered up to 100,000,000 shares of our common
stock for $10.00 per share and up to 5,000,000 shares of
our common stock pursuant to the DRIP for $9.50 per share, for a
maximum offering of up to $1,047,500,000. The shares of our
common stock offered in our initial offering were registered
with the SEC on a Registration Statement on
Form S-11
(File
No. 333-130945)
under the Securities Act of 1933, as amended, which was declared
effective by the SEC on July 19, 2006. Our initial offering
terminated on July 17, 2009. As of July 17, 2009, we
had received and accepted subscriptions in our initial offering
for 15,738,457 shares of our common stock, or $157,218,000,
excluding shares issued pursuant to the DRIP. As of
July 17, 2009, a total of $7,706,000 in distributions were
reinvested and 811,158 shares of our common stock were
issued pursuant to the DRIP.
In connection with our initial offering, as of December 31,
2010, we had incurred marketing support fees of $3,932,000,
selling commissions of $10,874,000 and due diligence expense
reimbursements of $141,000. We had also incurred other offering
expenses of $2,361,000 as of such date. Such fees and
reimbursements were incurred to our affiliates and were charged
to stockholders equity as such amounts were reimbursed
from the gross proceeds of our initial offering. The cost of
raising funds in our initial offering as a percentage
48
of funds was 11.0%. As of July 17, 2009, net offering
proceeds were $147,616,000, including proceeds from the DRIP and
after deducting offering expenses.
As of December 31, 2009, we had used $11,813,000 in
proceeds from our initial offering to purchase 13 of our 15
properties, $41,900,000 to repay borrowings from an affiliate
incurred in connection with such acquisitions and $68,000,000 to
repay borrowings from non-affiliates incurred in connection with
such acquisitions.
Follow-on
Offering
On July 20, 2009, we commenced a best efforts follow-on
public offering, or our follow-on offering, in which we offered
up to 105,000,000 shares of our common stock. Our follow-on
offering included up to 100,000,000 shares of our common
stock for sale at $10.00 per share in our primary offering and
up to 5,000,000 shares of our common stock for sale
pursuant to the DRIP at $9.50 per share, for a maximum offering
of up to $1,047,500,000, or the maximum offering. As explained
in more detail below, we suspended the primary portion of our
follow-on offering on December 31, 2010.
Until December 31, 2010, the managing broker-dealer for our
capital formation efforts had been Grubb & Ellis
Securities. Effective December 31, 2010, Grubb &
Ellis Securities terminated the Grubb & Ellis Dealer
Manager Agreement. In order to transition the capital formation
function to a successor managing broker-dealer, on
November 5, 2010, we entered into the RCS Dealer Manager
Agreement with Realty Capital Securities, LLC, or RCS, whereby
RCS agreed to serve as our exclusive dealer manager effective
upon the satisfaction of certain conditions, including receipt
of a no-objections notice from the Financial Industry Regulatory
Authority, or FINRA, in connection with our follow-on offering.
As of December 31, 2010, RCS had not yet received a
no-objections notice from FINRA and, having no effective dealer
manager agreement in place, we suspended the primary portion of
our follow-on offering. As of February 28, 2011, RCS still
had not yet received a no-objections notice from FINRA relating
to our follow-on offering. Recently, general market conditions
had caused us and RCS to reconsider the merits of continuing the
follow-on offering. Therefore, on February 28, 2011, we
provided written notice to RCS that we were terminating the RCS
Dealer Manager Agreement, effective immediately. As a result, we
currently do not have a dealer manager. We cannot make
assurances that we will enter into a new dealer manager
agreement or that we will offer shares of our common stock to
the public in the future.
As of December 31, 2010, we had received and accepted
subscriptions in our follow-on offering for
2,992,777 shares of our common stock, or $29,885,000,
excluding shares issued pursuant to the DRIP. As of
December 31, 2010, a total of $6,144,000 in distributions
were reinvested and 646,695 shares of our common stock were
issued pursuant to the DRIP. In connection with the primary
portion of our follow-on offering, as of December 31, 2010,
we had incurred selling commissions of $2,052,000 and dealer
manager fees of $897,000. We had also incurred other offering
expenses of $299,000 as of such date. Such fees and expenses
were paid to former affiliates and were charged to
stockholders equity as such amounts were reimbursed from
the gross proceeds of our follow-on offering. As of
December 31, 2010, net offering proceeds from our follow-on
offering were $32,781,000, including proceeds from the DRIP and
after deducting selling commissions, dealer manager fees and
other offering expenses.
As of December 31, 2010, a total of $15,000 remained
payable to Grubb & Ellis Company, our Former Dealer
Manager, our Former Advisor or their affiliates for offering
related costs in connection with our follow-on offering. As of
March 25, 2011, this amount has been paid in full from cash
flows from operations as they became due and payable by us in
the ordinary course of business.
As of December 31, 2010, we had used $9,513,000 in proceeds
from our follow-on offering to purchase Bella Ruscello Luxury
Apartment Homes located in Duncanville, Texas and Mission Rock
Ridge Apartments located in Arlington, Texas from unaffiliated
parties, $5,513,000 to purchase substantially all of the assets
and certain liabilities of Mission Residential Management,
$1,236,000 for acquisition-related expenses paid to affiliate
parties, $3,329,000 for
acquisition-related
expenses paid to unaffiliated parties, $1,350,000 to repay
borrowings from an affiliate incurred in connection with
previous property acquisitions and $3,271,000 to repay
borrowings from unaffiliated parties incurred in connection with
previous property acquisitions.
49
For the years ended December 31, 2010 and 2009, our FFO was
$2,096,000 and $6,135,000, respectively. For the year ended
December 31, 2010, we paid distributions of $2,096,000 or
19.3%, from FFO and $8,787,000, or 80.7%, from proceeds from our
follow-on offering. For the year ended December 31, 2009,
we paid distributions of $6,135,000 or 61.1%, from FFO and
$3,914,000, or 38.9%, from proceeds from our initial and
follow-on offerings. For a discussion of FFO, see Item 7.
Managements Discussion of Financial Condition and Results
of Operations Funds from Operations and Modified
Funds from Operations.
Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
Our board of directors adopted a share repurchase plan effective
July 19, 2006, which was amended effective August 25,
2008 and further amended and restated on September 20,
2009. According to the share repurchase plan, share repurchases
by our company were allowed when certain criteria were met by
its stockholders. Share repurchases were made at the sole
discretion of the board of directors. On February 24, 2011,
the board of directors determined that it was in our
companys best interest to preserve its cash, and
terminated the share repurchase plan. Accordingly, pending share
repurchase requests will not be fulfilled.
During the three months ended December 31, 2010, our
company repurchased shares of its common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
Maximum Approximate
|
|
|
|
|
|
|
(c)
|
|
Dollar Value
|
|
|
|
|
|
|
Total Number of Shares
|
|
of Shares that May
|
|
|
(a)
|
|
(b)
|
|
Purchased As Part of
|
|
Yet Be Purchased
|
|
|
Total Number of
|
|
Average Price
|
|
Publicly Announced
|
|
Under the
|
Period
|
|
Shares Purchased
|
|
Paid per Share
|
|
Plan or Program(1)
|
|
Plans or Programs
|
|
October 1, 2010 to
October 31, 2010
|
|
|
74,464
|
|
|
$
|
10.00
|
|
|
|
74,464
|
|
|
$
|
|
|
November 1, 2010 to November 30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
December 1, 2010 to December 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
As of December 31, 2010, our company had repurchased a
total of 592,692 shares pursuant to its share repurchase
plan. |
See also Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations
Share Repurchases.
50
|
|
Item 6.
|
Selected
Financial Data.
|
The following should be read with Part I, Item 1A.
Risk Factors and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and
our accompanying consolidated financial statements and the notes
thereto. Our historical results are not necessarily indicative
of results for any future period.
The following tables present summarized consolidated financial
information, including balance sheet data, statement of
operations data and statement of cash flows data in a format
consistent with our consolidated financial statements under
Part IV, Item 15. Exhibits, Financial Statement
Schedules of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
January 10, 2006
|
Selected Financial Data
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
(Date of Inception)
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
368,534,000
|
|
|
$
|
338,303,000
|
|
|
$
|
344,685,000
|
|
|
$
|
228,814,000
|
|
|
$
|
67,214,000
|
|
|
$
|
201,000
|
|
Mortgage loan payables, net
|
|
$
|
244,072,000
|
|
|
$
|
217,434,000
|
|
|
$
|
217,713,000
|
|
|
$
|
139,318,000
|
|
|
$
|
19,218,000
|
|
|
$
|
|
|
Unsecured note payables to affiliate
|
|
$
|
7,750,000
|
|
|
$
|
9,100,000
|
|
|
$
|
9,100,000
|
|
|
$
|
7,600,000
|
|
|
$
|
10,000,000
|
|
|
$
|
|
|
Total equity
|
|
$
|
106,158,000
|
|
|
$
|
104,769,000
|
|
|
$
|
106,705,000
|
|
|
$
|
66,057,000
|
|
|
$
|
14,248,000
|
|
|
$
|
201,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 10, 2006
|
|
|
|
|
|
|
|
|
|
|
(Date of Inception)
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Years Ended December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
42,121,000
|
|
|
$
|
37,465,000
|
|
|
$
|
31,878,000
|
|
|
$
|
12,705,000
|
|
|
$
|
659,000
|
|
Loss from continuing operations
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,827,000
|
)
|
|
$
|
(5,579,000
|
)
|
|
$
|
(523,000)
|
|
Net loss attributable to company stockholders
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,826,000
|
)
|
|
$
|
(5,579,000
|
)
|
|
$
|
(523,000)
|
|
Net loss per common share basic and diluted(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(0.59
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(1.99)
|
|
Net loss attributable to company stockholders
|
|
$
|
(0.59
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(1.99)
|
|
STATEMENT OF CASH FLOWS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
3,698,000
|
|
|
$
|
5,718,000
|
|
|
$
|
1,567,000
|
|
|
$
|
2,195,000
|
|
|
$
|
301,000
|
|
Cash flows used in investing activities
|
|
$
|
(44,580,000
|
)
|
|
$
|
(1,824,000
|
)
|
|
$
|
(126,638,000
|
)
|
|
$
|
(126,965,000
|
)
|
|
$
|
(63,991,000)
|
|
Cash flows provided by financing activities
|
|
$
|
37,261,000
|
|
|
$
|
337,000
|
|
|
$
|
126,041,000
|
|
|
$
|
125,010,000
|
|
|
$
|
65,144,000
|
|
OTHER DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared
|
|
$
|
11,034,000
|
|
|
$
|
9,999,000
|
|
|
$
|
8,633,000
|
|
|
$
|
3,519,000
|
|
|
$
|
145,000
|
|
Distributions declared per common share
|
|
$
|
0.60
|
|
|
$
|
0.62
|
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
|
$
|
0.14
|
|
Funds from operations(2)
|
|
$
|
2,096,000
|
|
|
$
|
6,135,000
|
|
|
$
|
(1,106,000
|
)
|
|
$
|
(194,000
|
)
|
|
$
|
(234,000)
|
|
Net operating income(3)
|
|
$
|
20,727,000
|
|
|
$
|
19,343,000
|
|
|
$
|
15,832,000
|
|
|
$
|
6,482,000
|
|
|
$
|
393,000
|
|
|
|
|
(1) |
|
Net loss per common share is based upon the weighted average
number of shares of our common stock outstanding. Distributions
by us of our current and accumulated earnings and profits for
federal income tax purposes are taxable to stockholders as
ordinary income. Distributions in excess of these earnings and
profits generally are treated as a non-taxable reduction of the
stockholders basis in the shares of our common stock to
the extent thereof (a return of capital for tax purposes) and,
thereafter, as taxable gain. These distributions in excess of
earnings and profits will have the effect of deferring taxation
of the distributions until the sale of the stockholders
common stock. |
|
(2) |
|
For additional information on FFO, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Funds from Operations and
Modified Funds from Operations, which includes a reconciliation
of our GAAP net loss to FFO for the years ended
December 31, 2010, 2009 and 2008. |
|
(3) |
|
For additional information on net operating income, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Net
Operating Income, which includes a reconciliation of our GAAP
net loss to net operating income for the years ended
December 31, 2010, 2009 and 2008. |
51
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The use of the words we, us,
our company, or our refers to Apartment
Trust of America, Inc. and its subsidiaries, including Apartment
Trust of America Holdings, LP, except where the context
otherwise requires.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes
thereto that are a part of this Annual Report on
Form 10-K.
Such consolidated financial statements and information have been
prepared to reflect our financial position as of
December 31, 2010 and 2009, together with our results of
operations and cash flows for the years ended December 31,
2010, 2009 and 2008.
Forward-Looking
Statements
Historical results and trends should not be taken as indicative
of future operations. Our statements contained in this Annual
Report on Form
10-K that
are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Actual results may
differ materially from those included in the forward-looking
statements. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and
expectations, are generally identifiable by use of the words
expect, project, may,
will, should, could,
would, intend, plan,
anticipate, estimate,
believe, continue, predict,
potential or the negative of such terms and other
comparable terminology. Our ability to predict results or the
actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on
our operations and future prospects on a consolidated basis
include, but are not limited to: the suspension of the primary
portion of our follow-on offering and the availability of other
sources of capital; changes in economic conditions generally and
the real estate market specifically; legislative and regulatory
changes, including changes to laws governing the taxation of
real estate investment trusts, or REITs; changes in interest
rates; competition in the real estate industry; the supply and
demand for operating properties in our proposed market areas;
changes in accounting principles generally accepted in the
United States of America, or GAAP, policies and guidelines
applicable to REITs; and the availability of financing. These
risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be
placed on such statements. Additional information concerning us
and our business, including additional factors that could
materially affect our financial results, is included herein and
in our other filings with the Securities and Exchange
Commission, or the SEC.
Overview
and Background
Apartment Trust of America, Inc., a Maryland corporation, was
incorporated on December 21, 2005. We were initially
capitalized on January 10, 2006 and therefore we consider
that our date of inception. On December 29, 2010, we
amended our charter to change our corporate name from
Grubb & Ellis Apartment REIT, Inc. to Apartment Trust
of America, Inc. We are in the business of acquiring and holding
a diverse portfolio of quality apartment communities with stable
cash flows and growth potential in select U.S. metropolitan
areas. We may also acquire other real estate-related
investments. We focus primarily on investments that produce
current income. We have qualified and elected to be taxed as a
real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended, or the Code, for federal
income tax purposes and we intend to continue to be taxed as a
REIT.
We commenced a best efforts initial public offering on
July 19, 2006, in which we offered up to
100,000,000 shares of our common stock for $10.00 per share
in our primary offering and up to 5,000,000 shares of our
common stock pursuant to our distribution reinvestment plan, or
the DRIP, for $9.50 per share, for a maximum offering of up to
$1,047,500,000. We terminated our initial offering on
July 17, 2009. As of July 17, 2009, we had received
and accepted subscriptions in our initial offering for
15,738,457 shares of our common stock, or $157,218,000,
excluding shares of our common stock issued pursuant to the DRIP.
52
On July 20, 2009, we commenced a best efforts follow-on
public offering, in which we offered up to
100,000,000 shares of our common stock for sale at $10.00
per share in our primary offering and up to
5,000,000 shares of our common stock for sale pursuant to
the DRIP for $9.50 per share, for a maximum offering of up to
$1,047,500,000. As explained in more detail below, effective
December 31, 2010, we suspended the primary portion of our
follow-on offering. As of December 31, 2010, we had
received and accepted subscriptions in our follow-on offering
for 2,992,777 shares of our common stock, or $29,885,000,
excluding shares of our common stock issued pursuant to the DRIP.
Until December 31, 2010, the managing broker-dealer for our
capital formation efforts had been Grubb & Ellis
Securities, Inc., or Grubb & Ellis Securities.
Effective December 31, 2010, Grubb & Ellis
Securities terminated the Grubb & Ellis Dealer Manager
Agreement. In order to transition the capital formation function
to a successor managing broker-dealer, on November 5, 2010,
we entered into a new dealer manager agreement, or the RCS
Dealer Manager Agreement, with Realty Capital Services, LLC, or
RCS, whereby RCS agreed to serve as our exclusive dealer manager
effective upon the satisfaction of certain conditions, including
receipt of a no-objections notice from the Financial Industry
Regulatory Authority, or FINRA. As of December 31, 2010,
RCS had not received a no-objections notice from FINRA and,
therefore, having no effective dealer manager agreement in
place, our follow-on offering was suspended. Recently, general
market conditions have caused us and RCS to reconsider the
merits of continuing the follow-on offering. Therefore, on
February 28, 2011, we provided written notice to RCS that
we were terminating the dealer manager agreement with RCS,
effective immediately. As a result, we currently do not have a
managing broker-dealer. We cannot make assurances that we will
enter into a new dealer manager agreement or that we will offer
shares of our common stock to the public in the future.
On February 24, 2011, our board of directors approved a
Second Amended and Restated Distribution Reinvestment Plan, or
the Amended and Restated DRIP, and we intend to register shares
for sale under the Amended and Restated DRIP with the SEC. Upon
effectiveness of the Amended and Restated DRIP and the related
registration statement, all distribution reinvestments will be
made pursuant to the Amended and Restated DRIP. Stockholders who
are already enrolled in the DRIP are not required to take any
further action to enroll in the Amended and Restated DRIP.
We conduct substantially all of our operations through Apartment
Trust of America Holdings, LP, or our operating partnership.
Until December 31, 2010, we were externally advised by
Grubb & Ellis Apartment REIT Advisor, LLC, or our
Former Advisor, pursuant to an advisory agreement, as amended
and restated, or the Grubb & Ellis Advisory Agreement,
between us and our Former Advisor. Our Former Advisor is jointly
owned by entities affiliated with Grubb & Ellis
Company and ROC REIT Advisors, LLC, or ROC REIT Advisors. Prior
to the termination of the Grubb & Ellis Advisory
Agreement, our
day-to-day
operations were managed by our Former Advisor and our properties
were managed by Grubb & Ellis Residential Management,
Inc., an affiliate of our Former Advisor. Our Former Advisor is
affiliated with our company in that all of our executive
officers, Stanley J. Olander, Jr., David L. Corneal and
Gustov G. Remppies, are indirect owners of a minority interest
in our Former Advisor through their ownership of ROC REIT
Advisors. In addition, one of our directors, Andrea R. Biller,
was an indirect owner of a minority interest in our Former
Advisor until October 2010. In addition, Messrs. Olander,
Corneal and Remppies served as executive officers of our Former
Advisor. Mr. Olander and Ms. Biller also own interests
in Grubb & Ellis Company, and served as executive
officers of Grubb & Ellis Company until November 2010
and October 2010, respectively.
On November 1, 2010, we received written notice from our
Former Advisor stating that it had elected to terminate the
Grubb & Ellis Advisory Agreement. In accordance with
the Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice without cause or penalty. Therefore, the
Grubb & Ellis Advisory Agreement terminated on
December 31, 2010, and the Former Advisor no longer serves
as our advisor. In connection with the termination of the
Grubb & Ellis Advisory Agreement, the Former Advisor
has notified us that it has elected to defer the redemption of
its incentive limited partnership interest in our operating
partnership until, generally, the earlier to occur of (i) a
listing of our shares on a national securities exchange or
national market system or (ii) a liquidity event. See
Note 19,
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Subsequent Events Termination of the
Grubb & Ellis Advisory Agreement, for a further
discussion of the termination of the Grubb & Ellis
Advisory Agreement.
On February 25, 2011, we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors, referred to herein as our Advisor. Our Advisor is
affiliated with us in that ROC REIT Advisors is owned by our
executive officers, Messrs. Olander, Carneal and Remppies.
The new advisory agreement has a one-year term and may be
renewed for an unlimited number of successive one-year terms.
Pursuant to the terms of the new advisory agreement, our Advisor
will use its commercially reasonable efforts to present to us a
continuing and suitable investment program and opportunities to
make investments consistent with our investment policies. Our
Advisor is also obligated to provide us with the first
opportunity to purchase any Class A income producing
multi-family property which satisfies our investment objectives.
In performing these obligations, our Advisor generally will
(i) provide and perform our
day-to-day
management; (ii) serve as our investment advisor;
(iii) locate, analyze and select potential investments for
us and structure and negotiate the terms and conditions of
acquisition and disposition transactions; (iv) arrange for
financing and refinancing with respect to our investments; and
(v) enter into leases and service contracts with respect to
our investments. Our Advisor is subject to the supervision of
our board of directors and has a fiduciary duty to us and our
stockholders. See Note 19, Subsequent Events
New Advisory Agreement to the Consolidated Financial Statements
that are a part of this Annual Report on
Form 10-K,
for a discussion of the new advisory agreement with ROC REIT
Advisors.
As of December 31, 2010, we owned nine properties located
in Texas consisting of 2,573 apartment units, two properties in
Georgia consisting of 496 apartment units, two properties in
Virginia consisting of 394 apartment units, one property in
Tennessee consisting of 350 apartment units, and one property in
North Carolina consisting of 160 apartment units for an
aggregate of 15 properties consisting of 3,973 apartment units,
which had an aggregate purchase price of $377,787,000.
We entered into definitive agreements on August 27, 2010 to
acquire nine multifamily apartment properties from affiliates of
MR Holdings, LLC, or MR Holdings, and to acquire substantially
all of the assets and certain liabilities of Mission Residential
Management, LLC, or Mission Residential Management, for total
consideration valued at approximately $182,357,000, based on
purchase price. We are not affiliated with MR Holdings or
Mission Residential Management. On September 30, 2010, we
acquired (from an unaffiliated party) Mission Rock Ridge
Apartments, or the Mission Rock Ridge property, located in
Arlington, Texas, for a purchase price of $19,857,000, plus
closing costs. The Mission Rock Ridge property is the first of
nine multifamily apartment properties that we intended to
acquire. We intended to acquire the remaining eight properties,
or the DST properties, from Delaware statutory trusts, or DSTs,
for which an affiliate of MR Holdings serves as a trustee. As of
February 23, 2011, the expiration date for the
lenders approval period pursuant to each of the purchase
agreements, certain conditions precedent to our obligation to
acquire the eight DST properties had not been satisfied. With
the prior approval of the board of directors, on
February 28, 2011, we provided the respective DSTs written
notice of termination of each of the respective purchase
agreements in accordance with the terms of the agreements. See
Note 3, Real Estate Investments Acquisitions in
Real Estate Investments to the Consolidated Financial Statements
that are a part of this Annual Report on
Form 10-K,
for a further discussion. See also Item 3. Legal
Proceedings for more detail regarding the pending litigation in
connection with such properties.
On November 5, 2010, we, through MR Property Management
LLC, or MR Property Management, which is a wholly-owned
subsidiary of our operating partnership, completed the
acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management, an affiliate of
MR Holdings, including the in-place workforce of approximately
300 employees. In connection with the closing, we assumed
property management agreements, or entered into
sub-management
agreements pending receipt of lender consents, with respect to
41 multifamily apartment properties containing approximately
12,000 units, including the Mission Rock Ridge property
that we acquired on September 30, 2010 and the eight
additional DST properties our operating partnership had
contracted to acquire from Delaware statutory trusts for which
an affiliate of MR Holdings serves as trustee. We paid total
consideration of $5,513,000 of cash plus the assumption of
certain liabilities and other payments totaling approximately
$1,500,000, subject to certain post-closing adjustments. In
connection with the acquisition, we paid an acquisition fee of
2.0% of the purchase price to our Former
54
Advisor and its affiliates. At the closing of the transaction,
we entered into various ancillary agreements, including:
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an asset management agreement pursuant to which we assumed the
asset management and investor relations responsibilities for all
of the aforementioned properties; and
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a termination fee agreement pursuant to which the lessees of the
managed properties under the master lease structures and certain
other affiliates of Mission Residential Management agreed to pay
us termination fees if any of the property management agreements
we assumed or
sub-management
agreements we entered into is terminated by the lessee of the
property under its master lease structure other than for cause,
is not extended by the lessee or is terminated by the manager
without good reason. The termination fee provisions will survive
for five years after the closing. The termination fee will not
be payable if a property management agreement is terminated as a
result of our acquisition of the managed property. The
obligations of the lessees of the properties to pay these
termination fees are guaranteed by MR Holdings and by Mission
Residential Holdings, LLC.
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As of February 23, 2011, the expiration date for the
lenders approval period pursuant to each of the purchase
agreements for the eight additional DST properties, certain
conditions precedent to our obligation to acquire the eight DST
properties had not been satisfied. With the prior approval of
the board of directors, on February 28, 2011, we provided
the respective Delaware Statutory Trusts written notice of
termination of each of the respective purchase agreements in
accordance with the terms of the agreements.
On December 31, 2010, we, through ATA-Mission, LLC, a
wholly-owned subsidiary of our operating partnership, acquired a
50% ownership interest in NNN/Mission Residential Holdings, LLC,
or NNN/MR Holdings, which serves as a holding company for the
master tenants of four multi-family apartment properties located
in Plano and Garland, Texas and Charlotte, North Carolina with
an aggregate of 1,066 units. We were not previously
affiliated with NNN/MR Holdings. We acquired the ownership
interest in NNN/MR Holdings, or the NNN/MR Holdings Interest,
from Grubb & Ellis Realty Investors, LLC, an affiliate
of our Former Advisor. The remaining 50% is owned by Mission
Residential, LLC, which consented to the transaction. We are not
affiliated with Mission Residential, LLC. The four multi-family
apartment properties are managed by our wholly-owned taxable
REIT subsidiary, MR Residential Management, LLC. We paid $50,000
in cash as consideration for the NNN/MR Holdings
Interest. We also assumed the obligation to fund up to
$1.0 million in draws on credit line loans extended to the
four master tenants by NNN/MR Holdings.
Business
Strategy
We believe the following are key factors for our success in
meeting our objectives.
Following
Demographic Trends and Population Shifts to Find Attractive
Tenants in Quality Apartment Community Markets
According to the U.S. Census Bureau, nearly 80.0% of the
estimated total U.S. population growth between 2000 and
2030 will occur in the South and West. We will emphasize
property acquisitions in regions of the U.S. that seem
likely to benefit from the ongoing population shift
and/or are
poised for strong economic growth. We further believe that these
markets will likely attract quality tenants who have good income
and strong credit profile and choose to rent an apartment rather
than buy a home because of their life circumstances. For
example, they may be baby-boomers or retirees who desire freedom
from home maintenance costs and property taxes. They may also be
individuals in transition who need housing while awaiting
selection or construction of a home. We believe that attracting
and retaining quality tenants strongly correlates with the
likelihood of providing stable cash flows to our investors as
well as increasing the value of our properties.
The current market environment has made it more difficult to
qualify for a home loan, and the down payment required to
purchase a new home may be substantially greater than it has in
the past, potentially making home ownership more expensive. We
believe that as the pool of potential renters increases, the
55
demand for apartments is also likely to increase. With this
increased demand, we believe that it may be possible to raise
rents and decrease rental concessions in the future at apartment
communities we may acquire.
Leveraging
the Experience of Our Management
We believe that a critical success factor in property
acquisition lies in having a management team that possesses the
flexibility to move quickly when an opportunity presents itself
to buy or sell a property. The owners of our Advisor possess
considerable experience in the apartment housing sector, which
we believe will help enable us to identify appropriate
opportunities to buy and sell properties to meet our objectives
and goals.
Each of our key executives has considerable experience building
successful real estate companies. As an example,
Mr. Olander has been responsible for the acquisition and
financing of approximately 40,000 apartment units, has been an
executive in the real estate industry for almost 30 years
and previously served as President and Chief Financial Officer
and a member of the board of directors of Cornerstone Realty
Income Trust, Inc., or Cornerstone, a publicly traded apartment
REIT. Likewise, Messrs. Remppies and Carneal are the former
Chief Investment Officer and Chief Operating Officer,
respectively, of Cornerstone, where they oversaw the growth of
that company.
Critical
Accounting Policies
We believe that our critical accounting policies are those that
require significant judgments and estimates such as those
related to revenue recognition, tenant receivables, allowance
for uncollectible accounts, capitalization of expenditures,
depreciation of assets, impairment of real estate, properties
held for sale, purchase price allocation and qualification as a
REIT. These estimates are made and evaluated on an on-going
basis using information that is currently available as well as
various other assumptions believed to be reasonable under the
circumstances.
Use of
Estimates
The preparation of our consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. These estimates are made and
evaluated on an on-going basis using information that is
currently available as well as various other assumptions
believed to be reasonable under the circumstances. Actual
results could differ from those estimates, perhaps in material
adverse ways, and those estimates could be different under
different assumptions or conditions.
Revenue
Recognition, Tenant Receivables and Allowance for Uncollectible
Accounts
We recognize revenue in accordance with Financial Accounting
Standards Board, or FASB, Accounting Standards Codification, or
ASC, Topic 605, Revenue Recognition, or ASC Topic 605.
ASC Topic 605 requires that all four of the following basic
criteria be met before revenue is realized or realizable and
earned: (1) there is persuasive evidence that an
arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the sellers price to the
buyer is fixed and determinable; and (4) collectability is
reasonably assured.
We lease multi-family residential apartments under operating
leases and substantially all of our apartment leases are for a
term of one year or less. Rental income and other property
revenues are recorded when due from tenants and are recognized
monthly as they are earned pursuant to the terms of the
underlying leases. Other property revenues consist primarily of
utility rebillings and administrative, application and other
fees charged to tenants, including amounts recorded in
connection with early lease terminations. Early lease
termination amounts are recognized when received and realized.
Expense reimbursements are recognized and presented in
accordance with ASC Subtopic
605-45,
Revenue Recognition Principal Agent
Considerations, or ASC Subtopic
605-45. ASC
Subtopic
605-45
requires that these reimbursements be recorded on a gross basis,
as we are generally the primary obligor with respect to
purchasing goods and services from third-party suppliers, have
discretion in selecting the supplier and have credit risk.
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Management fees are recognized when earned in accordance with
each management contract. We receive fees for property
management and related services provided to third parties. These
fees are in management fee income on the consolidated income
statement. Management fees are based on a percentage of revenues
for the month as defined in the related property management
agreements. We also pay certain payroll and related costs
related to the operations of third party properties that we
manage. Under terms of the related management agreements, these
costs are reimbursed by the third party property owners and
recognized by us as revenue as they are characterized by GAAP as
out of pocket expenses incurred in the performance
of a service.
Receivables are carried net of an allowance for uncollectible
receivables. An allowance is maintained for estimated losses
resulting from the inability of certain tenants to meet their
contractual obligations under their lease agreements. Such
allowance is charged to bad debt expense which is included in
rental expense for 2010 and general and administrative expense
for 2009 and 2008 in our accompanying consolidated statements of
operations. We determine the adequacy of this allowance by
continually evaluating individual tenants receivables
considering the tenants financial condition and security
deposits and current economic conditions.
Capitalization
of Expenditures and Depreciation of Assets
The cost of operating properties includes the cost of land and
completed buildings and related improvements. Expenditures that
increase the service life of properties are capitalized and the
cost of maintenance and repairs is charged to expense as
incurred. The cost of building and improvements is depreciated
on a straight-line basis over the estimated useful lives of the
buildings and improvements, ranging primarily from 10 to
40 years. Land improvements are depreciated over the
estimated useful lives ranging primarily from five to
15 years. Furniture, fixtures and equipment is depreciated
over the estimated useful lives ranging primarily from five to
15 years. When depreciable property is retired, replaced or
disposed of, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
operations.
Impairment
We carry our properties at the lower of historical cost less
accumulated depreciation. Properties held for sale are carried
at fair value less costs to sell. We assess the impairment of a
real estate asset on a quarterly basis or when events or changes
in circumstances indicate its carrying amount may not be
recoverable. Indicators we consider important and that we
believe could trigger an impairment review include, among
others, the following:
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significant negative industry or economic trends;
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a significant underperformance relative to historical or
projected future operating results; and
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a significant change in the extent or manner in which the asset
is used or a significant physical change in the asset.
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In the event that the carrying amount of a property exceeds the
sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the property, we would recognize
an impairment loss to the extent the carrying amount exceeds the
estimated fair value of the property. The estimation of expected
future net cash flows in determining fair value will be
inherently uncertain and will rely on subjective assumptions
dependent upon current and future market conditions and events
that affect the ultimate value of the property. It will require
us to make assumptions related to discount rates, future rental
rates, allowance for uncollectible accounts, operating
expenditures, property taxes, capital improvements, occupancy
levels and the estimated proceeds generated from the future sale
of the property.
Goodwill will be tested for impairment on an annual basis or in
interim periods if events or circumstances indicate potential
impairment.
Identified intangible assets, net, are evaluated for impairment
whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable.
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Properties
Held for Sale
We account for our properties held for sale in accordance with
ASC Topic 360, Property, Plant and Equipment, or ASC
Topic 360, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and requires
that, in a period in which a component of an entity either has
been disposed of or is classified as held for sale, the income
statements for current and prior periods shall report the
results of operations of the component as discontinued
operations.
In accordance with ASC Topic 360, at such time as a property is
held for sale, such property is carried at the lower of:
(1) its carrying amount or (2) fair value less costs
to sell. In addition, a property being held for sale ceases to
be depreciated. We classify operating properties as property
held for sale in the period in which all of the following
criteria are met:
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management, having the authority to approve the action, commits
to a plan to sell the asset;
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the asset is available for immediate sale in its present
condition subject only to terms that are usual and customary for
sales of such assets;
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an active program to locate a buyer and other actions required
to complete the plan to sell the asset has been initiated;
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the sale of the asset is probable and the transfer of the asset
is expected to qualify for recognition as a completed sale
within one year;
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the asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and
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given the actions required to complete the plan to sell the
asset, it is unlikely that significant changes to the plan would
be made or that the plan would be withdrawn.
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Purchase
Price Allocation
In accordance with ASC Topic 805, Business Combinations,
we, with assistance from independent valuation specialists,
allocate the purchase price of acquired properties to tangible
and identified intangible assets and liabilities based on their
respective fair values. The allocation to tangible assets
(building and land) is based upon our determination of the value
of the property as if it were to be replaced and vacant using
comparable sales, cost data and discounted cash flow models
similar to those used by independent appraisers. Allocations are
made at the fair market value for furniture, fixtures and
equipment on the premises. Additionally, the purchase price of
the applicable property is allocated to the above or below
market value of in-place leases, the value of in-place leases,
tenant relationships and above or below market debt assumed.
Factors considered by us include an estimate of carrying costs
during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between:
(1) the contractual amounts to be paid pursuant to the
lease over its remaining term and (2) managements
estimate of the amounts that would be paid using fair market
rates over the remaining term of the lease. The amounts
allocated to above market leases, if any, would be included in
identified intangible assets, net in our accompanying
consolidated balance sheets and will be amortized to rental
income over the remaining non-cancelable lease term of the
acquired leases with each property. The amounts allocated to
below market lease values, if any, would be included in
identified intangible liabilities, net in our accompanying
consolidated balance sheets and would be amortized to rental
income over the remaining non-cancelable lease term plus below
market renewal options, if any, of the acquired leases with each
property. As of December 31, 2010 and 2009, we did not have
any amounts allocated to above or below market leases.
The total amount of other intangible assets acquired is further
allocated to in-place lease costs and the value of tenant
relationships based on managements evaluation of the
specific characteristics of each tenants
58
lease and our overall relationship with that respective tenant.
Characteristics considered by us in allocating these values
include the nature and extent of the credit quality and
expectations of lease renewals, among other factors. The amounts
allocated to in-place lease costs are included in identified
intangible assets, net in our accompanying consolidated balance
sheets and are amortized to depreciation and amortization
expense over the average remaining non-cancelable lease term of
the acquired leases with each property. The amounts allocated to
the value of tenant relationships are included in identified
intangible assets, net in our accompanying consolidated balance
sheets and are amortized to depreciation and amortization
expense over the average remaining non-cancelable lease term of
the acquired leases plus a market renewal lease term.
The value allocable to above or below market debt is determined
based upon the present value of the difference between the cash
flow stream of the assumed mortgage and the cash flow stream of
a market rate mortgage at the time of assumption. The amounts
allocated to above or below market debt are included in mortgage
loan payables, net in our accompanying consolidated balance
sheets and are amortized to interest expense over the remaining
term of the assumed mortgage.
These allocations are subject to change based on information
received within one year of the purchase related to one or more
events identified at the time of purchase which confirm the
value of an asset or liability received in an acquisition of
property.
Goodwill
and Identified Intangible Assets, Net
During the fourth quarter of 2010, we, through MR Property
Management, a taxable REIT subsidiary of our operating
partnership, completed the acquisition of substantially all of
the assets and certain liabilities of Mission Residential
Management, an affiliate of MR Holdings, including the in-place
workforce, which created $3,751,000 of goodwill. See
Note 4, Goodwill and Identified Intangible Assets, Net to
the Consolidated Financial Statements that are a part of this
Annual Report on
Form 10-K,
for additional detail. Goodwill resulting from business
combinations is generally determined as the excess of the fair
value of the consideration transferred, plus the fair value of
any noncontrolling interests in the acquired, over the fair
value of the net assets acquired and liabilities assumed as of
the acquisition date. As of December 31, 2010 and 2009,
goodwill of $3,751,000 and zero, respectively, were included in
our accompanying consolidated balance sheets. Goodwill is not
amortized, but will be tested for impairment on an annual basis
or in interim periods if events or circumstances indicate
potential impairment.
Identified intangible assets, net, consists of
in-place
lease intangibles from property acquisitions and tenant
relationship intangibles and an expected termination fee
intangible resulting from the acquisition of substantially all
of the assets and certain liabilities of Mission Residential
Management in the fourth quarter of 2010.
In-place
lease intangibles are amortized on a straight-line basis over
their respective estimated useful lives and evaluated for
impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable. Tenant
relationship intangibles are amortized on a basis consistent
with estimated cash flows from these intangible assets.
Qualification
as a REIT
We qualified and elected to be taxed as a REIT under
Sections 856 through 860 of the Code for federal income tax
purposes beginning with our tax year ended December 31,
2006, and we intend to continue to be taxed as a REIT. To
maintain our qualification as a REIT for federal income tax
purposes, we must meet certain organizational and operational
requirements, including a requirement to pay distributions to
our stockholders of at least 90.0% of our annual taxable income,
excluding net capital gains. As a REIT, we generally will not be
subject to federal income tax on net income that we distribute
to our stockholders. During 2010, we acquired substantially all
of the assets and certain liabilities of Mission Residential
Management through our taxable REIT subsidiary, MR Property
Management, including an in-place work force to perform property
management and leasing services for our properties. MR Property
Management also serves as the property manager for approximately
39 additional multi-family apartment communities that are owned
by unaffiliated third parties.
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If we fail to maintain our qualification as a REIT in any
taxable year, we will then be subject to federal income taxes on
our taxable income and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost
unless the Internal Revenue Service grants us relief under
certain statutory provisions. Such an event could have a
material adverse effect on our results of operations and net
cash available for distribution to our stockholders.
Recently
Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements,
see Note 2, Summary of Significant Accounting
Policies Recently Issued Accounting Pronouncements,
to the Consolidated Financial Statements that are a part of this
Annual Report on
Form 10-K.
Acquisitions
in 2010, 2009 and 2008
For information regarding our acquisitions of properties, see
Note 3, Real Estate Investments, to the Consolidated
Financial Statements that are a part of this Annual Report on
Form 10-K.
Factors
Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other
than national economic conditions affecting real estate
generally and those risks listed in Part I, Item 1A.
Risk Factors, of this Annual Report on
Form 10-K,
that may reasonably be expected to have a material impact,
favorable or unfavorable, on revenues or income from the
acquisition, management and operation of properties.
Rental
Income
The amount of rental income generated by our properties depends
principally on our ability to maintain the occupancy rates of
currently leased space and to lease currently available space
and space available from unscheduled lease terminations at the
then existing rental rates. Negative trends in one or more of
these factors could adversely affect our rental income in future
periods.
Offering
Proceeds
In the year ended December 31, 2010, we did not raise
enough proceeds from the sale of shares of our common stock in
our follow-on offering to significantly expand or further
geographically diversify our real estate portfolio. A relatively
smaller, less geographically diverse portfolio could result in
increased exposure to local and regional economic downturns and
the poor performance of one or more of our properties, and,
therefore, expose our stockholders to increased risk. In
addition, some of our general and administrative expenses are
fixed regardless of the size of our real estate portfolio.
Therefore, having raised fewer gross offering proceeds than was
our expectation, we likely will expend a larger portion of our
income on operating expenses. This would reduce our
profitability and, in turn, the amount of net income available
for distribution to our stockholders.
Sarbanes-Oxley
Act
The Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act, and related laws, regulations and standards
relating to corporate governance and disclosure requirements
applicable to public companies, have increased the costs of
compliance with corporate governance, reporting and disclosure
practices, which are now required of us. These costs may have a
material adverse effect on our results of operations and could
impact our ability to continue to pay distributions at current
rates to our stockholders. Furthermore, we expect that these
costs will increase in the future due to our continuing
implementation of compliance programs mandated by these
requirements. Any increased costs may affect our ability to
distribute funds to our stockholders. As part of our compliance
with the Sarbanes-Oxley Act, we provided managements
assessment of our internal control over financial reporting as
of December 31, 2010 and continue to comply with such
regulations.
60
In addition, these laws, rules and regulations create new legal
bases for potential administrative enforcement, civil and
criminal proceedings against us in the event of non-compliance,
thereby increasing the risks of liability and potential
sanctions against us. We expect that our efforts to comply with
these laws and regulations will continue to involve significant
and potentially increasing costs, and that our failure to comply
with these laws could result in fees, fines, penalties or
administrative remedies against us.
Results
of Operations
Comparison
of the Years Ended December 31, 2010, 2009 and
2008
Our operating results are primarily comprised of income derived
from our portfolio of apartment communities.
Except where otherwise noted, the change in our results of
operations is primarily due to our owning 15 properties as of
December 31, 2010, compared to only 13 properties as of
December 31, 2009 and 2008. A full year of operations of
the 2008 property acquisitions was realized during 2009, as
compared to partial operations of the 2008 property acquisitions
during 2008. In addition, during 2010, we recognized management
fee income due to our purchase of substantially all of the
assets and certain liabilities of Mission Residential
Management, a third party property manager for 39 properties.
Revenues
For the years ended December 31, 2010, 2009 and 2008,
revenues were $42,121,000, $37,465,000 and $31,878,000,
respectively. For the year ended December 31, 2010,
revenues were comprised of rental income of $35,568,000, other
property revenues of $4,006,000 and management fee income of
$2,547,000. For the year ended December 31, 2009, revenues
were comprised of rental income of $33,674,000 and other
property revenues of $3,791,000. For the year ended
December 31, 2008, revenues were comprised of rental income
of $28,692,000 and other property revenues of $3,186,000. Other
property revenues consist primarily of utility re-billings as
well as administrative, application and other fees charged to
tenants, including amounts recorded in connection with early
lease terminations. The
year-over-year
increase in revenues from rental income and other property
revenues is due to the increase in the number of properties as
discussed above.
The aggregate occupancy for our properties was 94.5%, 93.9% and
90.3% as of December 31, 2010, 2009 and 2008, respectively.
Rental
Expenses
For the years ended December 31, 2010, 2009 and 2008,
rental expenses were $18,871,000, $18,122,000 and $16,046,000,
respectively. Rental expenses consisted of the following for the
periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Administration
|
|
$
|
6,327,000
|
|
|
$
|
6,101,000
|
|
|
$
|
4,665,000
|
|
Real estate taxes
|
|
|
5,361,000
|
|
|
|
5,679,000
|
|
|
|
5,368,000
|
|
Utilities
|
|
|
3,066,000
|
|
|
|
2,505,000
|
|
|
|
2,399,000
|
|
Repairs and maintenance
|
|
|
2,239,000
|
|
|
|
2,175,000
|
|
|
|
2,024,000
|
|
Property management fees
|
|
|
1,156,000
|
|
|
|
1,087,000
|
|
|
|
1,129,000
|
|
Insurance
|
|
|
722,000
|
|
|
|
575,000
|
|
|
|
461,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expenses
|
|
$
|
18,871,000
|
|
|
$
|
18,122,000
|
|
|
$
|
16,046,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, rental expenses
increased $749,000, as compared to the year ended
December 31, 2009. The increase in rental expenses was
primarily driven by a $561,000 increase in utility costs, a
$147,000 increase in insurance costs, a $69,000 increase in
property management fees, and a $64,000 increase in repairs and
maintenance expense. In addition, for 2010, bad debt of $223,000
is included in rental expenses and classified within
administration costs. In prior years, bad debt expense of
$446,000 and
61
$544,000, is included in general and administrative expenses.
These increases in rental expenses were partially offset by a
$318,000 decrease in real estate taxes mainly as a result of
successful property tax appeals.
For the year ended December 31, 2009, rental expenses
increased $2,076,000, as compared to the year ended
December 31, 2008. The increase in rental expenses was
primarily driven by a $1,436,000 increase in administrative
costs, a $311,000 increase in real estate taxes, a $106,000
increase in utilities costs, a $151,000 increase in repairs and
maintenance expense, and a $114,000 increase in insurance costs.
These increases in rental expenses were partially offset by a
$42,000 decrease in property management fees. The decrease in
property management fees was primarily due to amending our
property management agreements during 2008 on our nine
properties acquired through 2007 to decrease the fees from 4.0%
of the monthly gross cash receipts to 3.0% or lower.
As a percentage of revenue, operating expenses remained
materially consistent. Rental expenses as a percentage of
property revenue (rental income and other property revenue) were
47.7%, 48.4% and 50.3%, respectively, for the years ended
December 31, 2010, 2009 and 2008. The
year-over-year
increase in rental expenses was due to the increase in the
number of properties as discussed above.
Salaries
and Benefits Expense
For the year ended December 31, 2010, salaries and benefits
expense was $2,523,000 as compared to zero for the years ended
December 31, 2009 and 2008. Salaries and benefits for 2010
were due to our purchase, through our taxable REIT subsidiary,
MR Property Management, of substantially all of the assets and
certain liabilities of Mission Residential Management, including
an in-place work force to perform property management and
leasing services for our properties. MR Property Management also
serves as the property manager for approximately 39 additional
multi-family apartment communities that are owned by
unaffiliated third parties. Of the $2,523,000 of salaries and
benefits expense incurred during 2010, $2,082,000 was reimbursed
to us by the unaffiliated third parties and recorded as
management fee income.
General
and Administrative Expense
For the years ended December 31, 2010, 2009 and 2008,
general and administrative expense was $1,368,000, $1,647,000
and $4,445,000, respectively. General and administrative expense
consisted of the following for the periods then ended:
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|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Professional and legal fees(a)
|
|
$
|
569,000
|
|
|
$
|
456,000
|
|
|
$
|
672,000
|
|
Bad debt expense(b)
|
|
|
|
|
|
|
446,000
|
|
|
|
544,000
|
|
Directors and officers insurance premiums
|
|
|
220,000
|
|
|
|
230,000
|
|
|
|
220,000
|
|
Bank charges
|
|
|
97,000
|
|
|
|
113,000
|
|
|
|
61,000
|
|
Franchise taxes
|
|
|
108,000
|
|
|
|
103,000
|
|
|
|
57,000
|
|
Directors fees
|
|
|
119,000
|
|
|
|
98,000
|
|
|
|
101,000
|
|
Postage and delivery
|
|
|
93,000
|
|
|
|
72,000
|
|
|
|
60,000
|
|
Investor-related services
|
|
|
75,000
|
|
|
|
67,000
|
|
|
|
68,000
|
|
Asset management fee(c)
|
|
|
|
|
|
|
|
|
|
|
2,563,000
|
|
Other
|
|
|
87,000
|
|
|
|
62,000
|
|
|
|
99,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
$
|
1,368,000
|
|
|
$
|
1,647,000
|
|
|
$
|
4,445,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in general and administrative expense of $279,000
for the year ended December 31, 2010, compared to the year
ended December 31, 2009, and the decrease in general and
administrative of $2,798,000 for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, was due to:
(a) Professional and legal fees
62
For the year ended December 31, 2010, professional and
legal fees increased $113,000, as compared to the year ended
December 31, 2009. The increase in professional and legal
fees was primarily due to an increase in legal fees resulting
from the termination of agreements with our Former Advisor,
Grubb & Ellis Securities, and Grubb & Ellis
Equity Advisors, Transfer Agent, LLC, or Grubb & Ellis
Transfer Agent and the transitioning of those services to new
providers.
For the year ended December 31, 2009, professional and
legal fees decreased $216,000, as compared to the year ended
December 31, 2008. The decrease in professional and legal
fees was primarily due to a reduction of negotiated external
auditors fees in connection with the audit of our Annual
Report on
Form 10-K
and the review of our quarterly reports on
Form 10-Q.
(b) Bad debt expense
For the year ended December 31, 2010, bad debt expense of
$223,000 is included in rental expenses and classified within
administration costs. In prior years, bad debt expense of
$446,000 and $544,000, are included in general and
administrative expenses. For the year ended December 31,
2010, bad debt expense decreased $223,000, as compared to the
year ended December 31, 2009. Bad debt expense decreased
$98,000 for the year ended December 31 2009, as compared to the
year ended December 31, 2008. The decrease in bad debt
expense resulted from an improvement in tenants ability to
meet their contractual obligations under their lease agreements
as well as an overall improvement in collection practices by the
company. We continually evaluate individual tenants
receivables considering the tenants financial condition,
security deposits received, and current economic conditions.
(c) Asset management fees
The decrease in asset management fees for the years ended
December 31, 2010 and 2009, as compared to the year ended
December 31, 2008, was due to zero asset management fees
incurred in 2010 and 2009. The Advisory Agreement with our
Former Advisor provided that, effective January 1, 2009, no
asset management fee is due or payable to our advisor until the
quarter following the quarter in which we generate funds from
operations, or FFO, excluding non-recurring charges, sufficient
to cover 100% of the distributions declared to our stockholders
for such quarter. This agreement was terminated in December
2010. Our new Advisory Agreement with our new Advisor does not
have an asset management fee structure in place and we do not
foresee such a fee structure being established.
Acquisition-Related
Expenses
For the years ended December 31, 2010, 2009 and 2008, we
incurred acquisition-related expenses of $5,394,000, $12,000,
and $909,000, respectively.
For the year ended December 31, 2010, we incurred
acquisition-related expenses associated with the purchase of the
Bella Ruscello Luxury Apartment Homes, or the Bella Ruscello
property and the Mission Rock Ridge Apartments, or the Mission
Rock Ridge property, the acquisition of substantially all of the
assets and certain liabilities of MR Property Management, and
the termination of proposed property acquisitions from Delaware
statutory trusts for which an affiliate of MR Holdings serves as
trustee, including acquisition fees of $1,228,000 paid to our
Former Advisor and its affiliates.
For the year ended December 31, 2009, we recorded $12,000
in acquisition-related costs associated with the termination of
a proposed acquisition.
For the year ended December 31, 2008, we recorded $825,000
in acquisition-related costs associated with the termination of
a proposed acquisition. Such amount included expenses associated
with the acquisition and financing expenses of the property, for
which we reimbursed our Former Advisor and its affiliates
pursuant to the G&E Advisory Agreement. The remaining
$84,000 incurred during 2008 was due to acquisition-related
audit fees. We purchased four properties during 2008.
63
Depreciation
and Amortization
For the years ended December 31, 2010, 2009 and 2008,
depreciation and amortization was $12,861,000, $11,854,000 and
$11,720,000, respectively.
For the year ended December 31, 2010, depreciation and
amortization increased $1,007,000, as compared to the year ended
December 31, 2009. The increase in depreciation and
amortization expense is primarily attributable to the
depreciation and amortization incurred on our 2010 acquisitions,
partially offset by assets becoming fully depreciated. For the
year ended December 31, 2010, depreciation and amortization
was comprised of depreciation on our properties of $12,460,000
and amortization of identified intangible assets of $401,000.
For the year ended December 31, 2009, depreciation and
amortization expense remained relatively constant, increasing
$134,000, as compared to the year ended December 31, 2008.
For the year ended December 31, 2009, depreciation and
amortization was comprised of depreciation on our properties of
$11,605,000 and amortization of identified intangible assets of
$249,000. Identified intangible assets were fully amortized by
April 2009. For the year ended December 31, 2008,
depreciation and amortization was comprised of depreciation on
our properties of $9,260,000 and amortization of identified
intangible assets of $2,460,000.
Interest
Expense
For the years ended December 31, 2010, 2009 and 2008,
interest expense was $11,881,000, $11,552,000 and $11,607,000,
respectively. Interest expense consisted of the following for
the periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest expense on mortgage loan payables(a)
|
|
$
|
11,126,000
|
|
|
$
|
10,429,000
|
|
|
$
|
9,783,000
|
|
Amortization of deferred financing fees mortgage
loan payables(a)
|
|
|
246,000
|
|
|
|
231,000
|
|
|
|
173,000
|
|
Amortization of debt discount
|
|
|
136,000
|
|
|
|
136,000
|
|
|
|
136,000
|
|
Interest expense on the Wachovia Loan(b)
|
|
|
|
|
|
|
124,000
|
|
|
|
714,000
|
|
Write-off of deferred financing fees line of
credit(c)
|
|
|
|
|
|
|
|
|
|
|
243,000
|
|
Amortization of deferred financing fees lines of
credit(c)
|
|
|
|
|
|
|
88,000
|
|
|
|
338,000
|
|
Interest expense on unsecured note payables to affiliate(d)
|
|
|
373,000
|
|
|
|
544,000
|
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
11,881,000
|
|
|
$
|
11,552,000
|
|
|
$
|
11,607,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense of $329,000 for the year ended
December 31, 2010, as compared to the year ended
December 31, 2009, and the decrease in interest expense of
$55,000 for the year ended December 31, 2009, as compared
to the year ended December 31, 2008, was due to the
following:
(a) Mortgage loan payables
Interest expense and amortization of deferred financing fees on
mortgage loan payables increased by $712,000 for the year ended
December 31, 2010, as compared to the year ended
December 31, 2009. Interest expense and amortization of
deferred financing fees on mortgage loan payables increased by
$704,000 for the year ended December 31, 2009, as compared
to the year ended December 31, 2008. The increases in
interest expense were due to the increases in mortgage loan
payables balances outstanding as a result of the increase in the
number of properties owned year-over-year, partially offset by
lower interest expense on the mortgage loan payables with
amortizing principal balances.
(b) Interest expense on the lines of credit
The $590,000 decrease in interest expense on our loan of up to
$10,000,000 with Wachovia Bank, National Association, or the
Wachovia Loan, for the year ended December 31, 2009, as
compared to the year ended December 31, 2008, was the
result of lower interest rates and a lower outstanding balance
on the
64
Wachovia Loan during 2009, as compared to 2008. In October 2009,
we repaid the remaining outstanding principal balance on the
Wachovia Loan, which had a maturity date of November 1,
2009. As such, we did not incur interest expense or amortization
of deferred financing costs on the Wachovia Loan for the year
ended December 31, 2010.
(c) Deferred financing fees on the lines of credit
The decrease in amortization of deferred financing
fees lines of credit of $250,000 for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, was a result of the initial deferred
financing fees in connection with the Wachovia Loan incurred in
November 2007, and the additional deferred financing fees
incurred in connection with each acquisition-related draw from
November 2007 through September 2008 being fully amortized by
November 2008. In November 2008, we incurred $100,000 in
connection with the renewal of the Wachovia Loan which was
amortized through November 2009, and we did not have any
acquisition-related draws on the Wachovia Loan during 2009. In
October 2009, we repaid the remaining outstanding principal
balance on the Wachovia Loan, which had a maturity date of
November 1, 2009, therefore there were no additional
deferred financing fees recognized during the year ended
December 31, 2010. Also, for the year ended
December 31, 2008, we wrote-off $243,000 of deferred
financing fees as a result of the termination of the line of
credit in June 2008.
(d) Interest expense on unsecured note payables to affiliate
Interest expense on unsecured note payables to affiliate
decreased by $171,000 for the year ended December 31, 2010,
as compared to the year ended December 31, 2009. The
decrease was a result of the decrease in the outstanding
principal amount as of the periods then ended and the decrease
in interest rates on the unsecured note payables during the
periods then ended. As of December 31, 2010 and 2009, the
outstanding principal amount under the unsecured note payables
to affiliate was $7,750,000 and $9,100,000, respectively. The
interest rate on the unsecured note was 4.50% per annum during
the year ended December 31, 2010, and the interest rates on
the unsecured notes ranged from 4.50% to 8.43% per annum during
the year ended December 31, 2009.
Interest expense on unsecured note payables to affiliate
increased by $324,000 for the year ended December 31, 2009,
as compared to the year ended December 31, 2008. The
increase was primarily due to the period of time principal
balances were outstanding on the unsecured notes for the periods
then ended, as well as the interest rates on the unsecured notes
during those periods. A principal balance was outstanding on the
unsecured notes for 12 months during 2009, as compared to
nine months during 2008. The interest rates on the unsecured
notes ranged from 4.50% to 8.43% during 2009 and 4.95% to 7.46%
during 2008.
Interest
and Dividend Income
For the years ended December 31, 2010, 2009 and 2008,
interest and dividend income was $12,000, $3,000 and $22,000,
respectively. For such periods, interest and dividend income was
related primarily to interest earned on our money market
accounts. The change in interest and dividend income was due to
higher cash balances and higher interest rates in 2010 and 2008,
as compared 2009.
Liquidity
and Capital Resources
Until December 31, 2010, we were dependent primarily upon
the net proceeds from our follow-on offering to provide the
capital required to purchase real estate and real estate-related
investments, net of any indebtedness that we may incur, and to
repay our unsecured note payable to affiliate. We experienced a
relative increase in liquidity as additional subscriptions for
shares of our common stock were received and a relative decrease
in liquidity as net offering proceeds were expended in
connection with the acquisition, management and operation of our
real estate and real estate-related investments.
Currently, we are dependent upon our income from operations to
provide capital required to meet our principal demands for
funds, including operating expenses, principal and interest due
on our outstanding indebtedness, and distributions to our
stockholders. In addition, we will require resources to make
certain payments of fees and reimbursements of expenses to our
Advisor. We estimate that we will require
65
approximately $12,019,000 to pay interest on our outstanding
indebtedness over the next 12 months, based on rates in
effect as of December 31, 2010. In addition, we estimate
that we will require $875,000 to pay principal on our
outstanding indebtedness over the next 12 months. We are
required by the terms of the applicable mortgage loan documents
to meet certain financial covenants, such as minimum net worth
and liquidity amounts, and reporting requirements. As of
December 31, 2010, we were in compliance with all such
requirements. If we are unable to obtain financing in the
future, it may have a material effect on our operations,
liquidity
and/or
capital resources.
Generally, cash needs for items other than acquisitions of real
estate and real-estate related investments will be met from
operations, borrowings and the net proceeds from our follow-on
offering. We believe that these cash resources will be
sufficient to satisfy our cash requirements for the foreseeable
future, and we do not anticipate a need to raise funds from
other than these sources within the next 12 months. Our
Advisor evaluates potential additional investments and engages
in negotiations with real estate sellers, developers, brokers,
investment managers, lenders and others on our behalf.
In the event that we acquire a property, our Advisor will
prepare a capital plan that contemplates the estimated capital
needs of that investment. In addition to operating expenses,
capital needs may also include costs of refurbishment or other
major capital expenditures. The capital plan will also set forth
the anticipated sources of the necessary capital, which may
include a line of credit or other loans established with respect
to the investment, operating cash generated by the investment,
additional equity investments from us or joint venture partners
or, when necessary, capital reserves. Any capital reserve would
be established from the remaining proceeds of our follow-on
offering, proceeds from sales of other investments, operating
cash generated by other investments or other cash on hand. In
some cases, a lender may require us to establish capital
reserves for a particular investment. The capital plan for each
investment will be adjusted through ongoing, regular reviews of
our portfolio or as necessary to respond to unanticipated
additional capital needs.
Other
Liquidity Needs
In the event that there is a shortfall in net cash available due
to various factors, including, without limitation, the timing of
distributions or the timing of the collections of receivables,
we may seek to obtain capital to pay distributions by means of
secured or unsecured debt financing through one or more third
parties, or our Advisor or its affiliates. There currently are
no limits or restrictions on the use of borrowings or the sale
of assets that would prohibit us from making the proceeds
available for distribution.
As of December 31, 2010, we estimate that our expenditures
for capital improvements will require approximately $1,657,000
within the next 12 months. As of December 31, 2010, we
had $367,000 of restricted cash in loan impounds and reserve
accounts for such capital expenditures and any remaining
expenditures will be paid with net cash from operations or
borrowings. We cannot provide assurance, however, that we will
not exceed these estimated expenditure levels or be able to
obtain additional sources of financing on commercially favorable
terms or at all to fund such expenditures.
If we experience lower occupancy levels, reduced rental rates,
reduced revenues as a result of asset sales, increased capital
expenditures and leasing costs compared to historical levels due
to competitive market conditions for new and renewal leases, the
effect would be a reduction of net cash provided by operating
activities. If such a reduction of net cash provided by
operating activities is realized, we may have a cash flow
deficit in subsequent periods. Our estimate of net cash
available is based on various assumptions, which are difficult
to predict, including the levels of leasing activity and related
leasing costs. Any changes in these assumptions could impact our
financial results and our ability to fund working capital and
unanticipated cash needs.
Cash
Flows
Operating
Activities
Cash flows provided by operating activities for the years ended
December 31, 2010, 2009 and 2008, were $3,698,000,
$5,718,000 and $1,567,000, respectively.
66
For the year ended December 31, 2010, cash flows provided
by operating activities primarily related to the operations of
our 15 properties, as well as the payment of acquisition-related
expenses of $4,565,000. In addition, there was a $2,523,000
increase in accounts payable and accrued liabilities primarily
due to the additional accrual of 2010 real estate and business
taxes offset by the payment of 2009 real estate and business
taxes. The overall decrease in cash flows provided by operating
activities in 2010, as compared to 2009, was related to the
payment of acquisition-related expenses in 2010 versus not
paying any in 2009. We anticipate cash flows provided by
operating activities to increase as we purchase more properties.
For the year ended December 31, 2009, cash flows provided
by operating activities related primarily to a full year of
operations of our 13 properties, partially offset by the
$580,000 decrease in accounts payable due to affiliates, net
primarily due to the $581,000 payment of the asset management
fees related to the fourth quarter of 2008, as well as no
accrual for asset management fees during the year ended
December 31, 2009.
For the year ended December 31, 2008, cash flows provided
by operating activities related primarily to the increase in
accounts payable and accrued liabilities and accounts payable
due to affiliates, net of $2,143,000, partially offset by the
increase in accounts and other receivables of $712,000. In
addition to a full year of operations of our 13 properties, the
increase in cash flows provided by operating activities in 2009,
as compared to 2008, was related to the timing of the receipt of
receivables and the payment of payables.
As of December 31, 2010, we had an amount payable of
$94,000 to our Former Advisor and its affiliates for operating
expenses and property management fees, which have been paid from
cash flows from operations as they became due and payable by us
in the ordinary course of business consistent with our past
practice. We have incurred expenses during 2011 and have an
amount payable to our Former Advisor at March 25, 2011 of
$6,000.
As of December 31, 2010, no amounts due to our Former
Advisor or its affiliates have been deferred or forgiven.
Effective January 1, 2009, our Former Advisor has agreed to
waive the asset management fee until the quarter following the
quarter in which we generated FFO, excluding non-recurring
charges, sufficient to cover 100% of the distributions declared
to our stockholders for such quarter. Our Former Advisor and its
affiliates have no other obligations to defer, waive or forgive
amounts due to them. In the future, if our advisor or its
affiliates do not defer, waive or forgive amounts due to them,
this would negatively affect our cash flows from operations.
Investing
Activities
Cash flows used in investing activities for the years ended
December 31, 2010, 2009 and 2008, were $44,580,000,
$1,824,000 and $126,638,000, respectively.
For the year ended December 31, 2010, cash flows used in
investing activities related primarily to the acquisition of two
real estate operating properties in the amount of $36,713,000 as
well as the acquisition of substantially all of the assets and
certain liabilities of a property management company in the
amount of $5,513,000. We anticipate cash flows used in investing
activities to increase as we purchase properties.
For the year ended December 31, 2009, cash flows used in
investing activities related primarily to the payment of the
sellers allocation of accrued liabilities on our 2008
acquisitions of real estate operating properties in the amount
of $469,000 and $1,304,000 of cash flows used for capital
expenditures.
For the year ended December 31, 2008, cash flows used in
investing activities related primarily to the acquisition of
four real estate operating properties in the aggregate amount of
$124,874,000.
Financing
Activities
Cash flows provided by financing activities for the years ended
December 31, 2010, 2009 and 2008, were $37,261,000,
$337,000 and $126,041,000, respectively.
For the year ended December 31, 2010, cash flows provided
by financing activities related primarily to borrowings on our
mortgage loan payables of $27,200,000 and funds raised from
investors in our follow-on offering of $23,982,000, partially
offset by payments on our unsecured note payable to affiliate of
$1,350,000,
67
share repurchases of $2,612,000, the payment of offering cost of
$2,781,000, and cash distributions in the amount of $6,486,000.
For the year ended December 31, 2009, cash flows provided
by financing activities related primarily to funds raised from
investors in our offerings of $13,238,000, partially offset by
share repurchases of $2,383,000 pursuant to our share repurchase
plan, which was terminated on February 24, 2011, principal
repayments on the Wachovia Loan of $3,200,000, payment of
offering costs of $1,590,000 and distributions in the amount of
$5,676,000.
For the year ended December 31, 2008, cash flows provided
by financing activities related primarily to funds raised from
investors of $66,636,000 and borrowings on our mortgage loan
payables, net, unsecured note payables to affiliate and the
Wachovia Loan of $122,601,000, partially offset by payments on
unsecured note payables to affiliate of $7,600,000, payments on
the Wachovia Loan of $41,650,000, share repurchases of $797,000,
the payment of offering costs of $7,490,000 and cash
distributions in the amount of $4,414,000.
Distributions
The amount of the distributions we pay to our stockholders is
determined by our board of directors and is dependent on a
number of factors, including funds available for the payment of
distributions, our financial condition, capital expenditure
requirements and annual distribution requirements needed to
maintain our status as a REIT under the Code. We have not
established any limit on the amount of offering proceeds or
borrowings that may be used to fund distributions, except that,
in accordance with our organizational documents and Maryland
law, we may not make distributions that would: (1) cause us
to be unable to pay our debts as they become due in the usual
course of business; (2) cause our total assets to be less
than the sum of our total liabilities plus senior liquidation
preferences; or (3) jeopardize our ability to maintain our
qualification as a REIT.
From March 2007 through February 2009, we paid a 7.0% annualized
distribution rate based upon a purchase price of $10.00 per
share. Beginning in March 2009, our board of directors reduced
our annualized distribution rate to 6.0% based upon a purchase
price of $10.00 per share. We paid distributions to our
stockholders at this annualized rate through February 2011. On
February 24, 2011, our board of directors authorized an
annualized distribution rate of 3.0% based upon a purchase price
of $10.00 per share for the period commencing on March 1,
2011 and ending on June 30, 2011. We generally aggregate
daily distributions and pay them monthly in arrears.
For the year ended December 31, 2010, we paid aggregate
distributions of $10,883,000 ($6,486,000 in cash and $4,397,000
in shares of our common stock pursuant to the DRIP), as compared
to cash flows from operations of $3,698,000. For the year ended
December 31, 2009, we paid distributions of $10,049,000
($5,676,000 in cash and $4,373,000 in shares of our common stock
pursuant to the DRIP), as compared to cash flows from operations
of $5,718,000. From our inception through December 31,
2010, we paid cumulative distributions of $32,331,000
($18,481,000 in cash and $13,850,000 in shares of our common
stock pursuant to the DRIP), as compared to cumulative cash
flows from operations of $13,479,000. The distributions paid in
excess of our cash flows from operations were paid using net
proceeds from our offerings.
Our distributions of amounts in excess of our current and
accumulated earnings and profits have resulted in a return of
capital to our stockholders. We have not established any limit
on the amount of offering proceeds that may be used to fund
distributions other than those limits imposed by our
organizational documents and Maryland law. Therefore, all or any
portion of a distribution to our stockholders may be paid from
offering proceeds. The payment of distributions from our
offering proceeds could reduce the amount of capital we
ultimately invest in assets and negatively impact the amount of
income available for future distributions.
Sources
of Distributions
For the years ended December 31, 2010, 2009, and 2008, our
FFO was $2,096,000, $6,135,000, and $(1,106,000), respectively.
For the year ended December 31, 2010, we paid distributions
of $2,096,000 or
68
19.3%, from FFO and $8,787,000, or 80.7%, from proceeds from our
follow-on offering. For the year ended December 31, 2009,
we paid distributions of $6,135,000 or 61.1%, from FFO and
$3,914,000, or 38.9%, from proceeds from our initial and
follow-on offerings. For the year ended December 31, 2008,
we did not pay any distributions from FFO; rather, 100% of
distributions were paid from proceeds of our initial public
offering. From our inception through December 31, 2010, our
cumulative FFO was $6,697,000. From our inception through
December 31, 2010, we paid cumulative distributions of
$32,331,000 of which $6,697,000 was paid from FFO. The payment
of distributions from sources other than FFO reduces the amount
of proceeds available for investment and operations and may
cause us to incur additional interest expense as a result of
borrowed funds. For a further discussion of FFO, see Funds from
Operations and Modified Funds from Operations below.
If distributions made to our stockholders are in excess of our
current and accumulated earning and profits, such distributions
would be considered a return of capital to our stockholders for
federal income tax purposes. Our distributions paid in excess of
our current and accumulated earnings and profits have resulted
in a return of capital to our stockholders. The income tax
treatment for distributions per common share reportable for the
years ended December 31, 2010, 2009 and 2008 was as follows:
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|
Years Ended December 31,
|
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|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Ordinary income
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
Capital gain
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
0.60
|
|
|
|
100
|
|
|
|
0.63
|
|
|
|
100
|
|
|
|
0.70
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
100
|
%
|
|
$
|
0.63
|
|
|
|
100
|
%
|
|
$
|
0.70
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Effective as of February 24, 2011, our board of directors
authorized a daily distribution to our stockholders of record as
of the close of business on each day of the period commencing on
March 1, 2011 and ending on June 30, 2011. The
distributions will be calculated based on 365 days in the
calendar year and will be equal to $0.0008219 per share of
common stock, which is equal to an annualized distribution rate
of 3.0%, assuming a purchase price of $10.00 per share. These
distributions will be aggregated and paid in cash monthly in
arrears. The distributions declared for each record date in the
March 2011, April 2011, May 2011 and June 2011 periods will be
paid in April 2011, May 2011, June 2011 and July 2011,
respectively, only from legally available funds.
For a further discussion of our distributions, See Item 5.
Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Distributions.
Financing
We generally anticipate that aggregate borrowings, both secured
and unsecured, will not exceed 65.0% of all the combined fair
market value of all of our real estate and real estate-related
investments, as determined at the end of each calendar year. For
these purposes, the fair market value of each asset will be
equal to the purchase price paid for the asset or, if the asset
was appraised subsequent to the date of purchase, then the fair
market value will be equal to the value reported in the most
recent independent appraisal of the asset. Our policies do not
limit the amount we may borrow with respect to any individual
investment. However, we incurred higher leverage during the
period prior to the investment of all of the net proceeds of our
follow-on offering. As of December 31, 2010, our aggregate
borrowings were 66.8% of all of the combined fair market value
of all of our real estate and real estate-related investments
and such excess over 65.0% was due to the unsecured note payable
to an affiliate we incurred to purchase Kedron Village and
Canyon Ridge Apartments.
Our charter precludes us from borrowing in excess of 300.0% of
our net assets, unless approved by a majority of our independent
directors and the justification for such excess borrowing is
disclosed to our stockholders in our next quarterly report. For
purposes of this determination, net assets are our total assets,
other than intangibles, valued at cost before deducting
depreciation, amortization, bad debt or other similar non-cash
reserves, less total liabilities. We compute our leverage at
least quarterly on a consistently-applied basis. Generally, the
preceding calculation is expected to approximate 75.0% of the
aggregate cost of our real
69
estate and real estate-related investments before depreciation,
amortization, bad debt and other similar non-cash reserves. We
may also incur indebtedness to finance improvements to
properties and, if necessary, for working capital needs or to
meet the distribution requirements applicable to REITs under the
federal income tax laws. As of March 25, 2011 and
December 31, 2010, our leverage did not exceed 300.0% of
our net assets.
Mortgage
Loan Payables, Net and Unsecured Note Payables to
Affiliate
For a discussion of our mortgage loan payables, net and our
unsecured note payables to affiliate, see Note 7, Mortgage
Loan Payables, Net and Unsecured Note Payables to Affiliate, to
the Consolidated Financial Statements that are a part of this
Annual Report on
Form 10-K.
Line of
Credit
For a discussion of the Wachovia Loan, see Note 8, Line of
Credit, to the Consolidated Financial Statements that are a part
of this Annual Report on
Form 10-K.
REIT
Requirements
In order to continue to qualify as a REIT for federal income tax
purposes, we are required to make distributions to our
stockholders of at least 90.0% of our annual taxable income,
excluding net capital gains. In the event that there is a
shortfall in net cash available due to factors including,
without limitation, the timing of such distributions or the
timing of the collections of receivables, we may seek to obtain
capital to pay distributions by means of secured or unsecured
debt financing through one or more third parties, or our Advisor
or its affiliates. We may also pay distributions from cash from
capital transactions including, without limitation, the sale of
one or more of our properties.
Commitments
and Contingencies
For a discussion of our commitments and contingencies, see
Note 9, Commitments and Contingencies, to the Consolidated
Financial Statements that are a part of this Annual Report on
Form 10-K.
Debt
Service Requirements
One of our principal liquidity needs is the payment of interest
and principal on our outstanding indebtedness. As of
December 31, 2010, we had 15 mortgage loan payables
outstanding in the aggregate principal amount of $244,598,000
($244,072,000, net of discount).
As of December 31, 2010, we had $7,750,000 outstanding
under the amended and restated consolidated unsecured promissory
note, or the Amended Consolidated Promissory Note, with NNN
Realty Advisors, Inc., or NNN Realty Advisors, a wholly-owned
subsidiary of our former sponsor. The original note stipulated
an interest rate of 4.5% per annum that was subject to a
one-time adjustment, had a default interest rate of 2.00% per
annum in excess of the interest rate then in effect, which was
due January 1, 2011. The material terms of the Amended
Consolidated Promissory Note decreased the principal amount
outstanding to $7,750,000 due to our pay down of the principal
balance, extended the maturity date from January 1, 2011 to
July 17, 2012 and fixed the interest rate at 4.50% per
annum and the default interest rate at 6.50% per annum. On
February 2, 2011, NNN Realty Advisors sold the Amended
Consolidated Promissory Note to G & E Apartment
Lender, LLC, an unaffiliated party, for a purchase price of
$6,200,000 with the principal outstanding balance remaining at
$7,750,000.
We are required by the terms of the applicable loan documents to
meet certain financial covenants, such as minimum net worth and
liquidity amounts, and reporting requirements. As of
December 31, 2010, we were in compliance with all such
requirements and we expect to remain in compliance with all such
requirements for the next 12 months. As of
December 31, 2010, the weighted average effective interest
rate on our outstanding debt was 4.73% per annum.
70
Contractual
Obligations
The following table provides information with respect to the
maturities and scheduled principal repayments of our
indebtedness as of December 31, 2010. The table does not
reflect any available extension options.
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|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
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|
|
More than 5 Years
|
|
|
|
|
|
|
(2011)
|
|
|
(2012-2013)
|
|
|
(2014-2015)
|
|
|
(After 2015)
|
|
|
Total
|
|
|
Principal payments fixed rate debt
|
|
$
|
875,000
|
|
|
$
|
10,245,000
|
|
|
$
|
40,700,000
|
|
|
$
|
139,528,000
|
|
|
$
|
191,348,000
|
|
Interest payments fixed rate debt
|
|
|
10,463,000
|
|
|
|
20,274,000
|
|
|
|
17,740,000
|
|
|
|
14,281,000
|
|
|
|
62,758,000
|
|
Principal payments variable rate debt
|
|
|
|
|
|
|
30,000
|
|
|
|
60,970,000
|
|
|
|
|
|
|
|
61,000,000
|
|
Interest payments variable rate debt (based on rates
in effect as of December 31, 2010)
|
|
|
1,556,000
|
|
|
|
3,117,000
|
|
|
|
2,607,000
|
|
|
|
|
|
|
|
7,280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,894,000
|
|
|
$
|
33,666,000
|
|
|
$
|
122,017,000
|
|
|
$
|
153,809,000
|
|
|
$
|
322,386,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet
transactions and we currently have no such arrangements.
Inflation
Substantially all of our apartment leases are for a term of one
year or less. In an inflationary environment, this may allow us
to realize increased rents upon renewal of existing leases or
the beginning of new leases. Short-term leases generally will
minimize our risk from the adverse effects of inflation,
although these leases generally permit tenants to leave at the
end of the lease term, and, therefore, will expose us to the
effect of a decline in market rents. In a deflationary rent
environment, we may be exposed to declining rents more quickly
under these shorter term leases.
Funds
from Operations and Modified Funds From Operations
Funds From Operations is a non-GAAP financial performance
measure defined by the National Association of Real Estate
Investment Trusts, or NAREIT, and widely recognized by investors
and analysts as one measure of operating performance of a REIT.
The FFO calculation excludes items such as real estate
depreciation and amortization, and gains and losses on the sale
of real estate assets. Historical accounting convention used for
real estate assets requires straight-line depreciation of
buildings and improvements, which implies that the value of real
estate assets diminishes predictably over time. Since real
estate values have historically risen or fallen with market
conditions, it is managements view, and we believe the
view of many industry investors and analysts, that the
presentation of operating results for a REIT using the
historical accounting for depreciation is insufficient. In
addition, FFO excludes gains and losses from the sale of real
estate but includes asset impairment and write-downs, which we
believe provides management and investors with a helpful
additional measure of the performance of our real estate
portfolio, as it allows for comparisons, year to year, that
reflect the impact on operations from trends in items such as
occupancy rates, rental rates, operating costs, general and
administrative expenses, and interest expenses.
In addition to FFO, we use Modified Funds From Operations, or
MFFO, as a non-GAAP supplemental financial performance measure
to evaluate the operating performance of our real estate
portfolio. MFFO, as defined by our company, excludes from FFO,
acquisition-related expenses, amortization of debt discount and
amortization of an above market lease. In evaluating the
performance of our portfolio over time, management employs
business models and analyses that differentiate the costs to
acquire investments from the investments
71
revenues and expenses. Management believes that excluding
acquisition costs from MFFO provides investors with supplemental
performance information that is consistent with the performance
models and analysis used by management, and provides investors a
view of the performance of our portfolio over time, including
after the time we cease to acquire properties on a frequent and
regular basis. In calculating MFFO, we also exclude amortization
of debt discount and amortization of an above market lease in
accordance with the practice guidelines of the Investment
Program Association, an industry trade group. MFFO enables
investors to compare the performance of our portfolio with other
REITs that have not recently engaged in acquisitions, as well as
a comparison of our performance with that of other non-traded
REITs, as MFFO, or an equivalent measure, is routinely reported
by non-traded REITs, and we believe often used by analysts and
investors for comparison purposes.
For all of these reasons, we believe that, in addition to net
income and cash flows from operations, as defined by GAAP, both
FFO and MFFO are helpful supplemental performance measures and
useful in understanding the various ways in which our management
evaluates the performance of our real estate portfolio in
relation to managements performance models, and in
relation to the operating performance of other REITs. However,
not all REITs calculate FFO and MFFO the same way, so
comparisons with other REITs may not be meaningful. Furthermore,
FFO and MFFO should not be considered as alternatives to net
income or to cash flows from operations, and are not intended to
be used as a liquidity measure indicative of cash flow available
to fund our cash needs.
MFFO may provide investors with a useful indication of our
future performance, particularly after our acquisition stage,
and of the sustainability of our current distribution policy.
However, because MFFO excludes acquisition expenses, which are
an important component in an analysis of the historical
performance of a property, MFFO should not be construed as a
historic performance measure.
Our calculation of FFO and MFFO, and reconciliation to net loss,
which is the most directly comparable GAAP financial measure, is
presented in the following table for the years ended
December 31, 2010, 2009 and 2008.
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|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,827,000
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Depreciation and amortization consolidated properties
|
|
|
12,861,000
|
|
|
|
11,854,000
|
|
|
|
11,720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
2,096,000
|
|
|
$
|
6,135,000
|
|
|
$
|
(1,106,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related expenses
|
|
$
|
5,394,000
|
|
|
$
|
12,000
|
|
|
$
|
909,000
|
|
Amortization of debt discount
|
|
|
136,000
|
|
|
|
136,000
|
|
|
|
136,000
|
|
Amortization of above market lease
|
|
|
(12,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFFO(1)
|
|
$
|
7,613,368
|
|
|
$
|
6,283,000
|
|
|
$
|
(61,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
18,356,824
|
|
|
|
16,226,924
|
|
|
|
12,322,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share basic and diluted
|
|
$
|
0.11
|
|
|
$
|
0.38
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFFO per common share basic and diluted(1)
|
|
$
|
0.41
|
|
|
$
|
0.39
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Increases in MFFO and MFFO per common share basic
and diluted during the periods presented are attributable
primarily to our acquisition of additional properties during the
respective periods, rather than from improved performance of the
individual properties. |
72
Net
Operating Income
Net operating income is a non-GAAP financial measure that is
defined as net income (loss), computed in accordance with GAAP,
generated from properties before interest expense, general and
administrative expenses, depreciation, amortization, interest
and dividend income and other income, net. We believe that net
operating income provides an accurate measure of the operating
performance of our operating assets because net operating income
excludes certain items that are not associated with management
of our properties. Additionally, we believe that net operating
income is a widely accepted measure of comparative operating
performance in the real estate community. However, our use of
the term net operating income may not be comparable to that of
other real estate companies as they may have different
methodologies for computing this amount.
The following is a reconciliation of net loss, which is the most
directly comparable GAAP financial measure, to net operating
income for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,827,000
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,368,000
|
|
|
|
1,647,000
|
|
|
|
4,445,000
|
|
Acquisition-related expenses
|
|
|
5,394,000
|
|
|
|
12,000
|
|
|
|
909,000
|
|
Depreciation and amortization
|
|
|
12,861,000
|
|
|
|
11,854,000
|
|
|
|
11,720,000
|
|
Interest expense
|
|
|
11,881,000
|
|
|
|
11,552,000
|
|
|
|
11,607,000
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
(12,000
|
)
|
|
|
(3,000
|
)
|
|
|
(22,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
20,727,000
|
|
|
$
|
19,343,000
|
|
|
$
|
15,832,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Repurchases
Our share repurchase plan that was effective through
December 31, 2010, allowed for share repurchases by us upon
request by stockholders when certain criteria are met by
requesting stockholders. Share repurchases were made at the sole
discretion of our board of directors. Funds for the repurchase
of shares of our common stock came exclusively from the proceeds
we receive from the sale of shares of our common stock pursuant
to the DRIP.
Under our share repurchase plan, redemption prices ranged from
$9.25, or 92.5% of the price paid per share, following a one
year holding period, to an amount equal to not less than 100% of
the price paid per share following a four year holding period.
In order to effect the repurchase of shares of our common stock
held for less than one year due to the death of a stockholder or
a stockholder with a qualifying disability, we must have
received written notice within one year after the death of the
stockholder or the stockholders qualifying disability, as
applicable. Furthermore, our share repurchase plan provided that
if there are insufficient funds to honor all repurchase
requests, pending requests will be honored among all requests
for repurchase in any given repurchase period, as follows:
first, pro rata as to repurchases sought upon a
stockholders death; next, pro rata as to repurchases
sought by stockholders with a qualifying disability; and,
finally, pro rata as to other repurchase requests.
Our share repurchase plan provided that our board of directors
may, in its sole discretion, repurchase shares of our common
stock on a quarterly basis. Since the first quarter of 2009, in
accordance with the discretion given it under the share
repurchase plan, our board of directors determined to repurchase
shares only with respect to requests made in connection with a
stockholders death or qualifying disability, as determined
by our board of directors and in accordance with the terms and
conditions set forth in the share repurchase plan. During the
year ended December 31, 2010, we received valid redemption
requests relating to 442,705 shares, of which we redeemed
263,430 shares for an aggregate repurchase price of
$2,612,000 (an average of $9.92 per share). A valid redemption
request is one that complies with the applicable requirements
73
and guidelines of our current share redemption program set forth
in the prospectus relating to the follow-on offering, and
includes requests for reasons other than a stockholders
death or qualifying disability. We have funded share redemptions
with proceeds of our DRIP. Subsequent to December 31, 2010,
we did not redeem any shares.
In February 2011, our board of directors determined that it is
in the best interest of our company and its stockholders to
preserve our companys cash, and terminated our share
repurchase plan. Accordingly, pending share repurchase requests
will not be fulfilled.
Material
Related Party Arrangements
On February 25, 2010, we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors. See Note 19, Subsequent Events New
Advisory Agreement, to the Consolidated Financial Statements
that are a part of this Annual Report on
Form 10-K,
for a discussion of the terms of the new advisory agreement.
Other
Subsequent Events
For a discussion of other subsequent events, see, generally,
Note 19, Subsequent Events, to the Consolidated Financial
Statements that are a part of this Annual Report on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. In pursuing our business plan, the primary market
risk to which we are exposed is interest rate risk.
We are exposed to the effects of interest rate changes primarily
as a result of borrowings used to maintain liquidity and fund
expansion and refinancing of our real estate investment
portfolio and operations. Our interest rate risk management
objectives are to limit the impact of interest rate changes on
earnings, prepayment penalties and cash flows and to lower
overall borrowing costs while taking into account variable
interest rate risk. To achieve our objectives, we borrow at
fixed rates and variable rates. We may also enter into
derivative financial instruments such as interest rate swaps and
caps in order to mitigate our interest rate risk on a related
financial instrument. We do not enter into derivative or
interest rate transactions for speculative purposes.
Our interest rate risk is monitored using a variety of
techniques. We periodically determine the impact of hypothetical
interest rates on our borrowing cost. These analyses do not
consider the effects of the adjusted level of overall economic
activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management would likely
take actions to further mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity
analysis assumes no change in our financial structure.
The table below presents, as of December 31, 2010, the
principal amounts and weighted average interest rates by year of
expected maturity to evaluate the expected cash flows and
sensitivity to interest rate changes.
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
Total
|
|
Fair Value
|
|
Fixed rate debt principal payments
|
|
$
|
875,000
|
|
|
$
|
8,704,000
|
|
|
$
|
1,541,000
|
|
|
$
|
15,200,000
|
|
|
$
|
25,500,000
|
|
|
$
|
139,528,000
|
|
|
$
|
191,348,000
|
|
|
$
|
199,715,000
|
|
Weighted average interest rate on maturing debt (based on rates
in effect as of December 31, 2010)
|
|
|
5.36
|
%
|
|
|
4.59
|
%
|
|
|
5.28
|
%
|
|
|
5.07
|
%
|
|
|
5.48
|
%
|
|
|
5.52
|
%
|
|
|
5.43
|
%
|
|
|
|
|
Variable rate debt principal payments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,000
|
|
|
$
|
185,000
|
|
|
$
|
60,785,000
|
|
|
$
|
|
|
|
$
|
61,000,000
|
|
|
$
|
58,903,000
|
|
Weighted average interest rate on maturing debt (based on rates
in effect as of December 31, 2010)
|
|
|
|
%
|
|
|
|
%
|
|
|
2.54
|
%
|
|
|
2.54
|
%
|
|
|
2.52
|
%
|
|
|
|
%
|
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan payables were $244,598,000 ($244,072,000, net of
discount) as of December 31, 2010. As of December 31,
2010, we had fixed and variable rate mortgage loans with
effective interest rates ranging from 2.49% to 5.94% per annum
and a weighted average effective interest rate of 4.73% per
annum. As of December 31, 2010, we had $183,598,000
($183,072,000, net of discount) of fixed rate debt, or 75.1% of
mortgage loan payables, at a weighted average interest rate of
5.43% per annum and $61,000,000 of variable rate debt, or 24.9%
of mortgage loan payables, at a weighted average effective
interest rate of 2.52% per annum.
As of December 31, 2010, we had $7,750,000 outstanding
under the Amended Consolidated Promissory Note at a fixed
interest rate of 4.50% per annum and a default interest rate at
6.50% per annum, which is due on July 17, 2012.
Borrowings as of December 31, 2010, bore interest at a
weighted average effective interest rate of 4.73% per annum.
An increase in the variable interest rate on our three variable
interest rate mortgages constitutes a market risk. As of
December 31, 2010, a 0.50% increase in London Interbank
Offered Rate, or LIBOR, would have increased our overall annual
interest expense by $305,000, or 2.57%.
In addition to changes in interest rates, the value of our
future properties is subject to fluctuations based on changes in
local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to
refinance our debt if necessary.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
See the index at Part IV, Item 15. Exhibits, Financial
Statement Schedules.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in our reports pursuant to the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms, and that such
information is accumulated and communicated to us, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, we recognize that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired
75
control objectives, as ours are designed to do, and we
necessarily were required to apply our judgment in evaluating
whether the benefits of the controls and procedures that we
adopt outweigh their costs.
As required by
Rules 13a-15(b)
and
15d-15(b) of
the Exchange Act, an evaluation as of December 31, 2010 was
conducted under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures, as of December 31,
2010, were effective.
(b) Managements Report on Internal Control over
Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal
control over our financial reporting, as such term is defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision, and with the participation, of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO.
Based on our evaluation under the Internal Control-Integrated
Framework, our management concluded that our internal control
over financial reporting was effective.
(c) Changes in internal control over financial
reporting. There were no changes in our internal
control over financial reporting that occurred during the
quarter ended December 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
76
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2011 annual meeting of stockholders.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2011 annual meeting of stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2011 annual meeting of stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2011 annual meeting of stockholders.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with
respect to our 2011 annual meeting of stockholders.
77
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1) Financial Statements:
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
(a)(2) Financial Statement Schedule:
The following financial statement schedule for the year ended
December 31, 2010 is submitted herewith:
|
|
|
|
|
|
|
Page
|
|
Real Estate Operating Properties and Accumulated Depreciation
(Schedule III)
|
|
|
123
|
|
All schedules other than the one listed above have been omitted
as the required information is inapplicable or the information
is presented in the consolidated financial statements or related
notes.
(a)(3) Exhibits:
The exhibits listed on the Exhibit Index (following the
signatures section of this report) are included, or incorporated
by reference, in this Annual Report on
Form 10-K.
(b) Exhibits:
See Item 15(a)(3) above.
(c) Financial Statement Schedule:
|
|
|
|
|
|
|
Page
|
|
Real Estate Operating Properties and Accumulated Depreciation
(Schedule III)
|
|
|
123
|
|
78
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of directors and Stockholders
Apartment Trust of America, Inc. (formerly known as
Grubb & Ellis Apartment REIT, Inc.)
We have audited the accompanying consolidated balance sheets of
Apartment Trust of America, Inc. and subsidiaries (the
Company) as of December 31, 2010 and 2009 and
the related consolidated statements of operations, equity and
cash flows for each of the three years in the period ended
December 31, 2010. Our audits also included the
consolidated financial statement schedule listed in the index at
Item 15. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
and the consolidated financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2010 and 2009, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2010, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects, the information set forth
therein.
/s/ Deloitte &
Touche, LLP
Los Angeles, California
March 25, 2011
79
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Real estate investments:
|
|
|
|
|
|
|
|
|
Operating properties, net
|
|
$
|
350,670,000
|
|
|
$
|
324,938,000
|
|
Cash and cash equivalents
|
|
|
3,274,000
|
|
|
|
6,895,000
|
|
Accounts and other receivables
|
|
|
1,289,000
|
|
|
|
662,000
|
|
Restricted cash
|
|
|
4,943,000
|
|
|
|
4,007,000
|
|
Goodwill
|
|
|
3,751,000
|
|
|
|
|
|
Investment in unconsolidated joint venture
|
|
|
50,000
|
|
|
|
|
|
Identified intangible assets, net
|
|
|
2,521,000
|
|
|
|
|
|
Other assets, net
|
|
|
2,036,000
|
|
|
|
1,801,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
368,534,000
|
|
|
$
|
338,303,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage loan payables, net
|
|
$
|
244,072,000
|
|
|
$
|
217,434,000
|
|
Unsecured note payable to affiliate
|
|
|
7,750,000
|
|
|
|
9,100,000
|
|
Accounts payable and accrued liabilities
|
|
|
9,044,000
|
|
|
|
5,698,000
|
|
Accounts payable due to affiliates
|
|
|
109,000
|
|
|
|
140,000
|
|
Security deposits, prepaid rent and other liabilities
|
|
|
1,401,000
|
|
|
|
1,162,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
262,376,000
|
|
|
|
233,534,000
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest (Note 12)
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 50,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
0 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 300,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
19,632,818 and 17,028,454 shares issued and outstanding as
of
|
|
|
|
|
|
|
|
|
December 31, 2010 and December 31, 2009, respectively
|
|
|
196,000
|
|
|
|
170,000
|
|
Additional paid-in capital
|
|
|
174,704,000
|
|
|
|
151,542,000
|
|
Accumulated deficit
|
|
|
(68,742,000
|
)
|
|
|
(46,943,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
106,158,000
|
|
|
|
104,769,000
|
|
Noncontrolling interest (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
106,158,000
|
|
|
|
104,769,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
368,534,000
|
|
|
$
|
338,303,000
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
35,568,000
|
|
|
$
|
33,674,000
|
|
|
$
|
28,692,000
|
|
Other property revenues
|
|
|
4,006,000
|
|
|
|
3,791,000
|
|
|
|
3,186,000
|
|
Management fee income
|
|
|
2,547,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
42,121,000
|
|
|
|
37,465,000
|
|
|
|
31,878,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses
|
|
|
18,871,000
|
|
|
|
18,122,000
|
|
|
|
16,046,000
|
|
Salaries and benefits expense
|
|
|
2,523,000
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,368,000
|
|
|
|
1,647,000
|
|
|
|
4,445,000
|
|
Acquisition expenses
|
|
|
5,394,000
|
|
|
|
12,000
|
|
|
|
909,000
|
|
Depreciation and amortization
|
|
|
12,861,000
|
|
|
|
11,854,000
|
|
|
|
11,720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
41,017,000
|
|
|
|
31,635,000
|
|
|
|
33,120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1,104,000
|
|
|
|
5,830,000
|
|
|
|
(1,242,000
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (including amortization of deferred financing
costs and debt discount):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to unsecured note payables to affiliate
|
|
|
(373,000
|
)
|
|
|
(544,000
|
)
|
|
|
(220,000
|
)
|
Interest expense related to mortgage loan payables, net
|
|
|
(11,508,000
|
)
|
|
|
(10,796,000
|
)
|
|
|
(10,092,000
|
)
|
Interest expense related to lines of credit
|
|
|
|
|
|
|
(212,000
|
)
|
|
|
(1,295,000
|
)
|
Interest and dividend income
|
|
|
12,000
|
|
|
|
3,000
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10,765,000
|
)
|
|
|
(5,719,000
|
)
|
|
|
(12,827,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to company stockholders
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,826,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to company stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
interest basic and diluted
|
|
$
|
(0.59
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(1.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding basic and diluted
|
|
|
18,356,824
|
|
|
|
16,226,924
|
|
|
|
12,322,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
Number of
|
|
|
|
|
|
Paid-In
|
|
|
Preferred
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
Noncontrolling
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
Interest
|
|
|
BALANCE December 31, 2007
|
|
|
8,528,844
|
|
|
$
|
85,000
|
|
|
$
|
75,737,000
|
|
|
$
|
|
|
|
$
|
(9,766,000
|
)
|
|
$
|
1,000
|
|
|
$
|
66,057,000
|
|
|
$
|
|
|
Issuance of common stock
|
|
|
6,641,058
|
|
|
|
67,000
|
|
|
|
66,269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,336,000
|
|
|
|
|
|
Issuance of vested and nonvested restricted common stock
|
|
|
3,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(7,254,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,254,000
|
)
|
|
|
|
|
Amortization of nonvested common stock compensation
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
Issuance of common stock under the DRIP
|
|
|
400,216
|
|
|
|
4,000
|
|
|
|
3,798,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,802,000
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(84,308
|
)
|
|
|
(1,000
|
)
|
|
|
(796,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(797,000
|
)
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,633,000
|
)
|
|
|
|
|
|
|
(8,633,000
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,826,000
|
)
|
|
|
(1,000
|
)
|
|
|
(12,827,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
|
15,488,810
|
|
|
|
155,000
|
|
|
|
137,775,000
|
|
|
|
|
|
|
|
(31,225,000
|
)
|
|
|
|
|
|
|
106,705,000
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,322,313
|
|
|
|
13,000
|
|
|
|
13,202,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,215,000
|
|
|
|
|
|
Issuance of vested and nonvested restricted common stock
|
|
|
4,000
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
Forfeiture of nonvested shares of common stock
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,447,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,447,000
|
)
|
|
|
|
|
Amortization of nonvested common stock compensation
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
|
|
Issuance of common stock under the DRIP
|
|
|
460,285
|
|
|
|
5,000
|
|
|
|
4,368,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,373,000
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(244,954
|
)
|
|
|
(3,000
|
)
|
|
|
(2,380,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,383,000
|
)
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,999,000
|
)
|
|
|
|
|
|
|
(9,999,000
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,719,000
|
)
|
|
|
|
|
|
|
(5,719,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
|
17,028,454
|
|
|
|
170,000
|
|
|
|
151,542,000
|
|
|
|
|
|
|
|
(46,943,000
|
)
|
|
|
|
|
|
|
104,769,000
|
|
|
|
|
|
Issuance of common stock
|
|
|
2,401,917
|
|
|
|
24,000
|
|
|
|
23,958,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,982,000
|
|
|
|
|
|
Issuance of vested and nonvested restricted common stock
|
|
|
3,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(2,604,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,604,000
|
)
|
|
|
|
|
Amortization of nonvested common stock compensation
|
|
|
|
|
|
|
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,000
|
|
|
|
|
|
Issuance of common stock under the DRIP
|
|
|
462,877
|
|
|
|
5,000
|
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,397,000
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(263,430
|
)
|
|
|
(3,000
|
)
|
|
|
(2,609,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,612,000
|
)
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,034,000
|
)
|
|
|
|
|
|
|
(11,034,000
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,765,000
|
)
|
|
|
|
|
|
|
(10,765,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2010
|
|
|
19,632,818
|
|
|
$
|
196,000
|
|
|
$
|
174,704,000
|
|
|
$
|
|
|
|
$
|
(68,742,000
|
)
|
|
$
|
|
|
|
$
|
106,158,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,765,000
|
)
|
|
$
|
(5,719,000
|
)
|
|
$
|
(12,827,000
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (including deferred financing
costs and debt discount)
|
|
|
13,243,000
|
|
|
|
12,309,000
|
|
|
|
12,610,000
|
|
(Gain) loss on property insurance settlements
|
|
|
|
|
|
|
(101,000
|
)
|
|
|
16,000
|
|
Stock based compensation, net of forfeitures
|
|
|
25,000
|
|
|
|
24,000
|
|
|
|
21,000
|
|
Bad debt expense
|
|
|
223,000
|
|
|
|
446,000
|
|
|
|
544,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
|
(953,000
|
)
|
|
|
(726,000
|
)
|
|
|
(712,000
|
)
|
Other assets, net
|
|
|
(139,000
|
)
|
|
|
233,000
|
|
|
|
(79,000
|
)
|
Accounts payable and accrued liabilities
|
|
|
2,523,000
|
|
|
|
286,000
|
|
|
|
1,819,000
|
|
Accounts payable due to affiliates
|
|
|
146,000
|
|
|
|
(580,000
|
)
|
|
|
324,000
|
|
Security deposits and prepaid rent
|
|
|
(605,000
|
)
|
|
|
(454,000
|
)
|
|
|
(149,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,698,000
|
|
|
|
5,718,000
|
|
|
|
1,567,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of real estate operating properties
|
|
|
(36,713,000
|
)
|
|
|
(469,000
|
)
|
|
|
(124,874,000
|
)
|
Acquisition of management company
|
|
|
(5,513,000
|
)
|
|
|
|
|
|
|
|
|
Acquisition of unconsolidated joint venture
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,521,000
|
)
|
|
|
(1,304,000
|
)
|
|
|
(1,648,000
|
)
|
Proceeds from property insurance settlements
|
|
|
153,000
|
|
|
|
194,000
|
|
|
|
360,000
|
|
Restricted cash
|
|
|
(936,000
|
)
|
|
|
(245,000
|
)
|
|
|
(476,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(44,580,000
|
)
|
|
|
(1,824,000
|
)
|
|
|
(126,638,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on mortgage loan payables
|
|
|
27,200,000
|
|
|
|
|
|
|
|
78,651,000
|
|
Payments on mortgage loan payables
|
|
|
(698,000
|
)
|
|
|
(415,000
|
)
|
|
|
(391,000
|
)
|
Borrowings on unsecured note payables to affiliate
|
|
|
|
|
|
|
|
|
|
|
9,100,000
|
|
Payments on unsecured note payables to affiliate
|
|
|
(1,350,000
|
)
|
|
|
|
|
|
|
(7,600,000
|
)
|
Borrowings on line of credit
|
|
|
|
|
|
|
|
|
|
|
34,850,000
|
|
Payments on line of credit
|
|
|
|
|
|
|
(3,200,000
|
)
|
|
|
(41,650,000
|
)
|
Deferred financing costs
|
|
|
(293,000
|
)
|
|
|
(4,000
|
)
|
|
|
(1,050,000
|
)
|
Security deposits
|
|
|
299,000
|
|
|
|
367,000
|
|
|
|
196,000
|
|
Proceeds from issuance of common stock
|
|
|
23,982,000
|
|
|
|
13,238,000
|
|
|
|
66,636,000
|
|
Repurchase of common stock
|
|
|
(2,612,000
|
)
|
|
|
(2,383,000
|
)
|
|
|
(797,000
|
)
|
Payment of offering costs
|
|
|
(2,781,000
|
)
|
|
|
(1,590,000
|
)
|
|
|
(7,490,000
|
)
|
Distributions
|
|
|
(6,486,000
|
)
|
|
|
(5,676,000
|
)
|
|
|
(4,414,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
37,261,000
|
|
|
|
337,000
|
|
|
|
126,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,621,000
|
)
|
|
|
4,231,000
|
|
|
|
970,000
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
6,895,000
|
|
|
|
2,664,000
|
|
|
|
1,694,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
3,274,000
|
|
|
$
|
6,895,000
|
|
|
$
|
2,664,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
11,614,000
|
|
|
$
|
11,109,000
|
|
|
$
|
10,376,000
|
|
Income taxes
|
|
$
|
168,000
|
|
|
$
|
120,000
|
|
|
$
|
11,000
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
acquisition-related
expenses
|
|
$
|
829,000
|
|
|
$
|
|
|
|
$
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
|
|
|
$
|
26,000
|
|
|
$
|
20,000
|
|
The following represents the increase in certain assets and
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
in connection with our acquisitions of operating
properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,000
|
|
Other assets, net
|
|
$
|
49,000
|
|
|
$
|
|
|
|
$
|
141,000
|
|
Accounts payable and accrued liabilities
|
|
$
|
364,000
|
|
|
$
|
|
|
|
$
|
399,000
|
|
Security deposits and prepaid rent
|
|
$
|
230,000
|
|
|
$
|
|
|
|
$
|
521,000
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under the DRIP
|
|
$
|
4,397,000
|
|
|
$
|
4,373,000
|
|
|
$
|
3,802,000
|
|
Distributions declared but not paid
|
|
$
|
999,000
|
|
|
$
|
848,000
|
|
|
$
|
898,000
|
|
Accrued offering costs
|
|
$
|
10,000
|
|
|
$
|
44,000
|
|
|
$
|
187,000
|
|
Receivable for issuance of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,000
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
83
The use of the words the Company, we,
us, our company, or our
refers to Apartment Trust of America, Inc. and its subsidiaries,
including Apartment Trust of America Holdings, LP, except where
the context otherwise requires.
|
|
1.
|
Organization
and Description of Business
|
Apartment Trust of America, Inc., a Maryland corporation, was
incorporated on December 21, 2005. We were initially
capitalized on January 10, 2006 and therefore we consider
that our date of inception. On December 29, 2010, our board
of directors adopted an amendment to our charter to change our
corporate name from Grubb & Ellis Apartment REIT, Inc.
to Apartment Trust of America, Inc. We are in the business of
acquiring and holding a diverse portfolio of quality apartment
communities with stable cash flows and growth potential in
select U.S. metropolitan areas. We may also acquire other
real estate-related investments. We focus primarily on
investments that produce current income. We have qualified and
elected to be taxed as a real estate investment trust, or REIT,
under the Internal Revenue Code of 1986, as amended, or the
Code, for federal income tax purposes and we intend to continue
to be taxed as a REIT.
We commenced a best efforts initial public offering on
July 19, 2006, or our initial offering, in which we offered
up to 100,000,000 shares of our common stock for $10.00 per
share in our primary offering and up to 5,000,000 shares of
our common stock pursuant to our distribution reinvestment plan,
or the DRIP, for $9.50 per share, for a maximum offering of up
to $1,047,500,000. We terminated our initial offering on
July 17, 2009. As of July 17, 2009, we had received
and accepted subscriptions in our initial offering for
15,738,457 shares of our common stock, or $157,218,000,
excluding shares of our common stock issued pursuant to the DRIP.
On July 20, 2009, we commenced our follow-on offering, in
which we offered to the public up to 105,000,000 shares of
our common stock. Our follow-on offering included up to
100,000,000 shares of our common stock for sale at $10.00
per share in our primary offering and up to
5,000,000 shares of our common stock for sale pursuant to
the DRIP at $9.50 per share, for a maximum offering of up to
$1,047,500,000, or the maximum offering. As explained in more
detail below, we suspended the primary portion of our follow-on
offering on December 31, 2010. As of December 31,
2010, we had received and accepted subscriptions in our
follow-on offering for 2,992,777 shares of our common
stock, or $29,885,000, excluding shares of our common stock
issued pursuant to the DRIP.
Until December 31, 2010, the managing broker-dealer for our
capital formation efforts had been Grubb & Ellis
Securities, Inc. Effective December 31, 2010,
Grubb & Ellis Securities terminated the
Grubb & Ellis Dealer Management Agreement. In order to
transition the capital formation function to a successor
managing broker-dealer, on November 5, 2010, we entered
into a new Dealer Manager Agreement, or the RCS Dealer Manager
Agreement, with Realty Capital Securities, LLC, or RCS, whereby
RCS agreed to serve as our exclusive dealer manager effective
upon the satisfaction of certain conditions, including receipt
of a no-objections notice from the Financial Industry Regulatory
Authority, or FINRA, in connection with our follow-on offering.
On November 12, 2010, we suspended our follow-on offering
pending receipt of such no-objections notice. As of
December 31, 2010, RCS had not yet received a no-objections
notice from FINRA and, having no effective dealer manager
agreement in place, we suspended the primary portion of our
follow-on offering. As of February, 28, 2011, RCS still had not
received a no-objections notice from FINRA relating to our
follow-on offering. Recently, general market conditions had
caused us and RCS to reconsider the merits of continuing the
follow-on offering. Therefore, on February 28, 2011, we
provided written notice to RCS that we were terminating the RCS
Dealer Manager Agreement, effective immediately. As a result, we
currently do not have a dealer manager. We cannot make
assurances that we will enter into a new dealer manager
agreement or that we will offer shares of our common stock to
the public in the future.
84
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We conduct substantially all of our operations through Apartment
Trust of America Holdings, LP, or our operating partnership. On
December 30, 2010, our operating partnership filed a
Certificate of Amendment of a Certificate of Limited Partnership
with the Commonwealth of Virginia State Corporation Commission
to change the name of the operating partnership from
Grubb & Ellis Apartment REIT Holdings, LP to Apartment
Trust of America Holdings, LP. Until December 31, 2010, we
were externally advised by Grubb & Ellis Apartment
REIT Advisor, LLC, or our Former Advisor, pursuant to an
advisory agreement, as amended and restated, or the
Grubb & Ellis Advisory Agreement.
Our Former Advisor is jointly owned by entities affiliated with
Grubb & Ellis Company and ROC REIT Advisors, LLC, or
ROC REIT Advisors. Prior to the termination of the
Grubb & Ellis Advisory Agreement, the Companys
day-to-day
operations were managed by our Former Advisor and our properties
were managed by Grubb & Ellis Residential Management,
Inc., an affiliate of our Former Advisor. Our Former Advisor is
affiliated with the Company in that all of the Companys
executive officers, Stanley J. Olander, Jr., David L.
Corneal and Gustov G. Remppies, are indirect owners of a
minority interest in our Former Advisor through their ownership
of ROC REIT Advisors. In addition, one of our directors, Andrea
R. Biller, was an indirect owner of a minority interest in our
Former Advisor until October 2010. In addition,
Messrs. Olander, Corneal and Remppies served as executive
officers of our Former Advisor. Mr. Olander and
Ms. Biller also own interests in Grubb & Ellis
Company, and served as executive officers of Grubb &
Ellis Company until November 2010 and October 2010, respectively.
On November 1, 2010, we received written notice from our
Former Advisor stating that it had elected to terminate the
Grubb & Ellis Advisory Agreement. Pursuant to the
Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice without cause or penalty. Therefore, the
Grubb & Ellis Advisory Agreement terminated on
December 31, 2010 and our Former Advisor no longer serves
as our companys advisor. In connection with the
termination of the Grubb & Ellis Advisory Agreement,
our Former Advisor has notified us that it has elected to defer
the redemption of its Incentive Limited Partnership Interest (as
such term is defined in the agreement of limited partnership for
our companys operating partnership) until, generally, the
earlier to occur of (i) a listing of our shares on a
national securities exchange or national market system or
(ii) a liquidity event. See Note 19, Subsequent Events
- Termination of the Grubb & Ellis Advisory Agreement,
for a further discussion of the termination of the
Grubb & Ellis Advisory Agreement.
On February 25, 2011 we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors, LLC, referred to herein as our Advisor. Our Advisor is
affiliated with us in that ROC REIT Advisors is owned by Stanley
J. Olander, Jr., David L. Carneal and Gustav G. Remppies,
each of whom are executive officers of our company. The new
advisory agreement has a one-year term and may be renewed for an
unlimited number of successive one-year terms. Pursuant to the
terms of the new advisory agreement, our Advisor will use its
commercially reasonable efforts to present to our company a
continuing and suitable investment program and opportunities to
make investments consistent with the investment policies of our
company. Our Advisor is also obligated to provide our company
with the first opportunity to purchase any Class A income
producing multi-family property which satisfies our
companys investment objectives. In performing these
obligations, our Advisor generally will (i) provide and
perform the
day-to-day
management of our company; (ii) serve as our companys
investment advisor; (iii) locate, analyze and select
potential investments for our company and structure and
negotiate the terms and conditions of acquisition and
disposition transactions; (iv) arrange for financing and
refinancing with respect to investments by our company; and
(v) enter into leases and service contracts with respect to
the investments by our company. Our Advisor is subject to the
supervision of our board of directors and has a fiduciary duty
to our company and its stockholders. See Note 19,
Subsequent Events New Advisory Agreement for a
discussion of the new advisory agreement with ROC REIT Advisors.
85
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, we owned nine properties in Texas
consisting of 2,573 apartment units, two properties in Georgia
consisting of 496 apartment units, two properties in Virginia
consisting of 394 apartment units, one property in Tennessee
consisting of 350 apartment units and one property in North
Carolina consisting of 160 apartment units for an aggregate of
15 properties consisting of 3,973 apartment units, which had an
aggregate purchase price of $377,787,000.
On August 27, 2010, we entered into definitive agreements
to acquire nine multifamily apartment properties from affiliates
of MR Holdings, LLC, or MR Holdings, and to acquire
substantially all of the assets and certain liabilities of
Mission Residential Management, LLC, or Mission Residential
Management, for total consideration valued at approximately
$182,357,000, based on purchase price. We are not affiliated
with MR Holdings or Mission Residential Management. On
September 30, 2010, we acquired (from an unaffiliated
party) Mission Rock Ridge Apartments, or the Mission Rock Ridge
property, located in Arlington, Texas, for a purchase price of
$19,857,000, plus closing costs. The Mission Rock Ridge property
is the first of nine multifamily apartment properties that we
intended to acquire. We intended to acquire the remaining eight
properties, or the DST properties, from Delaware statutory
trusts, or DSTs, for which an affiliate of MR Holdings serves as
a trustee. As of February 23, 2011, the expiration date for
the lenders approval period pursuant to each of the
purchase agreements, certain conditions precedent to our
obligation to acquire the eight DST properties had not been
satisfied. With the prior approval of our board of directors, on
February 28, 2011, we provided the respective DSTs written
notice of termination of each of the respective purchase
agreements in accordance with the terms of the agreements. See
Note 3, Real Estate Investments Acquisitions in
Real Estate Investments, for a further discussion. See also
Item 3 Legal Proceedings for more detail
regarding the pending litigation in connection with such
properties.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The summary of significant accounting policies presented below
is designed to assist in understanding our consolidated
financial statements. Such consolidated financial statements and
the accompanying notes thereto are the representations of our
management, who are responsible for their integrity and
objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America,
or GAAP, in all material respects, and have been consistently
applied in preparing our accompanying consolidated financial
statements.
Basis
of Presentation
Our accompanying consolidated financial statements include our
accounts and those of our operating partnership, the
wholly-owned subsidiaries of our operating partnership and any
variable interest entities, as defined, in Financial Accounting
Standards Board, or FASB, Accounting Standards Codification, or
ASC, Topic 810, Consolidation, which we have concluded
should be consolidated. We operate in an umbrella partnership
REIT structure in which wholly-owned subsidiaries of our
operating partnership own all of our properties we acquire. We
are the sole general partner of our operating partnership and as
of December 31, 2010 and 2009, we owned a 99.99% general
partnership interest in our operating partnership. As of
December 31, 2010 and 2009, our Former Advisor owned a
0.01% limited partnership interest in our operating partnership
and is a special limited partner in our operating partnership.
Our Former Advisor is also entitled to certain special limited
partnership rights under the partnership agreement for our
operating partnership. Because we are the sole general partner
of our operating partnership and have unilateral control over
its management and major operating decisions, the accounts of
our operating partnership are consolidated in our consolidated
financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation.
86
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We had an accumulated deficit of $68,742,000 and $46,943,000 as
of December 31, 2010 and 2009, respectively. As discussed
further in Note 7, Mortgage Loan Payables, Net and
Unsecured Note Payable to Affiliate Unsecured Note
Payable to Affiliate, as of December 31, 2010, we had an
outstanding principal amount under an unsecured note payable to
affiliate of $7,750,000, which is due on July 17, 2012. We
plan to either repay the unsecured note payable to affiliate
using cash on hand or replace the unsecured note payable with
permanent financing or an interim line of credit.
In preparing our accompanying financial statements, management
has evaluated subsequent events through the financial statement
issuance date. We believe that the disclosures contained herein
are adequate to prevent the information presented from being
misleading.
Use of
Estimates
The preparation of our consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. These estimates are made and
evaluated on an on-going basis using information that is
currently available as well as various other assumptions
believed to be reasonable under the circumstances. Actual
results could differ from those estimates, perhaps in material
adverse ways, and those estimates could be different under
different assumptions or conditions.
Cash
and Cash Equivalents
Cash and cash equivalents consist of all highly liquid
investments with a maturity of three months or less when
purchased.
Restricted
Cash
Restricted cash is comprised of impound reserve accounts for
property taxes, insurance and capital improvements and
replacements.
Revenue
Recognition, Tenant Receivables and Allowance for Uncollectible
Accounts
We recognize revenue in accordance with ASC Topic 605,
Revenue Recognition, or ASC Topic 605. ASC Topic 605
requires that all four of the following basic criteria be met
before revenue is realized or realizable and earned:
(1) there is persuasive evidence that an arrangement
exists; (2) delivery has occurred or services have been
rendered; (3) the sellers price to the buyer is fixed
and determinable; and (4) collectability is reasonably
assured.
We lease multi-family residential apartments under operating
leases and substantially all of our apartment leases are for a
term of one year or less. Rental income and other property
revenues are recorded when due from tenants and is recognized
monthly as it is earned pursuant to the terms of the underlying
leases. Other property revenues consist primarily of utility
rebillings and administrative, application and other fees
charged to tenants, including amounts recorded in connection
with early lease terminations. Early lease termination amounts
are recognized when received and realized. Expense
reimbursements are recognized and presented in accordance with
ASC Subtopic
605-45,
Revenue Recognition Principal Agent
Considerations, or ASC Subtopic
605-45. ASC
Subtopic
605-45
requires that these reimbursements be recorded on a gross basis,
as we are generally the primary obligor with respect to
purchasing goods and services from third-party suppliers, have
discretion in selecting the supplier and have credit risk.
Management fees are recognized when earned in accordance with
each management contract. We receive fees for property
management and related services provided to third parties. These
fees are in management fee income on the consolidated income
statement. Management fees are based on a percentage of revenues
for the
87
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
month as defined in the related property management agreements.
We also pay certain payroll and related costs related to the
operations of third party properties that we manage. Under terms
of the related management agreements, these costs are reimbursed
by the third party property owners and recognized by us as
revenue as they are characterized by GAAP as out of
pocket expenses incurred in the performance of a service.
Receivables are carried net of an allowance for uncollectible
receivables. An allowance is maintained for estimated losses
resulting from the inability of certain tenants to meet their
contractual obligations under their lease agreements. Such
allowance is charged to bad debt expense which is included in
rental expense in 2010 and general and administrative in 2009
and 2008 in our accompanying consolidated statements of
operations. We determine the adequacy of this allowance by
continually evaluating individual tenants receivables
considering the tenants financial condition and security
deposits and current economic conditions. No allowance for
uncollectible accounts as of December 31, 2010 and 2009 was
determined to be necessary to reduce receivables to our estimate
of the amount recoverable. During the years ended
December 31, 2010, 2009 and 2008, $223,000, $446,000 and
$544,000, respectively, of receivables were directly written off
to bad debt expense.
Properties
Held for Sale
We account for our properties held for sale in accordance with
ASC Topic 360, Property, Plant and Equipment, or ASC
Topic 360, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and requires
that, in a period in which a component of an entity either has
been disposed of or is classified as held for sale, the
statements of operations for current and prior periods shall
report the results of operations of the component as
discontinued operations.
In accordance with ASC Topic 360, at such time as a property is
held for sale, such property is carried at the lower of
(1) its carrying amount or (2) fair value less costs
to sell. In addition, a property being held for sale ceases to
be depreciated. We classify operating properties as property
held for sale in the period in which all of the following
criteria are met:
|
|
|
|
|
management, having the authority to approve the action, commits
to a plan to sell the asset;
|
|
|
|
the asset is available for immediate sale in its present
condition subject only to terms that are usual and customary for
sales of such assets;
|
|
|
|
an active program to locate a buyer and other actions required
to complete the plan to sell the asset has been initiated;
|
|
|
|
the sale of the asset is probable and the transfer of the asset
is expected to qualify for recognition as a completed sale
within one year;
|
|
|
|
the asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and
|
|
|
|
given the actions required to complete the plan to sell the
asset, it is unlikely that significant changes to the plan would
be made or that the plan would be withdrawn.
|
As of December 31, 2010 and 2009, we did not have any
properties held for sale.
Purchase
Price Allocation of Properties
In accordance with ASC Topic 805, Business Combinations,
or ASC Topic 805, we, with the assistance from independent
valuation specialists, allocate the purchase price of acquired
properties to tangible and identified intangible assets and
liabilities based on their respective fair values. The
allocation to tangible assets
88
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(building and land) is based upon our determination of the value
of the property as if it were to be replaced and vacant using
comparable sales, cost data and discounted cash flow models
similar to those used by independent appraisers. Allocations are
made at the fair market value for furniture, fixtures and
equipment on the premises. Additionally, the purchase price of
the applicable property is allocated to the above or below
market value of in-place leases, the value of in-place leases,
tenant relationships and above or below market debt assumed.
Factors considered by us include an estimate of carrying costs
during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between:
(1) the contractual amounts to be paid pursuant to the
lease over its remaining term and (2) our estimate of the
amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above
market leases, if any, would be included in identified
intangible assets, net in our accompanying consolidated balance
sheets and would be amortized to rental income over the
remaining non-cancelable lease term of the acquired leases with
each property. The amounts allocated to below market leases, if
any, would be included in identified intangible liabilities, net
in our accompanying consolidated balance sheets and would be
amortized to rental income over the remaining non-cancelable
lease term plus below market renewal options, if any, of the
acquired leases with each property. As of December 31, 2010
and 2009, we did not have any amounts allocated to above or
below market leases.
The total amount of other intangible assets acquired is further
allocated to in-place lease costs and the value of tenant
relationships based on managements evaluation of the
specific characteristics of each tenants lease and our
overall relationship with that respective tenant.
Characteristics considered by us in allocating these values
include the nature and extent of the credit quality and
expectations of lease renewals, among other factors. The amounts
allocated to in-place lease costs are included in identified
intangible assets, net in our accompanying consolidated balance
sheets and are amortized to depreciation and amortization
expense over the average remaining non-cancelable lease term of
the acquired leases with each property. The amounts allocated to
the value of tenant relationships are included in identified
intangible assets, net in our accompanying consolidated balance
sheets and are amortized to depreciation and amortization
expense over the average remaining non-cancelable lease term of
the acquired leases plus a market renewal lease term.
The value allocable to above or below market debt is determined
based upon the present value of the difference between the cash
flow stream of the assumed mortgage and the cash flow stream of
a market rate mortgage at the time of assumption. The amounts
allocated to above or below market debt are included in mortgage
loan payables, net in our accompanying consolidated balance
sheets and are amortized to interest expense over the remaining
term of the assumed mortgage.
These allocations are subject to change based on information
received within one year of the purchase related to one or more
events identified at the time of purchase which confirm the
value of an asset or liability received in an acquisition of
property.
Purchase
Price Allocation of Management Company
The assets and liabilities of businesses acquired are recorded
at their respective preliminary fair values as of the
acquisition date. We obtained third-party valuations of material
intangible assets acquired, including tenant relationships and
termination fee intangibles, which were based on
managements inputs and assumptions relating primarily to
the expected cash flows, and the timing of cash flows from
property management contracts acquired as part of the Mission
Residential Management acquisition. We also performed fair value
estimates of the liabilities assumed in the acquisition
internally for the above market lease obligation
89
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumed and the paid time off liability assumed. Costs in excess
of the net fair values of assets and liabilities acquired is
recorded as goodwill.
We record and amortize above market leases assumed in the
acquisition of a business over the life of the lease on a
straight-line basis.
The fair values of the intangible assets acquired are based on
the expected discounted cash flows of the identified intangible
assets. Finite-lived intangible assets are amortized using a
method of amortization consistent with our expected future cash
flows in the period in which those assets are expected to be
received. We do not amortize indefinite lived intangibles and
goodwill.
Goodwill
and Identified Intangible Assets, Net
We will perform annual impairment tests on goodwill and more
often if events occur or circumstances change in accordance with
the applicable guidance for accounting for goodwill and other
intangible assets. As of December 31, 2010 and 2009,
goodwill of $3,751,000 and zero, respectively, were included in
the accompanying consolidated balance sheets.
During the fourth quarter of 2010, we, through MR Property
Management LLC, or MR Property Management, a taxable REIT
subsidiary, or TRS, of our operating partnership, completed the
acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management, an affiliate of
MR Holdings, including the in-place workforce, which created
$3,751,000 of goodwill. See Note 4, Goodwill and Identified
Intangible Assets, Net, for additional detail.
Identified intangible assets, net, consists of in-place lease
intangibles from property acquisitions and tenant relationship
intangibles and an expected termination fee intangible resulting
from the acquisition of substantially all of the assets and
certain liabilities of Mission Residential Management in the
fourth quarter of 2010. In-place lease intangibles are amortized
on a straight-line basis over their respective estimated useful
lives and evaluated for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not
be recoverable. Tenant relationship intangibles are amortized on
a basis consistent with estimated cash flows from these
intangible assets.
Operating
Properties, Net
We carry our operating properties at the lower of historical
cost less accumulated depreciation. Properties held for sale are
carried at fair value less costs to sell. The cost of operating
properties includes the cost of land and completed buildings and
related improvements. Expenditures that increase the service
life of properties are capitalized and the cost of maintenance
and repairs is charged to expense as incurred. The cost of
building and improvements is depreciated on a straight-line
basis over the estimated useful lives of the buildings and
improvements, ranging primarily from 10 to 40 years. Land
improvements are depreciated over the estimated useful lives
ranging primarily from five to 15 years. Furniture,
fixtures and equipment is depreciated over the estimated useful
lives ranging primarily from five to 15 years. When
depreciable property is retired, replaced or disposed of, the
related costs and accumulated depreciation is removed from the
accounts and any gain or loss is reflected in operations.
An operating property is evaluated for potential impairment
whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Impairment losses are
recorded on an operating property when indicators of impairment
are present and the carrying amount of the asset is greater than
the sum of the future undiscounted cash flows expected to result
from the use and eventual disposition of the asset. We would
recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. For the years ended
December 31, 2010, 2009 and 2008, there were no impairment
losses recorded.
90
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
in Unconsolidated Joint Venture
We use the equity method to account for investments that qualify
as variable interest entities where we are not the primary
beneficiary and entities that we do not control or where we do
not own a majority of the economic interest but have the ability
to exercise significant influence over the operations and
financial policies of the investee. We will also use the equity
method when we function as the managing member and our joint
venture partner has substantive participating rights or where we
can be replaced by our joint venture as a managing member
without cause. For a joint venture accounted for under the
equity method, our share of net earnings or losses is reflected
as income when earned and distributions are credited against our
investment in the joint venture as received.
In determining whether a joint venture is a variable interest
entity, we consider: the form of our ownership interest and
legal structure; the size of our investment; the financing
structure of the entity, including necessity of subordinated
debt; estimates of future cash flows; ours and our
partners ability to participate in the decision making
related acquisitions, dispositions, budgeting and financing of
the entity; obligation to absorb losses and preferential
returns; and the nature of our partners primary
operations. As of December 31, 2010, we assessed our joint
venture arrangement as a variable interest entity where
Apartment Trust of America, Inc., was not the primary
beneficiary, as the joint venture has been deemed to be an
entity under the common control of its two 50% owners.
We will continually evaluate our investment in unconsolidated
joint venture when events or changes in circumstances indicate
that there may be an
other-than-temporary
decline in value. We consider various factors to determine if a
decrease in value of the investment is
other-than-temporary.
These factors include, but are not limited to, age of the
venture, our intent and ability to retain our investment in the
equity, the financial condition and long-term prospects of the
entity, and the relationship with the other joint venture
partner and its lenders. The amount of loss recognized is the
excess of the investments carrying amount over its
estimated fair value. If we believe that the decline in fair
value is temporary, no impairment will be recorded. The
aforementioned factors are taken as a whole by management in
determining the valuation of our equity method investment.
Should the actual results differ from managements
judgment, the valuation could be negatively affected and may
result in a negative impact to our consolidated financial
statements.
Fair
Value Measurements
We follow ASC Topic 820, Fair Value Measurements and
Disclosures, or ASC Topic 820, to account for the fair value
of certain assets and liabilities. ASC Topic 820 defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. ASC Topic 820
applies to reported balances that are required or permitted to
be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any
new fair value measurements of reported balances.
ASC Topic 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC Topic
820 establishes a fair value hierarchy that distinguishes
between market participant assumptions based on market data
obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and
2 of the hierarchy) and the reporting entitys own
assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for
91
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other
than quoted prices), such as interest rates, foreign exchange
rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the
asset or liability, that are typically based on an entitys
own assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance
of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the
asset or liability.
Other
Assets, Net
Other assets, net consist primarily of deferred financing costs,
prepaid expenses and deposits. Deferred financing costs include
amounts paid to lenders and others to obtain financing. Such
costs are amortized using the straight-line method over the term
of the related loan, which approximates the effective interest
rate method. Amortization of deferred financing costs is
included in interest expense in our accompanying consolidated
statements of operations.
Stock
Compensation
We follow ASC Topic 718, Compensation Stock
Compensation, or ASC Topic 718, to account for our stock
compensation pursuant to our 2006 Incentive Award Plan, or our
2006 Plan. See Note 12, Equity 2006 Incentive
Award Plan for a further discussion of grants under our 2006
Plan.
Income
Taxes
For federal income tax purposes, we have elected to be taxed as
a REIT, under Sections 856 through 860 of the Code
beginning with our taxable year ended December 31, 2006,
and we intend to continue to be taxes as a REIT. To qualify as a
REIT for federal income tax purposes, we must meet certain
organizational and operational requirements, including a
requirement to pay distributions to our stockholders of at least
90.0% of our annual taxable income, excluding net capital gains.
As a REIT, we generally will not be subject to federal income
tax on net income that we distribute to our stockholders. During
2010, we acquired substantially all of the assets and certain
liabilities of Mission Residential Management through our
taxable REIT subsidiary, MR Property Management, including an
in-place work force to perform property management and leasing
services for our properties. MR Property Management also serves
as the property manager for approximately 39 additional
multi-family apartment communities that are owned by
unaffiliated third parties.
We are subject to state and local income taxes in some
jurisdictions, and in certain circumstances we may also be
subject to federal excise taxes on undistributed income. In
addition, certain of our activities must be conducted by
subsidiaries which elect to be treated as TRSs. TRSs are subject
to both federal and state income taxes. We recognize tax
penalties relating to unrecognized tax benefits as additional
tax expense. Interest relating to unrecognized tax benefits is
recognized as interest expense.
We follow ASC Topic 740, Income Taxes, to recognize,
measure, present and disclose in our consolidated financial
statements uncertain tax positions that we have taken or expect
to take on a tax return. As of December 31, 2010 and 2009,
we did not have any liabilities for uncertain tax positions that
we believe should be recognized in our consolidated financial
statements.
92
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment
Disclosure
ASC Topic 280, Segment Reporting, establishes standards
for reporting financial and descriptive information about a
public entitys reportable segments. We have determined
that we have one reportable segment, with activities related to
investing in apartment communities. Our investments in real
estate are geographically diversified and management evaluates
operating performance on an individual property level. However,
as each of our apartment communities has similar economic
characteristics, tenants and products and services, our
apartment communities have been aggregated into one reportable
segment for the years ended December 31, 2010, 2009 and
2008.
Recently
Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140, or
SFAS No. 166 (now contained in ASC Topic 860,
Transfers and Servicing). SFAS No. 166 removes
the concept of a qualifying special-purpose entity from
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities (now contained in ASC Topic 860, Transfers
and Servicing), and removes the exception from applying
Financial Accounting Standards Board Interpretation, or FIN,
No. 46(R), Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research
Bulletin No. 51, as revised, or
FIN No. 46(R) (now contained in ASC Topic 810,
Consolidation). SFAS No. 166 also clarifies the
requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting.
SFAS No. 166 is effective for financial asset
transfers occurring after the beginning of an entitys
first fiscal year that begins after November 15, 2009.
Early adoption is prohibited. We adopted SFAS No. 166
on January 1, 2010. The adoption of SFAS No. 166
did not have a material impact on our consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (now contained in ASC Topic 810,
Consolidation), which amends the consolidation guidance
applicable to variable interest entities, or VIEs. The
amendments to the overall consolidation guidance affect all
entities currently within the scope of FIN No. 46(R),
as well as qualifying special-purpose entities that are
currently excluded from the scope of FIN No. 46(R).
Specifically, an enterprise will need to reconsider its
conclusion regarding whether an entity is a VIE, whether the
enterprise is the VIEs primary beneficiary and what type
of financial statement disclosures are required.
SFAS No. 167 is effective as of the beginning of the
first fiscal year that begins after November 15, 2009.
Early adoption is prohibited. We adopted SFAS No. 167
on January 1, 2010. The adoption of SFAS No. 167
did not have a material impact on our consolidated financial
statements.
In January 2010, the FASB issued Accounting Standards Update, or
ASU,
2010-06,
Improving Disclosures about Fair Value Measurements, or
ASU 2010-06.
ASU 2010-06
amends ASC Topic 820 to require additional disclosure and
clarifies existing disclosure requirements about fair value
measurements. ASU
2010-06
requires entities to provide fair value disclosures by each
class of assets and liabilities, which may be a subset of assets
and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure
regarding the amounts and reasons for significant transfers in
and out of Level 1 and 2 of the fair value hierarchy and
separate presentation of purchases, sales, issuances and
settlements of items within Level 3 of the fair value
hierarchy. The guidance clarifies existing disclosure
requirements regarding the inputs and valuation techniques used
to measure fair value for measurements that fall in either
Level 2 or Level 3 of the hierarchy. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements of items within
level 3 of the hierarchy, which is effective for fiscal years
beginning after December 15, 2010 and for interim periods
within those fiscal years. We adopted ASU
2010-06 on
January 1, 2010, which will only apply to our future
disclosures on fair value of financial instruments provided in
future
93
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
filings with the Securities and Exchange Commission, or the SEC.
The adoption of the level 3 disclosures in ASU
2010-06 will
not have a material impact on our footnote disclosures.
In August 2010, the FASB issued ASU
2010-21,
Accounting for Technical Amendments to Various SEC Rules and
Schedules, or ASU
2010-21. ASU
2010-21
updates various SEC paragraphs pursuant to the issuance of
Release
No. 33-9026:
Technical Amendments to Rules, Forms, Schedules and Codification
of Financial Reporting Policies. The changes affect provisions
relating to consolidation and reporting requirements under
conditions of majority and minority ownership positions and
ownership by both controlling and noncontrolling entities. The
amendments also deal with redeemable and non-redeemable
preferred stocks and convertible preferred stocks. We adopted
ASU 2010-21
upon issuance in August 2010. The adoption of ASU
2010-21 did
not have a material impact on our consolidated financial
statements.
In December 2010, the FASB issued
ASU 2010-29,
Business Combinations (Topic 805), or
ASU 2010-29.
ASU 2010-29
amends ASC Topic 805 to require the disclosure of pro forma
revenue and earnings for all business combinations that occurred
during the current year to be presented as of the beginning of
the comparable prior annual reporting period. The amendments in
ASU 2010-29
also expand the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring
pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and
earnings.
ASU 2010-29
is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. The
adoption of
ASU 2010-29
will not have a material impact on our consolidated financial
statements.
|
|
3.
|
Real
Estate Investments
|
Our investments in our consolidated properties consisted of the
following as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
45,747,000
|
|
|
$
|
41,926,000
|
|
Land improvements
|
|
|
24,266,000
|
|
|
|
22,066,000
|
|
Building and improvements
|
|
|
304,729,000
|
|
|
|
274,199,000
|
|
Furniture, fixtures and equipment
|
|
|
12,230,000
|
|
|
|
10,799,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386,972,000
|
|
|
|
348,990,000
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(36,302,000
|
)
|
|
|
(24,052,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
350,670,000
|
|
|
$
|
324,938,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2010,
2009 and 2008 was $12,460,000, $11,605,000 and $9,260,000,
respectively.
Acquisition
of Real Estate Investments
Acquisitions during the years ended December 31, 2010, 2009
and 2008 are detailed below. We reimbursed our Former Advisor or
its affiliates for acquisition expenses related to selecting,
evaluating, acquiring and investing in properties. The
reimbursement of acquisition fees, real estate commissions and
other fees paid to unaffiliated parties will not exceed, in the
aggregate, 6.0% of the purchase price or total development
costs, unless fees in excess of such limits are approved by a
majority of our disinterested independent directors. As of
December 31, 2010 and 2009, such fees and expenses paid to
our Former Advisor or its affiliates did not exceed 6.0% of the
purchase price of our acquisitions.
94
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisitions
in 2010
Bella Ruscello Luxury Apartment Homes Duncanville,
Texas
On March 24, 2010, we purchased Bella Ruscello Luxury
Apartment Homes, located in Duncanville, Texas, or the Bella
Ruscello property, for a purchase price of $17,400,000, plus
closing costs, from an unaffiliated party. We financed the
purchase price of the Bella Ruscello property with a $13,300,000
secured loan and the remaining balance using proceeds from our
follow-on offering. We paid an acquisition fee of $522,000, or
3.0% of the purchase price, to our Former Advisor and its
affiliate.
Mission Rock Ridge Apartments Arlington, Texas
On September 30, 2010, we purchased the Mission Rock Ridge
property for a purchase price of $19,857,000, plus closing
costs, from an unaffiliated party. We financed the purchase
price of the Mission Rock Ridge property with a $13,900,000
secured loan and the remaining balance using proceeds from our
follow-on offering. We paid an acquisition fee of $596,000, or
3.0% of the purchase price, to our Former Advisor and its
affiliate.
Acquisitions
in 2009
We did not complete any acquisitions for the year ended
December 31, 2009.
Acquisitions
in 2008
Arboleda Apartments Cedar Park, Texas
On March 31, 2008, we purchased Arboleda Apartments,
located in Cedar Park, Texas, or the Arboleda property, for a
purchase price of $29,250,000, plus closing costs, from an
unaffiliated third party. We financed the purchase price of the
Arboleda property through a secured loan of $17,651,000;
$11,550,000 in borrowings under our loan with Wachovia Bank,
National Association, or Wachovia, or the Wachovia Loan (see
Note 8, Line of Credit); and $1,300,000 in proceeds from
our initial offering. We paid an acquisition fee of $878,000, or
3.0% of the purchase price, to our Former Advisor and its
affiliate.
Creekside Crossing Lithonia, Georgia
On June 26, 2008, we purchased Creekside Crossing, located
in Lithonia, Georgia, or the Creekside property, for a purchase
price of $25,400,000, plus closing costs, from an unaffiliated
third party. We financed the purchase price of the Creekside
property through a secured loan of $17,000,000 and $9,487,000 in
borrowings under the Wachovia Loan. We paid an acquisition fee
of $762,000, or 3.0% of the purchase price, to our Former
Advisor and its affiliate.
Kedron Village Peachtree City, Georgia
On June 27, 2008, we purchased Kedron Village, located in
Peachtree City, Georgia, or the Kedron property, for a purchase
price of $29,600,000, plus closing costs, from unaffiliated
third parties. We financed the purchase price of the Kedron
property through a secured loan of $20,000,000; $6,513,000 in
borrowings under the Wachovia Loan; $3,700,000 from an unsecured
loan from NNN Realty Advisors, Inc., or NNN Realty Advisors (see
Note 7, Mortgage Loan Payables, Net and Unsecured Note
Payables to Affiliate); and $1,000,000 in proceeds from our
initial offering. We paid an acquisition fee of $888,000, or
3.0% of the purchase price, to our Former Advisor and its
affiliate.
Canyon Ridge Apartments Hermitage, Tennessee
On September 15, 2008, we purchased Canyon Ridge
Apartments, located in Hermitage, Tennessee, or the Canyon Ridge
property, for a purchase price of $36,050,000, plus closing
costs, from an unaffiliated third
95
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
party. We financed the purchase price of the Canyon Ridge
property through a secured loan of $24,000,000; $7,300,000 in
borrowings under the Wachovia Loan; $5,400,000 from an unsecured
loan from NNN Realty Advisors; and $1,000,000 in proceeds from
our initial offering. We paid an acquisition fee of $1,082,000,
or 3.0% of the purchase price, to our Former Advisor and its
affiliate.
|
|
4.
|
Goodwill
and Identified Intangible Assets, Net
|
During the fourth quarter of 2010, we, through MR Property
Management, a taxable REIT subsidiary of our operating
partnership, completed the acquisition of substantially all of
the assets and certain liabilities of Mission Residential
Management, an affiliate of MR Holdings, including the in-place
workforce, which created $3,751,000 of goodwill.
In accordance with accounting guidance, goodwill is not
amortized but is tested for impairment at the reporting unit
level. Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value. Goodwill is
required to be tested for impairment annually and between annual
tests if events or circumstances change, such as adverse changes
in the business climate, that would more likely than not reduce
the fair value of the reporting unit below its carrying value.
Beginning in 2011, our goodwill impairment test, to be performed
during the fourth quarter of each year, will be a two-step test.
The first step will identify whether there is a potential
impairment by comparing the fair value of the reporting unit to
the carrying amount, including goodwill. If the fair value of
the reporting unit is less than the carrying amount, the second
step of the impairment test will be required to measure the
amount of any impairment loss. As goodwill was created from the
acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management during the fourth
quarter of 2010, no impairment test was performed in 2010.
The following table provides a summary of goodwill from the
acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management on
November 5, 2010:
|
|
|
|
|
Total purchase price
|
|
$
|
5,513,000
|
|
Assumed Oakton above market lease(a)
|
|
|
250,000
|
|
Assumed paid time off liability(b)
|
|
|
348,000
|
|
Intangible asset tenant relationships
|
|
|
(1,760,000
|
)
|
Intangible asset expected termination fees(c)
|
|
|
(600,000
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
3,751,000
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in security deposits, prepaid rent and other
liabilities on the consolidated balance sheet with a net balance
of $237,600 at December 31, 2010. |
|
(b) |
|
Included in accounts payable and accrued liabilities on the
consolidated balance sheet at December 31, 2010. |
|
(c) |
|
Represents termination fees due to terminations by property
owners, as outlined in the asset purchase agreement, which is
likely to be received by the company. |
96
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Identified intangible assets, net are a result of the purchase
of the Bella Ruscello Property, the Mission Rock Ridge Property
and substantially all of the assets and certain liabilities of
Mission Residential Management and consisted of the following as
of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
In-place leases, net of accumulated amortization of $126,000 and
$0 as of December 31, 2010 and 2009, respectively (with a
weighted average remaining life of 2 months and
0 months as of December 31, 2010 and 2009,
respectively)
|
|
$
|
84,000
|
|
|
$
|
|
|
Tenant relationships, net of accumulated amortization of $80,000
and $0 as of December 31, 2010 and 2009, respectively (with
a weighted average remaining life of 227 months and
0 months as of December 31, 2010 and 2009,
respectively)
|
|
|
1,837,000
|
|
|
|
|
|
Tenant relationships expected termination fees
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,521,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the identified intangible
assets, net for the years ended December 31, 2010, 2009 and
2008 was $401,000, $249,000 and $2,460,000, respectively.
Estimated amortization expense on the identified intangible
assets as of December 31, 2010 for each of the next five
years ending December 31 and thereafter, is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2011
|
|
$
|
393,000
|
|
2012
|
|
|
192,000
|
|
2013
|
|
|
165,000
|
|
2014
|
|
|
155,000
|
|
2015
|
|
|
143,000
|
|
Thereafter
|
|
|
873,000
|
|
|
|
5.
|
Investment
in Unconsolidated Joint Venture
|
As of December 31, 2010, we had one investment in an
unconsolidated joint venture. We account for this unconsolidated
joint venture under the equity method of accounting. We
recognize earnings or losses from our investment in the
unconsolidated joint venture, consisting of our proportionate
share of the net earnings or loss of the joint venture.
NNN/Mission
Residential Holdings, LLC
On December 31, 2010, we, through ATA-Mission, LLC, a
wholly-owned subsidiary of our operating partnership, acquired a
50% ownership interest in NNN/MR Holdings, which serves as a
holding company for the master tenants of four multi-family
apartment properties located in Plano and Garland, Texas and
Charlotte, North Carolina with an aggregate of 1,066 units.
We were not previously affiliated with NNN/MR Holdings. We
acquired the ownership interest in NNN/MR Holdings, or the
NNN/MR Holdings Interest, from Grubb & Ellis Realty
Investors, LLC, or Grubb & Ellis Realty Investors, an
affiliate of our Former Advisor. The remaining 50% is owned by
Mission Residential, LLC, which consented to the transaction. We
are not affiliated with Mission Residential, LLC. The four
multi-family apartment properties are managed by our
wholly-owned taxable REIT subsidiary, MR Residential Management,
LLC. We paid $50,000 in cash as consideration for the NNN/MR
Holdings Interest. We also assumed the obligation to fund up to
$1.0 million in draws on credit line loans extended to the
four master tenants by NNN/MR Holdings.
97
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other assets, net consisted of the following as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred financing costs, net of accumulated amortization of
$686,000 and
|
|
|
|
|
|
|
|
|
|
|
|
|
$440,000 as of December 31, 2010 and 2009, respectively
|
|
$
|
1,481,000
|
|
|
|
|
|
|
$
|
1,435,000
|
|
Prepaid expenses and deposits
|
|
|
555,000
|
|
|
|
|
|
|
|
366,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,036,000
|
|
|
|
|
|
|
$
|
1,801,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the deferred financing costs
for the years ended December 31, 2010, 2009 and 2008 was
$242,000, $319,000 and $754,000, respectively.
Estimated amortization expense on the deferred financing costs
as of December 31, 2010 for each of the next five years
ending December 31 and thereafter is as follows:
|
|
|
|
|
2011
|
|
$
|
261,000
|
|
2012
|
|
$
|
261,000
|
|
2013
|
|
$
|
261,000
|
|
2014
|
|
$
|
257,000
|
|
2015
|
|
$
|
175,000
|
|
Thereafter
|
|
$
|
266,000
|
|
|
|
7.
|
Mortgage
Loan Payables, Net and Unsecured Note Payables to
Affiliate
|
Mortgage
Loan Payables, Net
Mortgage loan payables were $244,598,000 ($244,072,000, net of
discount) and $218,095,000 ($217,434,000, net of discount) as of
December 31, 2010 and 2009, respectively. As of
December 31, 2010, we had 12 fixed rate and three variable
rate mortgage loans with effective interest rates ranging from
2.49% to 5.94% per annum and a weighted average effective
interest rate of 4.73% per annum. As of December 31, 2010,
we had $183,598,000 ($183,072,000, net of discount) of fixed
rate debt, or 75.1% of mortgage loan payables, at a weighted
average interest rate of 5.43% per annum and $61,000,000 of
variable rate debt, or 24.9% of mortgage loan payables, at a
weighted average effective interest rate of 2.52% per annum. As
of December 31, 2009, we had 10 fixed rate and three
variable rate mortgage loans with effective interest rates
ranging from 2.42% to 5.94% per annum and a weighted average
effective interest rate of 4.70% per annum. As of
December 31, 2009, we had $157,095,000, ($156,434,000, net
of discount) of fixed rate debt, or 72.0% of mortgage loan
payables, at a weighted average interest rate of 5.58% per annum
and $61,000,000 of variable rate debt, or 28.0% of mortgage loan
payables, at a weighted average effective interest rate of 2.45%
per annum.
We are required by the terms of the applicable loan documents to
meet certain financial covenants, such as minimum net worth and
liquidity amounts, and reporting requirements. As of
December 31, 2010 and 2009, we were in compliance with all
such requirements. Most of the mortgage loan payables may be
prepaid in whole but not in part, subject to prepayment
premiums. In the event of prepayment, the amount of the
prepayment premium will be paid according to the terms of the
applicable loan document. Eleven of our mortgage loan payables
currently have monthly interest-only payments. The mortgage loan
payables associated with Residences at Braemar, Towne Crossing
Apartments, Arboleda Apartments and the Bella Ruscello property
have monthly principal and interest payments.
98
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mortgage loan payables, net consisted of the following as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Property
|
|
Interest Rate
|
|
|
Maturity Date
|
|
2010
|
|
|
2009
|
|
|
Fixed Rate Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hidden Lake Apartment Homes
|
|
|
5.34
|
%
|
|
01/11/17
|
|
$
|
19,218,000
|
|
|
$
|
19,218,000
|
|
Walker Ranch Apartment Homes
|
|
|
5.36
|
%
|
|
05/11/17
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Residences at Braemar
|
|
|
5.72
|
%
|
|
06/01/15
|
|
|
9,188,000
|
|
|
|
9,355,000
|
|
Park at Northgate
|
|
|
5.94
|
%
|
|
08/01/17
|
|
|
10,295,000
|
|
|
|
10,295,000
|
|
Baypoint Resort
|
|
|
5.94
|
%
|
|
08/01/17
|
|
|
21,612,000
|
|
|
|
21,612,000
|
|
Towne Crossing Apartments
|
|
|
5.04
|
%
|
|
11/01/14
|
|
|
14,519,000
|
|
|
|
14,789,000
|
|
Villas of El Dorado
|
|
|
5.68
|
%
|
|
12/01/16
|
|
|
13,600,000
|
|
|
|
13,600,000
|
|
The Heights at Olde Towne
|
|
|
5.79
|
%
|
|
01/01/18
|
|
|
10,475,000
|
|
|
|
10,475,000
|
|
The Myrtles at Olde Towne
|
|
|
5.79
|
%
|
|
01/01/18
|
|
|
20,100,000
|
|
|
|
20,100,000
|
|
Arboleda Apartments
|
|
|
5.36
|
%
|
|
04/01/15
|
|
|
17,500,000
|
|
|
|
17,651,000
|
|
Bella Ruscello Luxury Apartment Homes
|
|
|
5.53
|
%
|
|
04/01/20
|
|
|
13,191,000
|
|
|
|
|
|
Mission Rock Ridge Apartments
|
|
|
4.20
|
%
|
|
10/01/20
|
|
|
13,900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,598,000
|
|
|
|
157,095,000
|
|
Variable Rate Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creekside Crossing
|
|
|
2.49
|
%*
|
|
07/01/15
|
|
|
17,000,000
|
|
|
|
17,000,000
|
|
Kedron Village
|
|
|
2.51
|
%*
|
|
07/01/15
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Canyon Ridge Apartments
|
|
|
2.54
|
%*
|
|
10/01/15
|
|
|
24,000,000
|
|
|
|
24,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,000,000
|
|
|
|
61,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed and variable rate debt
|
|
|
|
|
|
|
|
|
244,598,000
|
|
|
|
218,095,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: discount
|
|
|
|
|
|
|
|
|
(526,000
|
)
|
|
|
(661,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan payables, net
|
|
|
|
|
|
|
|
$
|
244,072,000
|
|
|
$
|
217,434,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents the interest rate in effect as of December 31,
2010. In addition, pursuant to the terms of the related loan
documents, the maximum variable interest rate allowable is
capped at a rate ranging from 6.50% to 6.75% per annum. |
The principal payments due on our mortgage loan payables and an
unsecured note payable to affiliate as of December 31, 2010
for each of the next five years ending December 31 and
thereafter are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
2011
|
|
$
|
875,000
|
|
2012
|
|
$
|
8,704,000
|
|
2013
|
|
$
|
1,571,000
|
|
2014
|
|
$
|
15,385,000
|
|
2015
|
|
$
|
86,285,000
|
|
Thereafter
|
|
$
|
139,528,000
|
|
99
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unsecured
Note Payable to Affiliate
Unsecured note payables to NNN Realty Advisors, a wholly-owned
subsidiary of Grubb & Ellis Company and an affiliate
of our Former Advisor, were originally evidenced by unsecured
promissory notes, each bearing interest at a fixed rate and
requiring monthly interest-only payments for the terms of the
unsecured note payables to affiliate. On November 10, 2009,
we entered into a consolidated unsecured promissory note, or the
Consolidated Promissory Note, with NNN Realty Advisors whereby
we cancelled the outstanding promissory notes dated
June 27, 2008 and September 15, 2008, and consolidated
the outstanding principal balances of the cancelled promissory
notes into the Consolidated Promissory Note. The Consolidated
Promissory Note had an interest rate of 4.50% per annum, a
default interest rate of 2.0% in excess of the interest rate
then in effect and a maturity date of January 1, 2011. The
interest rate payable under the Consolidated Promissory Note was
subject to a one-time adjustment to a maximum rate of 6.0% per
annum. On August 11, 2010, we amended the Consolidated
Promissory Note, or the Amended Consolidated Promissory Note.
The material terms of the Amended Consolidated Promissory Note
decreased the principal amount outstanding to $7,750,000 due to
our pay down of the principal balance, extended the maturity
date from January 1, 2011 to July 17, 2012, and fixed
the interest rate at 4.50% per annum and the default interest
rate at 6.50% per annum. As of December 31, 2010 and 2009,
the outstanding principal amount under the Amended Consolidated
Promissory Note was $7,750,000 and $9,100,000, respectively.
Because the loan pursuant to the Amended Consolidated Promissory
Note represents a related party loan, the terms of the loan and
the Amended Consolidated Promissory Note were approved by our
board of directors, including a majority of our independent
directors. See Note 19, Subsequent Events
Termination of the Grubb & Ellis Advisory Agreement.
Wachovia
Loan
On November 1, 2007, we entered into a loan agreement, or
the Wachovia Loan Agreement, with Wachovia Bank, National
Association, for the Wachovia Loan, which had an original
maturity date of November 1, 2008. We also entered into a
Pledge Agreement with Wachovia Bank, National Association to
initially secure the Wachovia Loan with (1) a pledge of
49.0% of our partnership interests in Apartment REIT Walker
Ranch, L.P., Apartment REIT Hidden Lakes, L.P. and Apartment
REIT Towne Crossing, L.P. and (2) 100% of our partnership
interests in Apartment REIT Park at North Gate, L.P. We also
agreed that we would pledge as security 100% of our ownership
interests in our subsidiaries that have acquired or will acquire
properties in the future if financed in part by the Wachovia
Loan. Accrued interest under the Wachovia Loan was to be paid
monthly and at maturity. Advances under the Wachovia Loan were
to bear interest at the applicable LIBOR Rate plus a spread, as
defined in the Wachovia Loan Agreement.
On December 21, 2007, March 31, 2008, June 26,
2008 and September 15, 2008, we entered into amendments to
the Wachovia Loan Agreement and Pledge Agreement, in connection
with our borrowings under the Wachovia Loan to finance our
acquisitions and pledge certain interests of: (a) the
Heights property and the Myrtles property; (b) the Arboleda
property; (c) the Creekside property and the Kedron
property; and (d) the Canyon Ridge property, respectively,
and temporarily extended the aggregate principal amount
available under the Wachovia Loan to up to $16,250,000. The
material terms of the amendment to the Wachovia Loan Agreement
entered into on September 15, 2008 also provided for an
extension of the maturity date of the Wachovia Loan to
November 1, 2009, at Wachovias sole and absolute
discretion, in the event the outstanding principal amount of the
Wachovia Loan was less than or equal to $6,000,000 on
November 1, 2008, certain financial covenants and
requirements were met and upon our payment of a $100,000
extension fee. On October 30, 2008, Wachovia extended the
maturity date of the Wachovia Loan to November 1, 2009.
100
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 31, 2009, we entered into a fifth amendment to
and waiver of the Wachovia Loan Agreement, or the Wachovia Fifth
Amendment. In connection with the Wachovia Fifth Amendment, we
amended certain mandatory prepayment provisions of the Wachovia
Loan Agreement; obtained a waiver with respect to the mandatory
prepayments required to be made prior to the Wachovia Fifth
Amendment under the Wachovia Loan Agreement; and redefined
certain defined terms of the Wachovia Loan Agreement. In
addition, pursuant to the terms of the Wachovia Fifth Amendment,
we paid a mandatory installment principal payment in the amount
of $500,000 prior to the Wachovia Fifth Amendment effective date
of August 31, 2009.
On October 1, 2009, we repaid the remaining principal due
on the Wachovia Loan. The Wachovia Loan would have matured on
November 1, 2009. We were required by the terms of the
Wachovia Loan Agreement, as amended, and applicable loan
documents, to meet certain covenants and reporting requirements.
|
|
9.
|
Commitments
and Contingencies
|
Litigation
On August 27, 2010, we entered into definitive agreements
to acquire Mission Rock Ridge Apartments, substantially all of
the assets and certain liabilities of Mission Residential
Management, and eight additional apartment communities owned by
eight separate Delaware Statutory Trusts for which an affiliate
MR Holdings, LLC serves as trustee, or the DST properties, for
total consideration valued at $157.8 million, including
approximately $33.2 million of limited partnership
interests in the OP and the assumption of approximately
$124.6 million of in-place mortgage indebtedness
encumbering the properties. On November 9, 2010, seven of
the 277 investors who hold interests in the eight Delaware
statutory trusts that hold the DST properties filed a complaint
in the United States District Court for the Eastern District of
Virginia (Civil Action No. 3:10CV824(HEH)), or the Federal
Action, against the trustee of each of these trusts and certain
of the trustees affiliates, as well as against our
operating partnership, seeking, among other things, to enjoin
the closing of our proposed acquisition of the eight DST
properties. The complaint alleged, among other things, that the
trustee has breached its fiduciary duties to the beneficial
owners of the trusts by entering into the eight purchase and
sale agreements with our operating partnership. The complaint
further alleged that our operating partnership aided and abetted
the trustees alleged breaches of fiduciary duty and
tortuously interfered with the contractual relations between the
trusts and the trust beneficiaries. On December 20, 2010, the
purported replacement trustee Internacional Realty, Inc., as
well as investors in each of the 23 DSTs for which Mission
Trust Services serves as trustee, filed a complaint in the
Circuit Court of Cook County, Illinois (Case No. 10 CH
53556), or the Cook County Action. The Cook County Action was
filed against the same parties as the Federal Action, and
included the same claims against us as in the Federal Action. On
December 23, 2010, the plaintiffs in the Federal Action
dismissed that action voluntarily. On January 28, 2011,
Internacional Realty, Inc. filed a third-party complaint against
us and other parties in the Circuit Court for Fairfax County,
Virginia (Case
No. 2010-17876),
or the Fairfax Action. The Fairfax Action included the same
claims against us as in the Federal Action and the Cook County
Action. On March 5, 2011, the court dismissed the
third-party complaint against us. The investors have indicated,
however, an intent to re-file the action against us in a
separate complaint in Fairfax County. We believe the allegations
contained in the complaints against us are without merit and we
intend to defend the claims vigorously. However, there is no
assurance that we will be successful in our defense.
In a Consent Order dated November 10, 2010, entered in the
Federal Action, the parties agreed that none of the eight
transactions will be closed during the
90-day
period following the date of such Consent Order.
As of February 23, 2011, the expiration date for the
lenders approval period pursuant to each of the purchase
agreements, certain conditions precedent to our obligation to
acquire the eight DST properties had not been satisfied. With
the prior approval of the board of directors, on
February 28, 2011, we provided the respective Delaware
Statutory Trusts written notice of termination of each of the
respective purchase
101
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreements in accordance with the terms of the agreements. We
have not accrued any amount for the possible outcome of this
litigation because management does not believe that a loss is
probable at this time.
Environmental
Matters
We follow a policy of monitoring our properties for the presence
of hazardous or toxic substances. While there can be no
assurance that a material environmental liability does not exist
at our properties, we are not currently aware of any
environmental liability with respect to our properties that
would have a material effect on our consolidated financial
position, results of operations or cash flows. Further, we are
not aware of any material environmental liability or any
unasserted claim or assessment with respect to an environmental
liability that we believe would require additional disclosure or
the recording of a loss contingency.
Other
Organizational and Offering Expenses
When recorded by us, other organizational expenses will be
expensed as incurred, and offering expenses will be deferred and
charged to stockholders equity as such amounts are
reimbursed to our Advisor or its affiliates from the gross
proceeds of our offerings. See Note 10, Related Party
Transactions Offering Stage, for a further
discussion of other organizational and offering expenses.
Initial
Offering
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our organizational and offering expenses, other than
selling commissions, marketing support fees and due diligence
expense reimbursements, incurred during our initial offering
were being paid by our Former Advisor or its affiliates on our
behalf. Other organizational and offering expenses included all
expenses (other than selling commissions, the marketing support
fees and due diligence expense reimbursements, which generally
represented 7.0%, 2.5% and 0.5% of our gross offering proceeds,
respectively) paid by us in connection with our initial
offering. These expenses only became our liability to the extent
these other organizational and offering expenses did not exceed
1.5% of the gross offering proceeds from the sale of shares of
our common stock in our initial offering. On July 17, 2009,
we terminated our initial offering. Since we are no longer
raising additional proceeds from our initial offering, we will
not be required to reimburse our Advisor or its affiliates for
any additional other organizational and offering expenses
incurred in connection with our initial offering.
Follow-On
Offering
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our organizational and offering expenses, other than
selling commissions and the dealer manager fee, incurred in
connection with our follow-on offering were paid by our Former
Advisor or its affiliates on our behalf. Going forward, our
organizational and offering expenses, other than selling
commissions and the dealer manager fee, incurred in connection
with our follow-on offering, will be paid by our Advisor, or its
affiliates on our behalf. Other organizational and offering
expenses include all expenses (other than selling commissions
and the dealer manager fee, which generally represent 7.0% and
3.0% of our gross offering proceeds, respectively) to be paid by
us in connection with our follow-on offering. These expenses
will only become our liability to the extent these other
organizational and offering expenses do not exceed 1.0% of the
gross offering proceeds from the sale of shares of our common
stock in our follow-on offering. As of December 31, 2010,
our Former Advisor and its affiliates had incurred expenses on
our behalf of $2,465,000 in excess of 1.0% of the gross proceeds
from our follow-on offering, and, therefore, these expenses are
not recorded in our accompanying consolidated financial
statements as of December 31, 2010. To the extent
additional funds were raised from our follow-on offering, these
amounts have become our liability. Management does not believe
that this matter requires the recording of a loss contingency at
this time.
102
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Our other commitments and contingencies include the usual
obligations of real estate owners and operators in the normal
course of business. In our view, these matters are not expected
to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
|
|
10.
|
Related
Party Transactions
|
Fees
and Expenses Paid to Affiliates
During 2010, all of our executive officers and our
non-independent directors were also executive officers and
employees
and/or
holders of a direct or indirect interest in our Former Advisor,
Grubb & Ellis Company or other affiliated entities.
Also during 2010, we were a party to the Grubb & Ellis
Advisory Agreement with our Former Advisor, and a dealer manager
agreement, or the Grubb & Ellis Dealer Manager
Agreement, with Grubb & Ellis Securities, Inc., or
Grubb & Ellis Securities, our former dealer manager.
Until December 31, 2010, these agreements entitled our
Former Advisor or its affiliates, and our former dealer manager
or its affiliates, to specified compensation for certain
services, as well as reimbursement of certain expenses.
On November 1, 2010, we received written notice from our
Former Advisor that it had elected to terminate the
Grubb & Ellis Advisory Agreement. Pursuant to the
Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice. Therefore, the Grubb & Ellis Advisory
Agreement terminated on December 31, 2010. On
November 1, 2010, we also received written notice from
Grubb & Ellis Securities that it had elected to
terminate the Grubb & Ellis Dealer Manager Agreement.
Pursuant to the Grubb & Ellis Dealer Manager
Agreement, either party was permitted to terminate the agreement
upon 60 days written notice. Therefore, the
Grubb & Ellis Dealer Manager Agreement terminated on
December 31, 2010 and Grubb & Ellis Securities no
longer serves as our dealer manager.
In the aggregate, for the years ended December 31, 2010,
2009 and 2008, we incurred fees and expenses of $9,487,000,
$7,097,000 and $17,098,000, respectively, payable to our Former
Advisor, and our former dealer manager, or their affiliates, as
detailed below.
Offering
Stage
Selling
Commissions
Initial Offering
Pursuant to our initial offering, our former dealer manager
received selling commissions of up to 7.0% of the gross offering
proceeds from the sale of shares of our common stock in our
initial offering, other than shares of our common stock sold
pursuant to the DRIP. Our former dealer manager re-allowed all
or a portion of these fees to participating broker-dealers. For
the year ended December 31, 2010, we did not incur any
selling commissions to our former dealer manager with respect to
our initial offering. For the years ended December 31, 2009
and 2008, we incurred $510,000 and $4,571,000, respectively, in
selling commissions to our former dealer manager. Such selling
commissions were charged to stockholders equity as such
amounts were reimbursed to our dealer manager from the gross
proceeds of our initial offering.
Follow-On Offering
Until December 31, 2010, pursuant to our follow-on
offering, our former dealer manager received selling commissions
of up to 7.0% of the gross offering proceeds from the sale of
shares of our common stock in our follow-on offering, other than
shares of our common stock sold pursuant to the DRIP. Pursuant
to the Grubb & Ellis Dealer Manager Agreement, which
terminated effective December 31, 2010, our former dealer
manager was permitted to re-allow all or a portion of these fees
to participating broker-dealers. For the years
103
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended December 31, 2010 and 2009, we incurred $1,644,000
and $408,000, respectively, in selling commissions to our former
dealer manager. Such selling commissions are charged to
stockholders equity as such amounts are reimbursed to our
former dealer manager from the gross proceeds of our follow-on
offering.
Initial
Offering Marketing Support Fees and Due Diligence Expense
Reimbursements and Follow-On Offering Dealer Manager
Fees
Initial Offering
Pursuant to our initial offering, our former dealer manager
received non-accountable marketing support fees of up to 2.5% of
the gross offering proceeds from the sale of shares of our
common stock in our initial offering, other than shares of our
common stock sold pursuant to the DRIP. Our former dealer
manager
re-allowed a
portion of up to 1.5% of the gross offering proceeds for
non-accountable marketing support fees to participating
broker-dealers. In addition, we reimbursed our former dealer
manager or its affiliates an additional 0.5% of the gross
offering proceeds from the sale of shares of our common stock in
our initial offering, other than shares of our common stock sold
pursuant to the DRIP, as reimbursements for accountable bona
fide due diligence expenses. Our former dealer manager or its
affiliates re-allowed all or a portion of these reimbursements
up to 0.5% of the gross offering proceeds to participating
broker-dealers for accountable bona fide due diligence expenses.
For the years ended December 31, 2010, we did not incur any
marketing support fees or due diligence expense reimbursements
to our former dealer manager or its affiliates. For the years
ended December 31, 2009 and 2008, we incurred $183,000 and
$1,687,000, respectively, in marketing support fees and due
diligence expense reimbursements to our former dealer manager or
its affiliates. Such fees and reimbursements were charged to
stockholders equity as such amounts were reimbursed to our
dealer manager or its affiliates from the gross proceeds of our
initial offering.
Follow-On Offering
Until December 31, 2010, pursuant to our follow-on
offering, our former dealer manager received a dealer manager
fee of up to 3.0% of the gross offering proceeds from the shares
of common stock sold pursuant to our follow-on offering, other
than shares of our common stock sold pursuant to the DRIP.
Pursuant to the Grubb & Ellis Dealer Manager
Agreement, which was terminated effective December 31,
2010, our former dealer manager was permitted to re-allow all or
a portion of the dealer manager fee to participating
broker-dealers. For the years ended December 31, 2010 and
2009, we incurred $720,000 and $177,000, respectively, in dealer
manager fees to our former dealer manager or its affiliates.
Such fees are charged to stockholders equity as such
amounts are reimbursed to our former dealer manager or its
affiliates from the gross proceeds of our follow-on offering.
Other
Organizational and Offering Expenses
Initial Offering
Our other organizational and offering expenses for our initial
offering were paid by our Former Advisor or its affiliates on
our behalf. Our Former Advisor or its affiliates were reimbursed
for actual expenses incurred up to 1.5% of the gross offering
proceeds from the sale of shares of our common stock in our
initial offering, other than shares of our common stock sold
pursuant to the DRIP. For the year ended December 31, 2010,
we did not incur any organizational or offering expenses to our
Former Advisors and its affiliates. For the years ended
December 31, 2009 and 2008, we incurred $110,000 and
$996,000, respectively, in offering expenses to our Former
Advisor and its affiliates. Other organizational expenses were
expensed as incurred, and offering expenses were charged to
stockholders equity as such amounts were reimbursed to our
Former Advisor or its affiliates from the gross proceeds of our
initial offering.
104
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Follow-On Offering
Until December 31, 2010, our other organizational and
offering expenses for our follow-on offering were paid by our
Former Advisor or its affiliates on our behalf. Pursuant to the
Grubb & Ellis Advisory Agreement, which was terminated
effective December 31, 2010, our Former Advisor or its
affiliates were reimbursed for actual expenses incurred up to
1.0% of the gross offering proceeds from the sale of shares of
our common stock in our follow-on offering, other than shares of
our common stock sold pursuant to the DRIP. For the years ended
December 31, 2010 and 2009, we incurred $240,000 and
$59,000, respectively, in offering expenses to our Former
Advisor and its affiliates. Other organizational expenses are
expensed as incurred, and offering expenses are charged to
stockholders equity as such amounts were reimbursed to our
Former Advisor or its affiliates from the gross proceeds of our
follow-on offering.
Acquisition
and Development Stage
Acquisition
Fee
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our Former Advisor or its affiliates received, as
compensation for services rendered in connection with the
investigation, selection and acquisition of properties, an
acquisition fee of up to 3.0% of the contract purchase price for
each property acquired or up to 4.0% of the total development
cost of any development property acquired, as applicable.
Additionally, effective July 17, 2009, our Former Advisor
or its affiliates received a 2.0% origination fee as
compensation for any real estate-related investment acquired.
For the years ended December 31, 2010, 2009 and 2008, we
incurred $1,228,000, $0 and $3,609,000, respectively, in
acquisition fees to our Former Advisor or its affiliates. For
the years ended December 31, 2010 and 2009, acquisition
fees in connection with the acquisition of properties were
expensed as incurred in accordance with ASC Topic 805 and are
disclosed as a separate line item in our accompanying
consolidated statements of operations. For the year ended
December 31, 2008, acquisition fees in connection with the
acquisition of properties were capitalized as part of the
purchase price allocations.
Reimbursement
of Acquisition Expenses
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our Former Advisor or its affiliates were reimbursed
for acquisition expenses related to selecting, evaluating,
acquiring and investing in properties. Until July 17, 2009,
acquisition expenses, excluding amounts paid to third parties,
could not exceed 0.5% of the contract purchase price of our
properties. The reimbursement of acquisition expenses,
acquisition fees, real estate commissions and other fees paid to
unaffiliated parties could not exceed, in the aggregate, 6.0% of
the purchase price or total development costs, unless fees in
excess of such limits were approved by a majority of our
disinterested independent directors. Effective July 17,
2009, our Former Advisor or its affiliates were reimbursed for
all acquisition expenses actually incurred related to selecting,
evaluating and acquiring assets, which was to be paid regardless
of whether an asset is acquired, subject to the aggregate 6.0%
limit on reimbursement of acquisition expenses, acquisition fees
and real estate commissions paid to unaffiliated parties. As of
December 31, 2010 and 2009, such fees and expenses did not
exceed 6.0% of the purchase price of our acquisitions.
For the years ended December 31, 2010 we incurred $8,000
for such expenses to our Former Advisor and its affiliates,
excluding amounts our Former Advisor and its affiliates paid
directly to third parties. For the year ended December 31,
2009, we did not incur any acquisition expenses to our Former
Advisor and its affiliates, including amounts our Former Advisor
and its affiliates paid directly to third parties. For the years
ended December 31, 2008, we incurred $4,000 for such
expenses to our Former Advisor and its affiliates, excluding
amounts our Former Advisor and its affiliates paid directly to
third parties. Beginning January 1, 2009, acquisition
expenses were expensed as incurred in accordance with ASC Topic
805 and are disclosed as a
105
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
separate line item in our accompanying consolidated statements
of operations. For the years ended December 31, 2008,
acquisition expenses were capitalized as part of the purchase
price allocations.
Operational
Stage
Asset
Management Fee
Pursuant to the Grubb & Ellis Advisory Agreement,
which was terminated effective December 31, 2010, until
November 1, 2008, our Former Advisor or its affiliates
received a monthly fee for services rendered in connection with
the management of our assets in an amount that equaled
one-twelfth of 1.0% of our average invested assets calculated as
of the close of business on the last day of each month, subject
to our stockholders receiving annualized distributions in an
amount equal to at least 5.0% per annum, cumulative,
non-compounded, on average invested capital. The asset
management fee was calculated and payable monthly in cash or
shares of our common stock, at the option of our Former Advisor,
not to exceed one-twelfth of 1.0% of our average invested assets
as of the last day of the immediately preceding quarter.
Effective November 1, 2008, we reduced the monthly asset
management fee our Former Advisor or its affiliates were
entitled to receive from us in connection with the management of
our assets from one-twelfth of 1.0% of our average invested
assets to one-twelfth of 0.5% of our average invested assets.
The asset management fee was calculated and payable monthly in
cash or shares of our common stock, at the option of our Former
Advisor, not to exceed one-twelfth of 0.5% of our average
invested assets as of the last day of the immediately preceding
quarter. Furthermore, effective January 1, 2009, and until
December 31, 2010, no asset management fee was to be due or
payable to our Former Advisor or its affiliates until the
quarter following the quarter in which we generated funds from
operations, or FFO, excluding non-recurring charges, sufficient
to cover 100% of the distributions declared to our stockholders
for such quarter.
For the years ended December 31, 2010, 2009 and 2008, we
incurred $0, $0 and $2,563,000, respectively, in asset
management fees to our Former Advisor and its affiliates, which
is included in general and administrative in our accompanying
consolidated statements of operations. Our new Advisory
Agreement with our new Advisor does not have an asset management
fee structure in place and we do not foresee such a fee
structure being established.
Property
Management Fee
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our Former Advisor or its affiliates were paid a
monthly property management fee of up to 4.0% of the monthly
gross cash receipts from any property managed for us. For the
years ended December 31, 2010, 2009 and 2008, we incurred
property management fees of $1,156,000, $1,087,000 and
$1,129,000, respectively, to our Former Advisor and its
affiliates, which is included in rental expenses in our
accompanying consolidated statements of operations.
On-site
Personnel Payroll
For the years ended December 31, 2010, 2009 and 2008,
Grubb & Ellis Residential Management incurred payroll
for on-site
personnel on our behalf of $4,316,000, $3,926,000 and
$2,138,000, respectively, which is included in rental expenses
in our accompanying consolidated statements of operations.
Operating
Expenses
Prior to the termination of the Grubb & Ellis Advisory
Agreement, we reimbursed our Former Advisor or its affiliates
for operating expenses incurred in rendering services to us,
subject to certain limitations on our operating expenses.
However, we were not permitted to reimburse our Former Advisor
or its affiliates for operating expenses that exceeded the
greater of: (1) 2.0% of our average invested assets, as
defined in the
106
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Grubb & Ellis Advisory Agreement; or (2) 25.0% of
our net income, as defined in the Grubb & Ellis
Advisory Agreement, unless our independent directors determined
that such excess expenses were justified based on unusual and
non-recurring factors. For the 12 months ended
December 31, 2010, 2009 and 2008, our operating expenses
did not exceed this limitation. Our operating expenses as a
percentage of average invested assets were 0.4%, 0.3% and 1.3%,
respectively, for the 12 months ended December 31,
2010, 2009, and 2008. Our operating expenses as a percentage of
net income were 20.1%, 14.3% and 1,182.8%, respectively, for the
12 months ended December 31, 2010, 2009 and 2008.
For the years ended December 31, 2010, 2009 and 2008, our
former transfer agent, Grubb & Ellis Equity Advisors,
Transfer Agent, LLC, or Grubb & Ellis Transfer Agent,
incurred operating expenses on our behalf of $26,000, $19,000
and $130,000, respectively, which is included in general and
administrative in our accompanying consolidated statements of
operations.
Compensation
for Additional Services
Prior to the termination of the Grubb & Ellis Advisory
Agreement, our Former Advisor and its affiliates were paid for
services performed for us other than those required to be
rendered by our Former Advisor and its affiliates under such
agreement. The rate of compensation for these services was
approved by a majority of our board of directors, including a
majority of our independent directors, and could not exceed an
amount that would be paid to unaffiliated third parties for
similar services.
We entered into a services agreement, effective January 1,
2008, or the Services Agreement, with Grubb & Ellis
Realty Investors for subscription agreement processing and
investor services. The Services Agreement had an initial term of
one-year and renewed automatically for successive one-year terms
unless terminated prior to such renewal in accordance with its
terms. On January 31, 2010, we terminated the Services
Agreement with Grubb & Ellis Realty Investors. On
February 1, 2010, we entered into an agreement, or the
Transfer Agent Services Agreement, with Grubb & Ellis
Transfer Agent, a wholly-owned subsidiary of Grubb &
Ellis Equity Advisors, for transfer agent and investor services.
The Transfer Agent Services Agreement had an initial term of one
year and renewed automatically for successive one-year terms
unless terminated prior to such renewal in accordance with its
terms. Since Grubb & Ellis Equity Advisors is the
managing member of our Former Advisor, the terms of the Transfer
Agent Services Agreement were approved and determined by a
majority of our directors, including a majority of our
independent directors, as fair and reasonable to us and at fees
charged to us in an amount no greater than that which would be
paid to an unaffiliated party for similar services. On
November 3, 2010, we received notification of termination
of the Transfer Agent Services Agreement from Grubb &
Ellis Transfer Agent. According to the terms of the Transfer
Agent Services Agreement, the Transfer Agent is required to
provide us with a 180 day advance written notice for any
termination. Accordingly, the Transfer Agent Services Agreement
will terminate effective May 2, 2011, and Grubb &
Ellis Transfer Agent will no longer be our transfer agent on
such date. See Note 19, Subsequent Events
Termination of Transfer Agent Services Agreement, for a further
discussion.
For the years ended December 31, 2010, 2009 and 2008, we
incurred $73,000, $67,000 and $47,000, respectively, for
investor services that Grubb & Ellis Transfer Agent or
Grubb & Ellis Realty Investors provided to us, which
is included in general and administrative in our accompanying
consolidated statements of operations.
For the years ended December 31, 2010, 2009 and 2008, our
Former Advisor and its affiliates incurred $10,000, $19,000 and
$44,000, respectively, in subscription agreement processing that
Grubb & Ellis Transfer Agent or Grubb &
Ellis Realty Investors provided to us. As another organizational
and offering expense, these subscription agreement processing
expenses will only become our liability to the extent other
organizational
107
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and offering expenses do not exceed 1.5% and 1.0% of the gross
proceeds of our initial offering and our follow-on offering,
respectively.
For the years ended December 31, 2010, 2009 and 2008, we
incurred $66,000, $7,000 and $4,000, respectively, for tax and
internal controls compliance services that affiliates provided
to us, which is also included in general and administrative in
our accompanying consolidated statements of operations.
Liquidity
Stage
Incentive
Distribution upon Sales
Prior to the termination of the Grubb & Ellis Advisory
Agreement, in the event of liquidation, our Former Advisor was
to be paid an incentive distribution equal to 15.0% of net sales
proceeds from any disposition of a property after subtracting:
(1) the amount of capital we invested in our operating
partnership; (2) an amount equal to an annual 8.0%
cumulative, non-compounded return on such invested capital; and
(3) any shortfall with respect to the overall annual 8.0%
cumulative, non-compounded return on the capital invested in our
operating partnership. Actual amounts which our Former Advisor
received depended on the sale prices of properties upon
liquidation. For the years ended December 31, 2010, 2009
and 2008, we did not pay any such distributions.
Incentive
Distribution upon Listing
Prior to the termination of the Grubb & Ellis Advisory
Agreement, in the event of a termination of agreement upon the
listing of shares of our common stock on a national securities
exchange, our Former Advisor was to be paid an incentive
distribution equal to 15.0% of the amount, if any, by which the
market value of our outstanding stock plus distributions paid by
us prior to listing, exceeded the sum of the amount of capital
we invested in our operating partnership plus an annual 8.0%
cumulative, non-compounded return on such invested capital.
Actual amounts to be received depended upon the market value of
our outstanding stock at the time of listing among other
factors. Upon our Former Advisors receipt of such
incentive distribution, our Former Advisors special
limited partnership units were to be redeemed and our Former
Advisor would not have been entitled to receive any further
incentive distributions upon sale of our properties. For the
years ended December 31, 2010, 2009 and 2008, we did not
pay any such distributions.
Fees
Payable upon Internalization of the Former Advisor
In connection with the termination of the Grubb &
Ellis Advisory Agreement, the Former Advisor has notified us
that it has elected to defer the redemption of its incentive
limited partnership interest in our operating partnership until,
generally, the earlier to occur of (i) a listing of our
shares on a national securities exchange or national market
system or (ii) a liquidity event.
108
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
Payable Due to Affiliates
The following amounts were outstanding to affiliates as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Entity
|
|
Fee
|
|
2010
|
|
|
2009
|
|
|
Grubb & Ellis Equity Advisors/ Grubb & Ellis
Realty Investors
|
|
Operating Expenses
|
|
$
|
2,000
|
|
|
$
|
6,000
|
|
Grubb & Ellis Equity Advisors/ Grubb & Ellis
Realty Investors
|
|
Offering Costs
|
|
|
|
|
|
|
14,000
|
|
Grubb & Ellis Securities
|
|
Selling Commissions, Marketing Support Fees and Dealer Manager
Fees
|
|
|
15,000
|
|
|
|
30,000
|
|
Residential Management
|
|
Property Management Fees
|
|
|
92,000
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,000
|
|
|
$
|
140,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Note Payables to Affiliate
For the years ended December 31, 2010, 2009 and 2008, we
incurred $373,000, $544,000 and $220,000, respectively, in
interest expense to NNN Realty Advisors. See Note 7,
Mortgage Loan Payables, Net and Unsecured Note Payables to
Affiliate Unsecured Note Payable to Affiliate, for a
further discussion.
New
Advisory Agreement with Affiliate
On February 25, 2010, we entered into a new advisory
agreement among us, our operating partnership and ROC REIT
Advisors. See Note 19, Subsequent Events New
Advisory Agreement, for a further discussion.
|
|
11.
|
Redeemable
Noncontrolling Interest
|
The Grubb & Ellis Advisory Agreement provided that,
upon a termination of the agreement in connection with any event
other than the listing of shares of our common stock on a
national securities exchange or a national market system or the
internalization of our Former Advisor in connection with our
conversion to a self-administered REIT, our Former
Advisors special limited partnership interest may be
redeemed by us (as the general partner of our operating
partnership) for a redemption price equal to the amount of the
incentive distribution that our Former Advisor would have
received upon property sales as discussed in further detail in
Note 10, Related Party Transactions Liquidity
Stage, as if our operating partnership immediately sold all of
its properties for their fair market value. Such incentive
distribution was payable in cash or in shares of our common
stock or in units of limited partnership interest in our
operating partnership, if agreed to by us and our Former
Advisor, except that our Former Advisor was not permitted to
elect to receive shares of our common stock to the extent that
doing so would have caused us to fail to qualify as a REIT. We
recognize any changes in the redemption value as they occur and
adjust the redemption value of the special limited partnership
interest (redeemable noncontrolling interest) as of each balance
sheet date. As of December 31, 2010 and 2009, we had not
recorded any redemption amounts, as the redemption value of the
special limited partnership interest was $0.
On November 1, 2010, we received written notice from our
Former Advisor that it had elected to terminate the
Grubb & Ellis Advisory Agreement. In connection with
the termination of the Grubb & Ellis Advisory
Agreement, on January 3, 2011, our Former Advisor elected
to defer the redemption of its Incentive Limited Partnership
Interest until, generally, the earlier to occur of (i) our
companys shares were listed on a national securities
exchange or national market system or (ii) a liquidity
event.
109
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock
Our charter authorizes us to issue 50,000,000 shares of our
$0.01 par value preferred stock. As of December 31,
2010 and 2009, no shares of preferred stock were issued and
outstanding.
Common
Stock
Through July 17, 2009, we were offering and selling to the
public up to 100,000,000 shares of our common stock,
$0.01 par value per share, for $10.00 per share and up to
5,000,000 shares of our common stock, par value $0.01 per
share, to be issued pursuant to the DRIP at $9.50 per share in
our initial offering.
On July 20, 2009, we commenced a best efforts follow-on
offering through which we proposed to offer for sale to the
public an aggregate of 105,000,000 shares of our common
stock. Our follow-on offering included up to
100,000,000 shares of our common stock to be offered for
sale at $10.00 per share and up to 5,000,000 shares of our
common stock to be offered for sale pursuant to the DRIP at
$9.50 per share, for a maximum offering of up to $1,047,500,000.
Effective December 21, 2010, we suspended the primary
portion of our follow-on offering. Our charter authorizes us to
issue 300,000,000 shares of our common stock.
On January 10, 2006, our Former Advisor purchased
22,223 shares of our common stock for a total cash
consideration of $200,000 and was admitted as our initial
stockholder. Through December 31, 2010, we had granted an
aggregate of 17,000 shares of restricted common stock to
our independent directors pursuant to the terms and conditions
of our 2006 Plan, 2,800 of which had been forfeited through
December 31, 2010. Through December 31, 2010, we had
issued an aggregate of 15,738,457 shares of our common
stock in connection with our initial offering,
2,992,777 shares of our common stock in connection with our
follow-on offering and 1,457,853 shares of our common stock
pursuant to the DRIP, and we had also repurchased
592,692 shares of our common stock under our share
repurchase plan. As of December 31, 2010 and 2009, we had
19,632,818 and 17,028,454 shares, respectively, of our
common stock outstanding.
Noncontrolling
Interest
Noncontrolling interest relates to the interests in our
consolidated entities that are not wholly owned by us.
As of December 31, 2010 and 2009, we owned a 99.99% general
partnership interest in our operating partnership and our Former
Advisor owned a 0.01% limited partnership interest in our
operating partnership. On December 31, 2010, the
Grubb & Ellis Advisory Agreement was terminated. In
connection with the termination, our Former Advisor elected to
defer the redemption of its Incentive Limited Partnership
Interest until, generally, the earlier to occur of (i) our
companys shares were listed on a national securities
exchange or national market system, or (ii) a liquidity
event. As such, 0.01% of the earnings and losses of our
operating partnership are allocated to noncontrolling interest.
Distribution
Reinvestment Plan and Second Amended and Restated Distribution
Reinvestment Plan
We adopted the DRIP, which allows stockholders to purchase
additional shares of our common stock through reinvestment of
distributions, subject to certain conditions. We registered and
reserved 5,000,000 shares of our common stock for sale
pursuant to the DRIP in our initial offering and in our
follow-on
offering. For the years ended December 31, 2010, 2009 and
2008, $4,397,000, $4,373,000 and $3,802,000, respectively, in
distributions were reinvested and 462,877, 460,285 and
400,216 shares of our common stock, respectively, were
issued pursuant to the DRIP. As of December 31, 2010 and
2009, a total of
110
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$13,850,000 and $9,453,000, respectively, in distributions were
reinvested and 1,457,853 and 994,976 shares of our common
stock, respectively, were issued pursuant to the DRIP.
On February 24, 2011, our board of directors adopted the
Second Amended and Restated Distribution Reinvestment Plan, or
the Amended and Restated DRIP, to be effective as of
March 11, 2011. The Amended and Restated DRIP is designed
to offer our existing stockholders a simple and convenient
method of purchasing additional shares of our common stock by
reinvesting cash distributions. Participants in the Amended and
Restated DRIP are required to have the full amount of their cash
distributions with respect to all shares of stock owned by them
reinvested pursuant to the Amended and Restated DRIP. The
purchase price for shares under the Amended and Restated DRIP
will be $9.50 per share until such time as the board of
directors determines a reasonable estimate of the value of the
shares of our common stock. On or after the date on which our
board of directors determines a reasonable estimate of the value
of the shares of our common stock, the purchase price for shares
will equal the most recently disclosed estimated value of the
shares of our common stock. Participants in the Amended and
Restated DRIP will not incur any brokerage commissions, dealer
manager fees, organizational and offering expenses, or service
charges when purchasing shares under the Amended and Restated
DRIP. Participants may terminate their participation in the
Amended and Restated DRIP at any time by providing us with
written notice. We reserve the right to amend any aspect of the
Amended and Restated DRIP at our sole discretion and without the
consent of stockholders. We also reserve the right to terminate
the Amended and Restated DRIP or any participants
participation in the Amended and Restated DRIP for any reason at
any time upon ten days prior written notice of termination.
We intend to file a registration statement on
Form S-3
with the Securities and Exchange Commission to register shares
issuable pursuant to the Amended and Restated DRIP. Upon
effectiveness of the Amended and Restated DRIP and the
registration statement relating thereto, all distributions to
stockholders participating in our distribution reinvestment
program will be made pursuant to the Amended and Restated DRIP.
Stockholders who are already enrolled in our distribution
reinvestment program are not required to take any further action
to enroll in the Amended and Restated DRIP.
Share
Repurchase Plan
Our share repurchase plan that was effective through
December 31, 2010, allowed for share repurchases by us upon
request by stockholders when certain criteria are met by
requesting stockholders. Share repurchases were made at the sole
discretion of our board of directors. Funds for the repurchase
of shares of our common stock came exclusively from the proceeds
we receive from the sale of shares of our common stock pursuant
to the DRIP.
Under our share repurchase plan, redemption prices ranged from
$9.25, or 92.5% of the price paid per share, following a one
year holding period to an amount equal to not less than 100% of
the price paid per share following a four year holding period.
In order to effect the repurchase of shares of our common stock
held for less than one year due to the death of a stockholder or
a stockholder with a qualifying disability, we must have
received written notice within one year after the death of the
stockholder or the stockholders qualifying disability, as
applicable. Furthermore, our share repurchase plan provided that
if there are insufficient funds to honor all repurchase
requests, pending requests will be honored among all requests
for repurchase in any given repurchase period, as follows:
first, pro rata as to repurchases sought upon a
stockholders death; next, pro rata as to repurchases
sought by stockholders with a qualifying disability; and,
finally, pro rata as to other repurchase requests.
Our share repurchase plan provided that our board of directors
may, in its sole discretion, repurchase shares of our common
stock on a quarterly basis. Since the first quarter of 2009, in
accordance with the discretion given it under the share
repurchase plan, our board of directors determined to repurchase
shares only with respect to requests made in connection with a
stockholders death or qualifying disability, as
111
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined by our board of directors and in accordance with the
terms and conditions set forth in the share repurchase plan. Our
board of directors determined that it was in our best interest
to conserve cash, and, therefore, no other repurchases requested
prior to or during 2010 were made.
Subsequent to December 31, 2010, our board of directors
determined that it is in the best interest of our company and
its stockholders to preserve our companys cash, and
terminated our share repurchase plan. Accordingly, pending share
repurchase requests will not be fulfilled.
For the years ended December 31, 2010, 2009 and 2008, we
repurchased 263,430 shares of our common stock for an
aggregate of $2,612,000, 244,954 shares of our common stock
for an aggregate of $2,383,000 and 84,308 shares of our
common stock for an aggregate of $797,000.
2006
Incentive Award Plan
We adopted our 2006 Plan, pursuant to which our board of
directors or a committee of our independent directors may make
grants of options, restricted common stock awards, stock
purchase rights, stock appreciation rights or other awards to
our independent directors, employees and consultants. The
maximum number of shares of our common stock that may be issued
pursuant to our 2006 Plan is 2,000,000, subject to adjustment
under specified circumstances.
On each of June 12, 2007, June 25, 2008, June 23,
2009 and June 22, 2010, in connection with their
re-election,
we granted an aggregate of 3,000 shares of restricted
common stock to our independent directors under our 2006 Plan,
of which 20.0% vested on the grant date and 20.0% will vest on
each of the first four anniversaries of the date of the grant.
On September 24, 2009, in connection with the resignation
of one independent director and the concurrent election of a new
independent director, 2,000 shares of restricted common
stock were forfeited and we granted 1,000 shares of
restricted common stock to the new independent director under
our 2006 Plan, which will vest over the same period described
above. The fair value of each share of restricted common stock
was estimated at the date of grant at $10.00 per share, the per
share price of shares in our offerings, and is amortized on a
straight-line basis over the vesting period. Shares of
restricted common stock may not be sold, transferred, exchanged,
assigned, pledged, hypothecated or otherwise encumbered. Such
restrictions expire upon vesting. Shares of restricted common
stock have full voting rights and rights to dividends. For the
years ended December 31, 2010, 2009 and 2008, we recognized
compensation expense of $25,000, $24,000 and $21,000,
respectively, related to the restricted common stock grants,
ultimately expected to vest, which has been reduced for
estimated forfeitures. ASC Topic 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Stock compensation expense is included in general and
administrative in our accompanying consolidated statements of
operations.
As of December 31, 2010 and 2009, there was $44,000 and
$59,000, respectively, of total unrecognized compensation
expense, net of estimated forfeitures, related to nonvested
shares of restricted common stock. As of December 31, 2010,
this expense is expected to be recognized over a remaining
weighted average period of 2.89 years.
112
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010 and 2009, the fair value of the
nonvested shares of restricted common stock was $54,000 and
$48,000, respectively. A summary of the status of the nonvested
shares of restricted common stock as of December 31, 2010,
2009, 2008, and 2007, and the changes for the years ended
December 31, 2010, 2009 and 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Common
|
|
|
Date Fair
|
|
|
|
Stock
|
|
|
Value
|
|
|
Balance December 31, 2007
|
|
|
4,200
|
|
|
$
|
10.00
|
|
Granted
|
|
|
3,000
|
|
|
|
10.00
|
|
Vested
|
|
|
(1,800
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
5,400
|
|
|
|
10.00
|
|
Granted
|
|
|
4,000
|
|
|
|
10.00
|
|
Vested
|
|
|
(2,600
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
|
4,800
|
|
|
|
10.00
|
|
Granted
|
|
|
3,000
|
|
|
|
10.00
|
|
Vested
|
|
|
(2,400
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
|
5,400
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Expected to vest December 31, 2010
|
|
|
5,400
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Fair
Value of Financial Instruments
|
ASC Topic 825, Financial Instruments, requires disclosure
of the fair value of financial instruments, whether or not
recognized on the face of the balance sheet. Fair value is
defined under ASC Topic 820.
Our consolidated balance sheets include the following financial
instruments: cash and cash equivalents, restricted cash,
accounts and other receivables, real estate and escrow deposits,
accounts payable and accrued liabilities, accounts payable due
to affiliates, mortgage loan payables, net, unsecured note
payable to affiliate and short term notes.
We consider the carrying values of cash and cash equivalents,
restricted cash, accounts and other receivables, real estate and
escrow deposits, accounts payable and accrued liabilities and
short term notes to approximate fair value for these financial
instruments because of the short period of time between
origination of the instruments and their expected realization.
The fair value of accounts payable due to affiliates and
unsecured note payable to affiliate is not determinable due to
the related party nature of the accounts payable and unsecured
notes.
The fair value of the mortgage loan payables is estimated using
borrowing rates available to us for debt instruments with
similar terms and maturities. As of December 31, 2010 and
2009, the fair value of the mortgage loan payables was
$252,417,000 and $218,400,000, respectively, compared to the
carrying value of $244,072,000 and $217,434,000, respectively.
For purposes of this fair value disclosure, we based our fair
value estimate of mortgage loan payables on our internal
valuation whereby we apply the discounted cash flow method to
our expected cash flow payments due under our existing debt
agreements based on level 3 inputs of a representative
sample of our lenders market interest rate quotes as of
December 31, 2010 and 2009 for debt with similar risk
characteristics and maturities.
113
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of the unsecured note payable to affiliate is
estimated using the sale price of the unsecured note payable on
February 2, 2011 to G&E Apartment Lender LLC, an
unaffiliated party. As of December 31, 2010, the fair value
was $6,200,000 compared to a carrying value of $7,750,000. The
fair value of the unsecured note payable to affiliate as of
December 31, 2009 was not determinable due to the related
party nature of the note compared to the carrying value of
$9,100,000.
|
|
14.
|
Business
Combinations
|
For the year ended December 31, 2010, we completed the
acquisition of two consolidated properties, adding a total of
442 apartment units to our property portfolio. The aggregate
purchase price was $37,257,000, plus closing costs and
acquisition fees of $1,118,000, which are included in
acquisition-related expenses in our accompanying consolidated
statements of operations. See Note 3, Real Estate
Investments Acquisition of Real Estate Investments,
for a listing of the properties acquired, the dates of
acquisition and the amount of mortgage debt initially incurred
or assumed in connection with such acquisition.
Results of operations for the property acquisitions are
reflected in our consolidated statements of operations for the
year ended December 31, 2010 for the period subsequent to
the acquisition dates. For the period from the acquisition dates
through December 31, 2010, we recognized $1,830,000 in
revenues and $289,000 in net loss for the Bella Ruscello
property and $622,000 in revenues and $114,000 in net loss for
the Mission Rock Ridge property.
The fair value of the two properties at the time of acquisition,
which was finalized during the third quarter of 2010, is shown
below:
|
|
|
|
|
|
|
|
|
|
|
Bella Ruscello
|
|
|
Mission Rock
|
|
|
|
Property
|
|
|
Ridge Property
|
|
|
Land
|
|
$
|
1,619,000
|
|
|
$
|
2,201,000
|
|
Land improvements
|
|
|
1,226,000
|
|
|
|
974,000
|
|
Building and improvements
|
|
|
13,599,000
|
|
|
|
15,669,000
|
|
Furniture, fixtures and equipment
|
|
|
686,000
|
|
|
|
721,000
|
|
In-place leases
|
|
|
194,000
|
|
|
|
211,000
|
|
Tenant relationships
|
|
|
76,000
|
|
|
|
81,000
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
17,400,000
|
|
|
$
|
19,857,000
|
|
|
|
|
|
|
|
|
|
|
Management
Company Acquisition
In keeping with our business plan of becoming a self-managed
REIT, we acquired Mission Residential Management Company on
November 5, 2010. The acquisition included the acquisition
of the management companys existing property management
contracts and the assumption of those client relationships from
the seller, the assumption of the management companys
above market office lease, and the assumption of the paid time
off liability for employees continuing on with the management
company. In addition, the agreement allowed for a termination
fee adjustment to be paid to the Company, as acquirer of the
management company, as terminations of contracts occur. The
total purchase price was $5,513,000 in cash paid to the seller.
We have made preliminary estimates of the fair value of the
assets and liabilities acquired from this acquisition. These
preliminary fair value estimates have been allocated to the
acquired identified intangible assets, above market lease, and
paid time off liability, based in each case on their respective
fair values at the date of acquisition. Goodwill was recorded to
the extent the purchase price exceeded the preliminary fair
value estimates of the net acquired assets. The completion of
our purchase accounting for the assets and liabilities acquired
from this acquisition is pending the completion of
managements final review of an appraisal of
114
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain assets acquired in the acquisition. Acquisition costs of
$1,154,000 were expensed as incurred during the year ended
December 31, 2010. Our preliminary estimated purchase price
allocation is as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
5,513,000
|
|
Assumed Oakton above market lease(a)
|
|
|
250,000
|
|
Assumed paid time off liability(b)
|
|
|
348,000
|
|
Intangible asset tenant relationships
|
|
|
(1,760,000
|
)
|
Intangible asset expected termination fees(c)
|
|
|
(600,000
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
3,751,000
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in security deposits, prepaid rent and other
liabilities on the consolidated balance sheet with a net balance
of $237,600 at December 31, 2010. |
|
(b) |
|
Included in accounts payable and accrued liabilities on the
consolidated balance sheet at December 31, 2010. |
|
(c) |
|
Represents termination fees due to terminations by property
owners, as outlined in the asset purchase agreement, which is
likely to be received by the company. |
Assuming the acquisitions of the two properties and the one
management company discussed above had occurred January 1,
2010, for the year ended December 31, 2010, pro forma
revenues, net loss, net loss attributable to controlling
interest, and net loss per basic and diluted share would have
been $47,909,000, $(11,298,000), $(11,298,000) and $(0.62),
respectively.
Assuming the acquisitions of the two properties and the one
management company discussed above had occurred January 1,
2009, for the year ended December 31, 2009, pro forma
revenues, net loss, net loss attributable to controlling
interest, and net loss per basic and diluted share would have
been $45,573,000, $(4,607,000), $(4,607,000) and $(0.28),
respectively.
These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as increased depreciation and amortization expenses as a result
of intangible assets acquired in the acquisition. The pro forma
results are not necessarily indicative of the operating results
that would have been obtained had the acquisition occurred at
the beginning of the periods presented, nor are they necessarily
indicative of future operating results.
|
|
15.
|
Tax
Treatment of Distributions
|
The income tax treatment for distributions per common share
reportable for the years ended December 31, 2010, 2009 and
2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Ordinary income
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
Capital gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
0.60
|
|
|
|
100
|
|
|
|
0.63
|
|
|
|
100
|
|
|
|
0.70
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
100
|
%
|
|
$
|
0.63
|
|
|
|
100
|
%
|
|
$
|
0.70
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Concentration
of Credit Risk
|
Financial instruments that potentially subject us to a
concentration of credit risk are primarily cash and cash
equivalents, restricted cash and accounts receivable from
tenants. Cash is generally invested in investment-grade
short-term instruments. We have cash in financial institutions
that is insured by the Federal Deposit Insurance Corporation, or
FDIC. As of December 31, 2009 and 2008, we had cash and
cash equivalents and restricted cash accounts in excess of FDIC
insured limits. We believe this risk is not significant.
Concentration of credit risk with respect to accounts receivable
from tenants is limited. We perform credit evaluations of
prospective tenants, and security deposits are obtained upon
lease execution.
As of December 31, 2010, we owned nine properties located
in Texas, two properties in Georgia, two properties in Virginia,
one property in Tennessee and one property in North Carolina,
which accounted for 60.2%, 14.1%, 13.1%, 8.8% and 3.8%,
respectively, of our total rental income and other property
revenues for the year ended December 31, 2010. As of
December 31, 2009, we owned seven properties located in
Texas, two properties in Georgia, and two properties in
Virginia, which accounted for 56.5%, 15.0%, and 14.6%,
respectively, of our total revenues for the year ended
December 31, 2009. As of December 31, 2008, we owned
seven properties in Texas and two properties in Virginia, which
accounted for 65.9% and 16.9%, respectively, of our total
revenues for the year ended December 31, 2008. Accordingly,
there is a geographic concentration of risk subject to
fluctuations in each states economy.
We report earnings (loss) per share pursuant to ASC Topic 260,
Earnings Per Share. Basic earnings (loss) per share
attributable for all periods presented are computed by dividing
net income (loss) attributable to controlling interest by the
weighted average number of shares of our common stock
outstanding during the period. Diluted earnings (loss) per share
are computed based on the weighted average number of shares of
our common stock and all potentially dilutive securities, if
any. Nonvested shares of our restricted common stock give rise
to potentially dilutive shares of our common stock. As of
December 31, 2010 and 2009, there were 5,400 shares
and 4,800 shares, respectively, of nonvested shares of our
restricted common stock outstanding, but such shares were
excluded from the computation of diluted earnings per share
because such shares were anti-dilutive during these periods.
116
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Selected
Quarterly Financial Data
(Unaudited)
|
Set forth below is the unaudited selected quarterly financial
data. We believe that all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the
amounts stated below to present fairly, and in accordance with
GAAP, the unaudited selected quarterly financial data when read
in conjunction with our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
June 30, 2010
|
|
|
March 31, 2010
|
|
|
Revenues
|
|
$
|
13,051,000
|
|
|
$
|
9,930,000
|
|
|
$
|
9,875,000
|
|
|
$
|
9,265,000
|
|
Expenses
|
|
|
(13,285,000
|
)
|
|
|
(11,143,000
|
)
|
|
|
(8,272,000
|
)
|
|
|
(8,317,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(234,000
|
)
|
|
|
(1,213,000
|
)
|
|
|
1,603,000
|
|
|
|
948,000
|
|
Other expense, net
|
|
|
(3,141,000
|
)
|
|
|
(2,989,000
|
)
|
|
|
(2,973,000
|
)
|
|
|
(2,766,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,375,000
|
)
|
|
|
(4,202,000
|
)
|
|
|
(1,370,000
|
)
|
|
|
(1,818,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to controlling interest
|
|
$
|
(3,375,000
|
)
|
|
$
|
(4,202,000
|
)
|
|
$
|
(1,370,000
|
)
|
|
$
|
(1,818,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to controlling
interest basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic and diluted
|
|
|
19,624,769
|
|
|
|
18,782,212
|
|
|
|
17,984,572
|
|
|
|
17,286,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
December 31, 2009
|
|
|
September 30, 2009
|
|
|
June 30, 2009
|
|
|
March 31, 2009
|
|
|
Revenues
|
|
$
|
9,423,000
|
|
|
$
|
9,405,000
|
|
|
$
|
9,259,000
|
|
|
$
|
9,378,000
|
|
Expenses
|
|
|
(7,651,000
|
)
|
|
|
(8,037,000
|
)
|
|
|
(7,951,000
|
)
|
|
|
(7,996,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,772,000
|
|
|
|
1,368,000
|
|
|
|
1,308,000
|
|
|
|
1,382,000
|
|
Other expense, net
|
|
|
(2,862,000
|
)
|
|
|
(2,933,000
|
)
|
|
|
(2,894,000
|
)
|
|
|
(2,860,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,090,000
|
)
|
|
|
(l,565,000
|
)
|
|
|
(1,586,000
|
)
|
|
|
(1,478,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to controlling interest
|
|
$
|
(1,090,000
|
)
|
|
$
|
(1,565,000
|
)
|
|
$
|
(1,586,000
|
)
|
|
$
|
(1,478,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to controlling
interest basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic and diluted
|
|
|
16,780,769
|
|
|
|
16,384,198
|
|
|
|
16,042,294
|
|
|
|
15,688,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share
Repurchases
In January 2011, we did not repurchase any shares of our common
stock under our share repurchase plan. On February 24,
2011, our board of directors determined that it is in the best
interest of our company and its stockholders to preserve our
companys cash, and terminated our share repurchase plan.
Accordingly, pending share repurchase requests will not be
fulfilled.
Status
of our Follow-On Offering
Effective December 31, 2010, the primary portion of our
follow-on offering was suspended.
Termination
of the Grubb & Ellis Advisory Agreement
On November 1, 2010, we received written notice from our
Former Advisor stating that it had elected to terminate the
Grubb & Ellis Advisory Agreement. In accordance with
the Grubb & Ellis Advisory Agreement, either party was
permitted to terminate the agreement upon 60 days
written notice without cause of penalty. Therefore, the
Grubb & Ellis Advisory Agreement terminated on
December 31, 2010 and the Former Advisor no longer serves
as our companys advisor. In connection with the
termination of the Grubb & Ellis Advisory Agreement,
on January 3, 2011, the Former Advisor notified us that it
has elected to defer the redemption of its Incentive Limited
Partnership Interest (as such term is defined in the agreement
of limited partnership for our companys operating
partnership) until, generally, the earlier to occur of
(i) a listing of our shares on a national securities
exchange or national market system or (ii) a liquidity
event.
New
Advisory Agreement
On February 25, 2010, we entered into a new advisory
agreement among us, our operating partnership and our Advisor,
ROC REIT Advisors. Our Advisor is affiliated with us in that ROC
is owned by Stanley J. Olander, Jr., David L.
Carneal and Gustav G. Remppies, each of whom are executive
officers of our company. The new advisory agreement has a
one-year term and may be renewed for an unlimited number of
successive one-year terms. Pursuant to the terms of the new
advisory agreement, our Advisor will use its commercially
reasonable efforts to present to us a continuing and suitable
investment program and opportunities to make investments
consistent with our investment policies. Our Advisor is also
obligated to provide us with the first opportunity to purchase
any Class A income producing multi-family property which
satisfies our investment objectives. In performing these
obligations, our Advisor generally will (i) provide and
perform our
day-to-day
management; (ii) serve as our investment advisor;
(iii) locate, analyze and select potential investments for
us and structure and negotiate the terms and conditions of
acquisition and disposition transactions; (iv) arrange for
financing and refinancing with respect to our investments; and
(v) enter into leases and service contracts with respect to
our investments. Our Advisor is subject to the supervision of
our board of directors and has a fiduciary duty to us and our
stockholders.
Pursuant to the terms of the Advisory Agreement, the Advisor is
entitled to receive certain fees from the Company for services
performed. As compensation for services rendered in connection
with the investigation, selection and acquisition of
investments, the Company shall pay the Advisor an acquisition
fee that shall not exceed (A) 1.0% of the contract purchase
price of properties, and (B) 1.0% of the origination price
or purchase price of real estate-related securities and real
estate assets other than properties; in each of the foregoing
cases along with reimbursement of acquisition expenses. However,
the total of all acquisition fees and acquisition expenses
payable with respect to any real estate assets or real
estate-related securities shall not exceed 6.0% of the contract
purchase price of such real estate assets or real estate-related
securities, or in the case of a loan, 6.0% of the funds
advanced, unless fees in excess of such amount are approved by a
majority
118
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the Companys directors not interested in such
transaction and by a majority of the Companys independent
directors not interested in such transaction and such
transaction is determined to be commercially competitive, fair
and reasonable to the Company. Furthermore, in connection with a
sale of a property in which the Advisor or any affiliate of the
Advisor provides a substantial amount of services, the Company
shall pay to the Advisor or its affiliate a property disposition
fee equal to the lesser of (i) 1.75% of the contract sales
price of such real estate asset and (ii) one-half of a
competitive real estate commission; provided, however, that in
no event may total real estate commissions paid to all persons
by the Company with respect to the sale of such property exceed
the lesser of 6.0% of the contract sales price or a competitive
real estate commission. As compensation for services rendered in
connection with the management of the Companys assets, the
Company shall pay a monthly asset management fee to the Advisor
equal to one-twelfth of 0.30% of the Companys average
invested assets as of the last day of the immediately preceding
quarter; the asset management fee shall be payable monthly in
arrears by the Company in cash equal to 0.25% of the
Companys average invested assets and in the Companys
shares of common stock equal to 0.05% of the Companys
average invested assets.
Upon listing the Companys shares of common stock on a
national securities exchange, the Advisor shall be entitled to a
subordinated performance fee equal to 15.0% of the amount by
which the market value of the Companys shares of common
stock plus distributions paid by the Company prior to the
listing exceeds (i) a cumulative, non-compounded return
equal to 8.0% per annum on the Companys invested capital
plus (ii) the Companys invested capital. Upon the
sale of a real estate asset, the Company will pay the Advisor a
subordinated performance fee equal to 15.0% of the net proceeds
from such sale remaining after the Companys stockholders
have received distributions such that the owners of all
outstanding shares have received distributions in an aggregate
amount equal to the sum of, as of such point in time (i) a
cumulative, non-compounded return equal to 8.0% per annum on the
Companys invested capital and (ii) the Companys
invested capital. Upon termination of the Advisory Agreement,
unless such termination is by the Company because of a material
breach of the Advisory Agreement by the Advisor or occurs upon a
change of control of the Company, the Advisor shall be entitled
to receive a subordinated performance fee equal to 15.0% of the
amount by which the appraised value of the Companys real
estate assets and real estate-related securities on the date of
termination of the Advisory Agreement, less the amount of all
indebtedness secured by the Companys real estate assets
and real estate-related securities, plus the total distributions
paid to the Companys stockholders, exceeds (i) a
cumulative, non-compounded return equal to 8.0% per annum on the
Companys invested capital plus (ii) the
Companys invested capital. Notwithstanding the foregoing,
if termination of the Advisory Agreement occurs upon a change of
control of the Company, the Advisor shall be entitled to payment
of a subordinated performance fee equal to 15.0% of the amount
by which the value of the Companys real estate assets and
real estate-related securities on the date of termination of the
Advisory Agreement as determined in good faith by the
Companys board of directors, including a majority of the
independent directors, less the amount of all indebtedness
secured by the Companys real estate assets and real
estate-related securities, plus the total distributions paid to
the Companys stockholders, exceeds (i) a cumulative,
non-compounded return equal to 8.0% per annum on the
Companys invested capital plus (ii) the
Companys invested capital. In addition, in the event of
the origination or refinancing of any debt financing obtained by
the Company, including the assumption of existing debt, that is
used to acquire real estate assets or originate or acquire real
estate-related securities or is assumed in connection with the
acquisition of real estate assets or the origination or
acquisition of real estate-related securities, and if the
Advisor provides a substantial amount of services in connection
therewith, the Company will pay to the Advisor a financing
coordination fee equal to 1.0% of the amount available to the
Company
and/or
outstanding under such debt financing.
In addition to the compensation paid to the Advisor, the Company
shall pay directly or reimburse the Advisor for all the expenses
paid or incurred by the Advisor or its affiliates in connection
with the services
119
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provided to the Company. However, the Company shall not
reimburse the Advisor at the end of any fiscal quarter in which
total operating expenses incurred by the Advisor for the four
consecutive fiscal quarters then ended exceed the greater of
2.0% of the Companys average invested assets or 25.0% of
the Companys net income for such year, unless the
independent directors of the Company determine such excess
expenses are justified.
If the Companys board of directors elects to internalize
any management services provided by the Advisor, the Company
shall not pay any compensation or other remuneration to the
Advisor or its affiliates in connection with the internalization
transaction.
Furthermore, subject to certain limitations in the Advisory
Agreement and the Companys charter, the Company has agreed
to indemnify and hold harmless the Advisor and its affiliates
from all losses and liabilities arising in performance of their
duties under the Advisory Agreement.
The Advisory Agreement may be terminated by either the Company
or the Advisor upon 60 days written notice without
cause and without penalty.
Termination
of Dealer Manager Agreement
Until December 31, 2010, the managing broker-dealer for our
capital formation efforts had been Grubb & Ellis
Securities. On November 1, 2010, we received written notice
from Grubb & Ellis Securities that it had elected to
terminate the Grubb & Ellis Dealer Manager Agreement,
dated June 22, 2009, between our company and
Grubb & Ellis Securities. Pursuant to the
Grubb & Ellis Dealer Manager Agreement, either party
was permitted to terminate the agreement upon 60 days
written notice. Therefore, the Grubb & Ellis Dealer
Manager Agreement terminated on December 31, 2010 and
Grubb & Ellis Securities no longer serves as our
dealer manager.
On November 5, 2010, we entered into the RCS Dealer Manager
Agreement with RCS, whereby RCS agreed to assume the role of
dealer manager after the termination of the Grubb &
Ellis Dealer Manager Agreement, subject to the satisfaction of
certain conditions, including the receipt of a no-objections
notice from FINRA. As of February 28, 2011, RCS had not yet
received a no-objections notice from FINRA relating to our
follow-on offering. Recently, general market conditions had
caused us and RCS to reconsider the merits of continuing the
follow-on offering. Therefore, on February 28, 2011, we
provided written notice to RCS that we were terminating the RCS
Dealer Manager Agreement, effective immediately. As a
result, we currently do not have a dealer manager. We cannot
make assurances that we will enter into a new dealer manager
agreement or that we will offer shares of our common stock to
the public in the future.
Termination
of Transfer Agent Services Agreement
On November 3, 2010, we received written notice from
Grubb & Ellis Transfer Agent, our former transfer
agent, that it had elected to terminate the Transfer Agent
Services Agreement. Pursuant to the Transfer Agent Services
Agreement, Grubb & Ellis Transfer Agent was permitted
to terminate the Transfer Agent Services Agreement upon
180 days written notice. Accordingly, in January
2011, we appointed DST Systems, Inc. to serve as our
companys transfer agent.
Declaration
of Distributions
On December 28, 2010, our board of directors authorized a
daily distribution to our stockholders of record as of the close
of business on each day of the period commencing on
January 1, 2011 and ending on January 31, 2011. The
distributions were calculated based on 365 days in the
calendar year and will be equal to $0.0016438 per share of
common stock, which is equal to an annualized distribution rate
of 6.0%, assuming a purchase price of $10.00 per share. These
distributions will be aggregated and paid in cash monthly in
120
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
arrears. The distributions declared for each record date were
paid in February 2011 from legally available funds.
On February 24, 2011, the board of directors authorized a
daily distribution to its stockholders of record as of the close
of business on each day of the period commencing on
March 1, 2011 and ending on June 30, 2011. The
distributions will be calculated based on 365 days in the
calendar year and will be equal to $0.0008219 per share of
common stock, which is equal to an annualized distribution rate
of 3.0%, assuming a purchase price of $10.00 per share. These
distributions will be aggregated and paid in cash monthly in
arrears. The distributions declared for each record date in the
March 2011, April 2011, May 2011 and June 2011 periods will be
paid in April 2011, May 2011, June 2011 and July 2011,
respectively, only from legally available funds.
Termination
of Share Repurchase Plan
On February 24, 2011, our board of directors determined
that it is in the best interest of our company and its
stockholders to preserve our companys cash, and terminated
our companys share repurchase plan. Accordingly, pending
share repurchase requests will not be fulfilled.
Engagement
of Robert A. Stanger & Co., Inc.
On February 24, 2011, our board of directors authorized us
to engage the investment banking firm of Robert A.
Stanger & Co., Inc., or Stanger, to advise our
management regarding strategic alternatives available to us. We
believe that Stanger possesses extensive knowledge and
experience in the real estate finance industry, which will
enable our management to more effectively assess available
alternatives for enhancing stockholder value. Also on
February 24, 2011, our board of directors appointed Glenn
W. Bunting, Jr. as our lead independent director to work
with representatives of Stanger to explore strategic
alternatives for our company.
Second
Amended and Restated Distribution Reinvestment
Plan
On February 24, 2011, our board of directors adopted the Amended
and Restated DRIP. See Note 12, Equity Distribution
Reinvestment Plan and Second Amended and Restated Distribution
Reinvestment Plan.
121
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT, Inc.)
SCHEDULE III REAL ESTATE OPERATING PROPERTIES
AND
ACCUMULATED DEPRECIATION
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount at Which Carried at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to Company
|
|
|
|
|
|
Close of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building,
|
|
|
|
|
|
|
|
|
Building,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements
|
|
|
Cost Capitalized
|
|
|
|
|
|
Improvements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Subsequent to
|
|
|
|
|
|
and
|
|
|
|
|
|
Accumulated
|
|
|
Date of
|
|
|
Date
|
|
|
|
|
|
Encumbrances
|
|
|
Land
|
|
|
Fixtures
|
|
|
Acquisition(a)
|
|
|
Land
|
|
|
Fixtures
|
|
|
Total(b)
|
|
|
Depreciation(d)(e)
|
|
|
Construction
|
|
|
Acquired
|
|
|
Walker Ranch Apartment Homes (Residential)
|
|
San Antonio, TX
|
|
$
|
20,000,000
|
|
|
$
|
3,025,000
|
|
|
$
|
28,273,000
|
|
|
$
|
139,000
|
|
|
$
|
3,025,000
|
|
|
$
|
28,412,000
|
|
|
$
|
31,437,000
|
|
|
$
|
(4,363,000
|
)
|
|
|
2004
|
|
|
|
10/31/06
|
|
Hidden Lake Apartment Homes (Residential)
|
|
San Antonio, TX
|
|
|
19,218,000
|
|
|
|
3,031,000
|
|
|
|
29,540,000
|
|
|
|
302,000
|
|
|
|
3,031,000
|
|
|
|
29,842,000
|
|
|
|
32,873,000
|
|
|
|
(3,615,000
|
)
|
|
|
2004
|
|
|
|
12/28/06
|
|
Park at Northgate (Residential)
|
|
Spring, TX
|
|
|
10,295,000
|
|
|
|
1,870,000
|
|
|
|
14,958,000
|
|
|
|
228,000
|
|
|
|
1,870,000
|
|
|
|
15,186,000
|
|
|
|
17,056,000
|
|
|
|
(2,304,000
|
)
|
|
|
2002
|
|
|
|
06/12/07
|
|
Residences at Braemar (Residential)
|
|
Charlotte, NC
|
|
|
9,188,000
|
|
|
|
1,564,000
|
|
|
|
13,718,000
|
|
|
|
101,000
|
|
|
|
1,564,000
|
|
|
|
13,819,000
|
|
|
|
15,383,000
|
|
|
|
(1,837,000
|
)
|
|
|
2005
|
|
|
|
06/29/07
|
|
Baypoint Resort (Residential)
|
|
Corpus Christi, TX
|
|
|
21,612,000
|
|
|
|
5,306,000
|
|
|
|
28,522,000
|
|
|
|
809,000
|
|
|
|
5,306,000
|
|
|
|
29,331,000
|
|
|
|
34,637,000
|
|
|
|
(3,129,000
|
)
|
|
|
1998
|
|
|
|
08/02/07
|
|
Towne Crossing Apartments (Residential)
|
|
Mansfield, TX
|
|
|
14,519,000
|
|
|
|
2,041,000
|
|
|
|
19,079,000
|
|
|
|
263,000
|
|
|
|
2,041,000
|
|
|
|
19,342,000
|
|
|
|
21,383,000
|
|
|
|
(2,638,000
|
)
|
|
|
2004
|
|
|
|
08/29/07
|
|
Villas of El Dorado (Residential)
|
|
McKinney, TX
|
|
|
13,600,000
|
|
|
|
1,622,000
|
|
|
|
16,741,000
|
|
|
|
507,000
|
|
|
|
1,622,000
|
|
|
|
17,248,000
|
|
|
|
18,870,000
|
|
|
|
(2,680,000
|
)
|
|
|
2002
|
|
|
|
11/02/07
|
|
The Heights at Olde Towne (Residential)
|
|
Portsmouth, VA
|
|
|
10,475,000
|
|
|
|
2,513,000
|
|
|
|
14,957,000
|
|
|
|
315,000
|
|
|
|
2,513,000
|
|
|
|
15,272,000
|
|
|
|
17,785,000
|
|
|
|
(1,548,000
|
)
|
|
|
1972
|
|
|
|
12/21/07
|
|
The Myrtles at Olde Towne (Residential)
|
|
Portsmouth, VA
|
|
|
20,100,000
|
|
|
|
3,698,000
|
|
|
|
33,319,000
|
|
|
|
137,000
|
|
|
|
3,698,000
|
|
|
|
33,456,000
|
|
|
|
37,154,000
|
|
|
|
(3,154,000
|
)
|
|
|
2004
|
|
|
|
12/21/07
|
|
Arboleda Apartments (Residential)
|
|
Cedar Park, TX
|
|
|
17,500,000
|
|
|
|
4,051,000
|
|
|
|
25,928,000
|
|
|
|
114,000
|
|
|
|
4,051,000
|
|
|
|
26,042,000
|
|
|
|
30,093,000
|
|
|
|
(2,393,000
|
)
|
|
|
2007
|
|
|
|
03/31/08
|
|
Creekside Crossing (Residential)
|
|
Lithonia, GA
|
|
|
17,000,000
|
|
|
|
5,233,000
|
|
|
|
20,699,000
|
|
|
|
111,000
|
|
|
|
5,233,000
|
|
|
|
20,810,000
|
|
|
|
26,043,000
|
|
|
|
(2,080,000
|
)
|
|
|
2003
|
|
|
|
06/26/08
|
|
Kedron Village (Residential)
|
|
Peachtree City, GA
|
|
|
20,000,000
|
|
|
|
4,057,000
|
|
|
|
26,144,000
|
|
|
|
244,000
|
|
|
|
4,057,000
|
|
|
|
26,388,000
|
|
|
|
30,445,000
|
|
|
|
(2,705,000
|
)
|
|
|
2001
|
|
|
|
06/27/08
|
|
Canyon Ridge Apartments (Residential)
|
|
Hermitage, TN
|
|
|
24,000,000
|
|
|
|
3,915,000
|
|
|
|
32,987,000
|
|
|
|
125,000
|
|
|
|
3,915,000
|
|
|
|
33,112,000
|
|
|
|
37,027,000
|
|
|
|
(3,223,000
|
)
|
|
|
2005
|
|
|
|
09/15/08
|
|
Bella Ruscello Luvury Apartment Homes (Residential)
|
|
Duncanville, TX
|
|
|
13,191,000
|
|
|
|
1,620,000
|
|
|
|
15,510,000
|
|
|
|
84,000
|
|
|
|
1,620,000
|
|
|
|
15,594,000
|
|
|
|
17,214,000
|
|
|
|
(443,000
|
)
|
|
|
2008
|
|
|
|
03/24/10
|
|
Mission Rock Ridge Aparments (Residential)
|
|
Arlington, TX
|
|
|
13,900,000
|
|
|
|
2,201,000
|
|
|
|
17,364,000
|
|
|
|
7,000
|
|
|
|
2,201,000
|
|
|
|
17,371,000
|
|
|
|
19,572,000
|
|
|
|
(190,000
|
)
|
|
|
2003
|
|
|
|
09/30/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
244,598,000
|
|
|
$
|
45,747,000
|
|
|
$
|
337,198,000
|
|
|
$
|
4,028,000
|
|
|
$
|
45,747,000
|
|
|
$
|
341,225,000
|
|
|
$
|
386,972,000
|
(c)
|
|
$
|
(36,302,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The cost capitalized subsequent to acquisition is net of
dispositions. |
122
APARTMENT
TRUST OF AMERICA, INC.
(Formerly known as Grubb & Ellis Apartment REIT, Inc.)
SCHEDULE III REAL ESTATE OPERATING PROPERTIES
AND
ACCUMULATED DEPRECIATION (Continued)
(b) The changes in total real estate for the years ended
December 31, 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance as of December 31, 2007
|
|
$
|
223,938,000
|
|
Acquisitions
|
|
|
122,942,000
|
|
Additions
|
|
|
1,698,000
|
|
Dispositions
|
|
|
(681,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
347,897,000
|
|
Acquisitions
|
|
|
|
|
Additions
|
|
|
1,382,000
|
|
Dispositions
|
|
|
(289,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
348,990,000
|
|
Acquisitions
|
|
|
36,695,000
|
|
Additions
|
|
|
1,706,000
|
|
Dispositions
|
|
|
(419,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
386,972,000
|
|
|
|
|
|
|
|
|
|
(c) |
|
The aggregate cost of our real estate for federal income tax
purposes is $394,642,000. |
|
(d) |
|
The changes in accumulated depreciation for the years ended
December 31, 2010, 2009 and 2008 are as follows: |
|
|
|
|
|
|
|
Amount
|
|
|
Balance as of December 31, 2007
|
|
$
|
3,552,000
|
|
Additions
|
|
|
9,260,000
|
|
Dispositions
|
|
|
(182,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
12,630,000
|
|
Additions
|
|
|
11,605,000
|
|
Dispositions
|
|
|
(183,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
24,052,000
|
|
Additions
|
|
|
12,441,000
|
|
Dispositions
|
|
|
(191,000
|
)
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
36,302,000
|
|
|
|
|
|
|
|
|
|
(e) |
|
The cost of building and improvements is depreciated on a
straight-line basis over the estimated useful lives of the
buildings and improvements, ranging primarily from 10 to
40 years. Land improvements are depreciated over the
estimated useful lives ranging primarily from five to
15 years. Furniture, fixtures and equipment is depreciated
over the estimated useful lives ranging primarily from five to
15 years. |
123
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized this 25th day of March, 2011.
Apartment Trust of America, Inc.
|
|
|
|
By:
|
/s/ Stanley
J. Olander, Jr.
|
Stanley J. Olander, Jr.
Chief Executive Officer and Chief Financial Officer
(principal executive officer, principal financial
officer and principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Stanley
J. Olander, Jr.
Stanley
J. Olander, Jr.
|
|
Chief Executive Officer and Chief Financial Officer (principal
executive officer, principal financial officer and principal
accounting officer)
|
|
March 25, 2011
|
|
|
|
|
|
|
|
By
|
|
/s/ Andrea
R. Biller
Andrea
R. Biller
|
|
Director
|
|
March 25, 2011
|
|
|
|
|
|
|
|
By
|
|
/s/ Glenn
W. Bunting, JR.
Glenn
W. Bunting, Jr.
|
|
Director
|
|
March 25, 2011
|
|
|
|
|
|
|
|
By
|
|
/s/ Robert
A. Gary, IV
Robert
A. Gary, IV
|
|
Director
|
|
March 25, 2011
|
|
|
|
|
|
|
|
By
|
|
/s/ Richard
S. Johnson
Richard
S. Johnson
|
|
Director
|
|
March 25, 2011
|
124
EXHIBIT INDEX
Our company and our operating partnership were formerly known as
NNN Apartment REIT, Inc. and NNN Apartment REIT Holdings, L.P.
Following the merger of NNN Realty Advisors, Inc. with
Grubb & Ellis Company on December 7, 2007, we
changed our corporate name, and the name of our operating
partnership, to Grubb & Ellis Apartment REIT, Inc. and
Grubb & Ellis Apartment REIT Holdings, L.P.,
respectively. On December 29, 2010, we amended our charter
to change our corporate name from Grubb & Ellis
Apartment REIT, Inc. to Apartment Trust of America, Inc., and we
changed the name of our operating partnership from
Grubb & Ellis Apartment REIT Holdings, L.P. to
Apartment Trust of America Holdings, LP. The following
Exhibit List refers to the entity names used prior to such
name changes, as applicable, in order to accurately reflect the
names of the parties on the documents listed.
Pursuant to Item 601(a)(2) of
Regulation S-K,
this Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by
reference, in this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010 (and are
numbered in accordance with Item 601 of
Regulation S-K).
|
|
|
|
|
|
3
|
.1
|
|
Articles of Amendment and Restatement of NNN Apartment REIT,
Inc. dated July 18, 2006 (included as Exhibit 3.1 to
our Quarterly Report on
Form 10-Q
filed November 9, 2006, and incorporated herein by
reference)
|
|
3
|
.2
|
|
Articles of Amendment to the Articles of Amendment and
Restatement of Grubb & Ellis Apartment REIT, Inc.,
dated December 7, 2007 (included as Exhibit 3.1 to our
Current Report on
Form 8-K
filed on December 10, 2007, and incorporated herein by
reference)
|
|
3
|
.3
|
|
Second Articles of Amendment to the Articles of Amendment and
Restatement of Grubb & Ellis Apartment REIT, Inc.,
dated June 22, 2010 (included as Exhibit 3.1 to our
Current Report on
Form 8-K
filed June 23, 2010, and incorporated herein by reference)
|
|
3
|
.4
|
|
Third Articles of Amendment to the Articles of Amendment and
Restatement of Grubb & Ellis Apartment REIT, Inc.
(included as Exhibit 3.1 to our Current Report on
Form 8-K
filed January 5, 2011, and incorporated herein by reference)
|
|
3
|
.5
|
|
Amended and Restated Bylaws of NNN Apartment REIT, Inc. dated
July 19, 2006 (included as Exhibit 3.2 to our
Quarterly Report on
Form 10-Q
filed November 9, 2006 and incorporated herein by reference)
|
|
3
|
.6
|
|
Amendment to Amended and Restated Bylaws of NNN Apartment REIT,
Inc. dated December 6, 2006 (included as Exhibit 3.6
to Post-Effective Amendment No. 1 to the registrants
Registration Statement on
Form S-11
(File
No. 333-130945)
filed January 31, 2007, and incorporated herein by
reference)
|
|
3
|
.7
|
|
Agreement of Limited Partnership of NNN Apartment REIT Holdings,
L.P. dated July 19, 2006 (included as Exhibit 3.3 to
our Quarterly Report on
Form 10-Q
filed November 9, 2006, and incorporated herein by
reference)
|
|
3
|
.8
|
|
First Amendment to Agreement of Limited Partnership of
Grubb & Ellis Apartment REIT Holdings, L.P., dated
June 3, 2010 (included as Exhibit 10.2 to our Current
Report on
Form 8-K
filed June 3, 2010, and incorporated herein by reference)
|
|
4
|
.1
|
|
Form of Subscription Agreement (included as Exhibit B to
our Prospectus filed pursuant to Rule 424(b)(3) (File
No. 333-157375)
filed July 20, 2009, and incorporated herein by reference)
|
|
4
|
.2
|
|
Amended and Restated Share Repurchase Plan (included as
Exhibit D to our Prospectus filed pursuant to
Rule 424(b)(3) (File
No. 333-157375)
filed April 28, 2010, and incorporated herein by reference)
|
|
4
|
.3
|
|
Amended and Restated Distribution Reinvestment Plan (included as
Exhibit C to our Prospectus filed pursuant to
Rule 424(b)(3) (File
No. 333-157375)
filed April 28, 2010, and incorporated herein by reference)
|
|
4
|
.4
|
|
Second Amended and Restated Distribution Reinvestment Plan
(included as Exhibit 10.2 to our Current Report on
Form 8-K
filed March 1, 2011, and incorporated herein by reference)
|
|
10
|
.1
|
|
Advisory Agreement, dated February 25, 2011, by and between
Apartment Trust of America, Inc., Apartment Trust of America
Holdings, LP, and ROC REIT Advisors, LLC (included as
Exhibit 10.1 to our Current Report on
Form 8-K
filed March 1, 2011, and incorporated herein by reference)
|
125
|
|
|
|
|
|
10
|
.2
|
|
Contract of Sale by and between Cedar Park Multifamily, Ltd. and
Triple Net Properties, LLC, dated January 8, 2008 (included
as Exhibit 10.1 to our Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.3
|
|
Amendment to Contract of Sale by and between Cedar Park
Multifamily, Ltd. and Triple Net Properties, LLC, dated
February 26, 2008 (included as Exhibit 10.2 to our
Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.4
|
|
Second Amendment to Contract of Sale by and between Cedar Park
Multifamily, Ltd. and Grubb & Ellis Realty Investors,
LLC, dated March 7, 2008 (included as Exhibit 10.3 to
our Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.5
|
|
Third Amendment to Contract of Sale by and between Cedar Park
Multifamily, Ltd. and Grubb & Ellis Realty Investors,
LLC, dated March 27, 2008 (included as Exhibit 10.4 to
our Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.6
|
|
Sale Agreement Assignment by and between Grubb & Ellis
Realty Investors, LLC and G & E Apartment REIT
Arboleda, LLC, dated March 27, 2008 (included as
Exhibit 10.5 to our Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.7
|
|
Fixed+1 Multifamily Note by G & E Apartment REIT
Arboleda, LLC in favor of PNC ARCS, LLC, dated March 31,
2008 (included as Exhibit 10.6 to our Current Report on
Form 8-K
filed April 4, 2008, and incorporated herein by reference)
|
|
10
|
.8
|
|
Multifamily Deed of Trust, Assignment of Rents and Security
Agreement and Fixture Filing by G & E Apartment REIT
Arboleda, LLC for the benefit of PNC ARCS, LLC, dated
March 31, 2008 (included as Exhibit 10.7 to our
Current Report on
Form 8-K
filed April 4, 2008 and incorporated herein by reference)
|
|
10
|
.9
|
|
Second Amendment to and Waiver of Loan Agreement by and between
Grubb & Ellis Apartment REIT, Inc. and Wachovia Bank,
National Association, date March 31, 2008 (included as
Exhibit 10.8 to our Current Report on
Form 8-K
filed April 4, 2008 and incorporated herein by reference)
|
|
10
|
.10
|
|
Amended and Restated Promissory Note by Grubb & Ellis
Apartment REIT, Inc. in favor of Wachovia Bank, National
Association, dated March 31, 2008 (included as
Exhibit 10.9 to our Current Report on
Form 8-K
filed April 4, 2008 and incorporated herein by reference)
|
|
10
|
.11
|
|
Second Amended and Restated Pledge Agreement (Membership and
Partnership Interests) by and between Wachovia Bank, National
Association and Grubb & Ellis Apartment REIT Holdings,
L.P., dated March 31, 2008 (included as Exhibit 10.10
to our Current Report on
Form 8-K
filed April 4, 2008 and incorporated herein by reference)
|
|
10
|
.12
|
|
Purchase and Sale Agreement by and between Atlanta Creekside
Gardens Associates, LLC and Grubb & Ellis Realty
Investors, LLC, dated June 12, 2008 (included as
Exhibit 10.1 to our Current Report on
Form 8-K
filed July 2, 2008 and incorporated herein by reference)
|
|
10
|
.13
|
|
First Amendment to Purchase and Sale Agreement by and between
Atlanta Creekside Gardens Associates, LLC and Grubb &
Ellis Realty Investors, LLC, dated June 18, 2008 (included
as Exhibit 10.2 to our Current Report on
Form 8-K
filed July 2, 2008 and incorporated herein by reference)
|
|
10
|
.14
|
|
Purchase and Sale Agreement by and between AMLI at Peachtree
City-Phase I, LLC, AMLI at Peachtree City-Phase II, LLC and
Grubb and Ellis Realty Investors, LLC, dated June 23, 2008
(included as Exhibit 10.4 to our Current Report on
Form 8-K
filed July 2, 2008 and incorporated herein by reference)
|
|
10
|
.15
|
|
Assignment and Assumption of Real Estate Purchase Agreement by
and between Grubb & Ellis Realty Investors, LLC and
G & E Apartment REIT Kedron Village, LLC, dated
June 27, 2008 (included as Exhibit 10.5 to our Current
Report on
Form 8-K
filed July 2, 2008 and incorporated herein by reference)
|
|
10
|
.16
|
|
Unsecured Promissory Note by Grubb & Ellis Apartment
REIT Holdings, LP in favor of NNN Realty Advisors, Inc., dated
June 27, 2008 (included as Exhibit 10.14 to our
Current Report on
Form 8-K
filed July 2, 2008 and incorporated herein by reference)
|
|
10
|
.17
|
|
Amended and Restated Consolidated Unsecured Promissory Note by
Grubb & Ellis Apartment REIT Holdings, LP in favor of
NNN Realty Advisors, Inc., dated August 11, 2010 (included
a Exhibit 10.1 to our Current Report on
Form 8-K
filed August 17, 2010, and incorporated herein by
reference)
|
126
|
|
|
|
|
|
10
|
.18
|
|
Real Estate Purchase and Sale Agreement by and between
Apartments at Canyon Ridge, LLC and Grubb & Ellis
Realty Investors, LLC, dated July 10, 2008 (included as
Exhibit 10.1 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.19
|
|
First Amended and Restated Advisory Agreement by and between
Grubb & Ellis Apartment REIT, Inc. and
Grubb & Ellis Apartment REIT Advisor, LLC, dated
July 18, 2008 (included as Exhibit 10.1 to our Current
Report on
Form 8-K
filed July 21, 2008 and incorporated herein by reference)
|
|
10
|
.20
|
|
Second Amended and Restated Advisory Agreement by and between
Grubb & Ellis Apartment REIT, Inc. and
Grubb & Ellis Apartment REIT Advisor, LLC, dated
June 3, 2010 (included as Exhibit 10.1 to our Current
Report on
Form 8-K
filed June 3, 2010 and incorporated herein by reference)
|
|
10
|
.21
|
|
First Amendment to Real Estate Purchase and Sale Agreement by
and between Apartments at Canyon Ridge, LLC and
Grubb & Ellis Realty Investors, LLC, dated
August 15, 2008 (included as Exhibit 10.2 to our
Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.22
|
|
Assignment and Assumption of Real Estate Purchase and Sale
Agreement by and between Grubb & Ellis Realty
Investors, LLC and G & E Apartment REIT Canyon Ridge,
LLC, dated September 15, 2008 (included as
Exhibit 10.3 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.23
|
|
Multifamily Note by G & E Apartment REIT Canyon Ridge,
LLC to the order of Capmark Bank, dated September 15, 2008
(included as Exhibit 10.4 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.24
|
|
Multifamily Deed of Trust, Assignment of Rents and Security
Agreement by G & E Apartment REIT Canyon Ridge, LLC
for the benefit of Capmark Bank, dated September 15, 2008
(included as Exhibit 10.5 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.25
|
|
Guaranty by G & E Apartment REIT, Inc. for the benefit
of Capmark Bank, dated September 15, 2008 (included as
Exhibit 10.6 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.26
|
|
Fourth Amendment to and Waiver of Loan Agreement between
Grubb & Ellis Apartment REIT, Inc. and Wachovia Bank,
National Association, dated September 15, 2008 (included as
Exhibit 10.7 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.27
|
|
Fourth Amended and Restated Pledge Agreement by and between
Wachovia Bank, National Association and Grubb and Ellis
Apartment REIT Holdings, L.P., dated September 15, 2008
(included as Exhibit 10.8 to our Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.28
|
|
Unsecured Promissory Note by Grubb & Ellis Apartment
REIT Holdings, LP in favor of NNN Realty Advisors, Inc., dated
September 15, 2008 (included as Exhibit 10.9 to our
Current Report on
Form 8-K
filed September 19, 2008 and incorporated herein by
reference)
|
|
10
|
.29
|
|
Assignment and Assumption of Real Estate Purchase and Sale
Agreement by and between Grubb & Ellis Realty
Investors, LLC and G & E Apartment REIT Canyon Ridge,
LLC, dated September 15, 2008 (included as
Exhibit 10.3 to our Current Report on
Form 8-K/A
filed September 25, 2008 and incorporated herein by
reference)
|
|
10
|
.30
|
|
Amendment No. 1 to First Amended and Restated Advisory
Agreement by and between Grubb & Ellis Apartment REIT,
Inc. and Grubb & Ellis Apartment REIT Advisor, LLC,
dated as of November 26, 2008 (included as
Exhibit 10.1 to our Current Report on
Form 8-K
filed on December 2, 2008 and incorporated herein by
reference)
|
|
10
|
.31
|
|
Amendment No. 2 to First Amended and Restated Advisory
Agreement by and between Grubb & Ellis Apartment REIT,
Inc. and Grubb & Ellis Apartment REIT Advisor, LLC,
dated as of July 17, 2009 (included as Exhibit 10.1 to
our Current Report on
Form 8-K
filed on July 23, 2009 and incorporated herein by reference)
|
|
10
|
.32
|
|
Dealer Manager Agreement by and between Grubb & Ellis
Apartment REIT, Inc. and Grubb & Ellis Securities,
Inc., dated June 22, 2009 (included as Exhibit 1.1 to
our Current Report on
Form 8-K
filed on June 26, 2009 and incorporated herein by
reference)
|
127
|
|
|
|
|
|
10
|
.33
|
|
Exclusive Dealer Manager Agreement, dated November 5, 2010,
by and between Grubb & Ellis Apartment REIT, Inc., and
Realty Capital Securities, LLC (included as Exhibit 1.1 to
our Current Report on
Form 8-K
filed on November 12, 2010, and incorporated herein by
reference)
|
|
10
|
.34
|
|
Fifth Amendment to and Waiver of Loan Agreement with Wachovia
Bank dated August 31, 2009 (included as Exhibit 10.1
to our Current Report on
Form 8-K
filed on September 4, 2009 and incorporated herein by
reference)
|
|
10
|
.35
|
|
Extension No. 2 to the Unsecured Promissory Note with NNN
Realty Advisors, Inc. dated September 15, 2009 (included as
Exhibit 10.1 to our Current Report on
Form 8-K
filed on September 18, 2009 and incorporated herein by
reference)
|
|
10
|
.36
|
|
Consolidated Promissory Note between Grubb & Ellis
Apartment REIT Holdings, L.P. and NNN Realty Advisors, Inc.,
dated November 10, 2009 (included as Exhibit 10.1 to
our Current Report on
Form 8-K
filed on November 12, 2009 and incorporated herein by
reference)
|
|
10
|
.37
|
|
Asset Purchase Agreement, dated August 27, 2010, by and
among MR Property Management, LLC, Mission Residential
Management, LLC, MR Holdings, LLC, Forward Capital, LLC and
Christopher C. Finlay (included as Exhibit 10.1 to our
Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.38
|
|
Purchase and Sale Agreement by and between Mission Tanglewood,
DST and Grubb & Ellis Apartment REIT, Holdings, L.P.
(included as Exhibit 10.2 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.39
|
|
Purchase and Sale Agreement by and between Mission Capital
Crossing, DST and Grubb & Ellis Apartment REIT
Holdings, L.P. (included as Exhibit 10.3 to our Current
Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.40
|
|
Purchase and Sale Agreement by and between Mission Barton Creek,
DST and Grubb & Ellis Apartment REIT Holdings, L.P.
(included as Exhibit 10.4 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.41
|
|
Purchase and Sale Agreement by and between Mission Briley
Parkway, DST and Grubb & Ellis Apartment REIT
Holdings, L.P. (included as Exhibit 10.5 to our Current
Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.42
|
|
Purchase and Sale Agreement by and between Mission Preston Wood,
DST and Grubb & Ellis Apartment REIT Holdings, L.P.
(included as Exhibit 10.6 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.43
|
|
Purchase and Sale Agreement by and between Mission Battleground
Park, DST and Grubb & Ellis Apartment REIT Holdings,
L.P. (included as Exhibit 10.7 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.44
|
|
Purchase and Sale Agreement by and between Mission Mayfield
Downs, DST and Grubb & Ellis Apartment REIT Holdings,
L.P. (included as Exhibit 10.8 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.45
|
|
Purchase and Sale Agreement by and between Mission Brentwood,
DST and Grubb & Ellis Apartment REIT Holdings, L.P.
(included as Exhibit 10.9 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.46
|
|
Purchase and Sale Agreement by and between Mission Rock Ridge,
LP and Grubb & Ellis Apartment REIT Holdings, L.P.
(included as Exhibit 10.10 to our Current Report on
Form 8-K
filed on August 31, 2010, and incorporated herein by
reference)
|
|
10
|
.47
|
|
Contract of Sale, dated January 22, 2010, by and between
Duncanville Villages Multifamily, LTD and Grubb &
Ellis Apartment REIT Holdings, LP (included as Exhibit 10.1
to our Current Report on
Form 8-K
filed on January 27, 2010, and incorporated herein by
reference)
|
|
10
|
.48
|
|
Form of Indemnification Agreement (included as Exhibit 10.1
to our Current Report on
Form 8-K
filed on March 22, 2010, and incorporated herein by
reference)
|
|
10
|
.49
|
|
2006 Incentive Award Plan of NNN Apartment REIT, Inc. (included
as Exhibit 10.3 to the Registration Statement on
Form S-11
(Registration Number
333-130945)
filed on April 21, 2006, and incorporated herein by
reference)
|
128
|
|
|
|
|
|
10
|
.50
|
|
Amendment to the 2006 Incentive Award Plan of NNN Apartment
REIT, Inc. (included as Exhibit 10.6 to our Quarterly
Report on
Form 10-Q
filed on November 9, 2006, and incorporated herein by
reference)
|
|
21
|
.1*
|
|
Subsidiaries of Grubb & Ellis Apartment REIT, Inc.
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer and Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.1**
|
|
Certification of Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
129